Indicate by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
In this annual report on Form 20-F, unless otherwise indicated, “we,”
“us,” “our,” the “Company”, “Jowell”, “Registrant” and “JWEL”
refer to Jowell Global Ltd., a company organized in the Cayman Islands, its predecessor entities, its subsidiaries, variable interest
entity and the subsidiaries of the consolidated variable interest entity.
PART
I
ITEM 1. |
IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS |
Not
Applicable.
ITEM 2. |
OFFER STATISTICS AND
EXPECTED TIMETABLE |
Not
Applicable.
Our
Holding Company Structure and Contractual Arrangements with Our Consolidated VIE and Its Individual Shareholders in China
We
are a Cayman Islands holding company without material operations and our business is conducted by our variable interest entity (“VIE”)
in China and this structure involves unique risks to investors. We are not a Chinese operating company and that our business in China
is conducted through contractual arrangements with our VIE. However, the VIE agreements have not been truly tested in the courts in China.
Chinese regulatory authorities could disallow this structure, which would likely result in a material change in our operations and/or
a material change in the value of our securities, including that it could cause the value of such securities to significantly decline
or become worthless. See “Item 3. Key Information—D. Risk Factors— “If the Chinese government determines that
the contractual arrangements through which we control our VIE do not comply with applicable regulations, our business could be adversely
affected.” and “Uncertainties and quick change in the interpretation and enforcement of Chinese laws and regulations
with little advance notice could result in a material and negative impact on our business operations, decrease the value of our securities
and limit the legal protections available to you and us.”
There
are legal and operational risks associated with being based in and having our operations in China. Recently, the PRC government initiated
a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking
down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable
interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly
enforcement. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State
Council jointly issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development
of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight
of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and
improve the system of extraterritorial application of the PRC securities laws. On February 15, 2022, Cybersecurity Review Measures published
by Cyberspace Administration of China or the CAC, National Development and Reform Commission, Ministry of Industry and Information Technology,
Ministry of Public Security, Ministry of State Security, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State
Administration of Radio and Television, China Securities Regulatory Commission, State Secrecy Administration and State Cryptography Administration
became effective, which provides that, Critical Information Infrastructure Operators (“CIIOs”) that intend to purchase internet
products and services and Data Processing Operators (“DPOs”) engaging in data processing activities that affect or may affect
national security shall be subject to the cybersecurity review by the Cybersecurity Review Office. On November 14, 2021, CAC published
the Administration Measures for Cyber Data Security (Draft for Public Comments), or the “Cyber Data Security Measure (Draft)”,
which requires cyberspace operators with personal information of more than 1 million users who want to list abroad to file a cybersecurity
review with the Office of Cybersecurity Review. As of the date of this report, these new laws and guidelines have not impacted the Company’s
ability to conduct its business, accept foreign investments, or list and trade on a U.S. or other foreign exchange as the Company has
listed on Nasdaq before these laws take effect and the data processing activities by our VIE do not affect national security; however,
there are uncertainties in the interpretation and enforcement of these new laws and guidelines, which could materially and adversely
impact our business and financial outlook and may impact our ability to accept foreign investments or continue to list on a U.S. or other
foreign exchange. Any change in foreign investment regulations, and other policies in China or related enforcement actions by China government
could result in a material change in our operations and the value of our securities and could significantly limit or completely hinder
our ability to offer our securities to investors or cause the value of our securities to significantly decline or be worthless. The Company’s
auditor is headquartered in the U.S. and it is not subject to the determinations announced by the PCAOB on December 16, 2021, and Holding
Foreign Companies Accountable Act and related regulations currently do not affect the Company as the Company’s auditor is subject
to PCAOB’s inspection on a regular basis
Permissions
Required from the PRC Authorities for Our Operations
Shanghai
Juhao is incorporated and operating in mainland China and they have received all required permissions from Chinese authorities to operate
its current business in China, including Business License, EDI (Electronic Data Interchange) Certificate, Retail License for Alcoholic
Products, Food Business License and International Trade Business Filing Form. Other than these permits, our VIE is not required to obtain
permit and approval from Chinese authorities to operate our business and to offer the securities being registered to foreign investors.
We, our subsidiaries, or VIE are not covered by permissions requirements from the China Securities Regulatory Commission (CSRC), Cyberspace
Administration of China (CAC) or any other governmental agency that is required to approve our VIE’s business and operations. As
our VIE operates an e-commerce platforms for online-to-offline sales of cosmetics, health and nutritional supplements and household products
in China and our products and services do not pose national security risks, based on the advice of our PRC counsel Jiangsu Yiyou Tianyuan
Law Firm, we are not subject to the report requirement under Cybersecurity Review Measures published by Cyberspace Administration of
China, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Public Security, Ministry
of State Security, Ministry of Finance, Ministry of Commerce, People’s Bank of China, State Administration of Radio and Television,
China Securities Regulatory Commission, State Secrecy Administration and State Cryptography Administration on December 28, 2021, which
became effective on February 15, 2022.
As of the date of this
report, we (1) are not required to obtain permissions from any PRC authorities to issue our securities to foreign investors, (2) are
not subject to permission requirements from China Securities Regulatory Commission (the “CSRC”), Cyberspace Administration
of China (“CAC”) or any other authority that is required to approve of our VIE’s operations, and (3) have not
received or were denied such permissions by any PRC authorities. Nevertheless, the General Office of the Central Committee of the Communist
Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities
Activities According to Law,” or the Opinions, which were made available to the public on July 6, 2021. The Opinions emphasized
the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas
listings by Chinese companies. Given the current PRC regulatory environment, it is uncertain when and whether we, WFOE or VIE, will be
required to obtain permission from the PRC government to be listed on a U.S. exchange in the future, and even when such permission is
obtained, whether it will be rescinded. If we, our subsidiaries, or the VIE do not receive or maintain such permissions or approvals,
inadvertently conclude that such permissions or approvals are not required, or applicable laws, regulations, or interpretations change
and we are required to obtain such permissions or approvals in the future, it could significantly limit or completely hinder our ability
to offer or continue to offer our securities to investors and cause the value of our securities to significantly decline or become worthless.
Dividend
Distribution and Cash Transfer Between the Holding Company, Subsidiary and VIE.
We,
through our VIE, operates an e-commerce platform for cosmetics, health and nutritional supplements and household products e-commerce
platform in China. Our VIE also sells our products through authorized retail stores all across China. Operating under the brand name
of “Love Home Store” or “LHH Store”, the authorized retailers may operate as independent stores or store-in-shop
(an integrated store), selling products that they purchased through our online platform LHH Mall under their retailers’ accounts which
provide them with major discounts. Our VIE also sells products through its “Juhao Best Choice” community group-buying
stores in China.
Our
VIE receives its revenue in RMB. Under our current corporate structure, to fund any cash and financing requirements we may have, the
Company may rely on certain dividend payments from our WFOE in China. Our WFOE receives payments from VIE, pursuant to the VIE Agreements.
WFOE may make distribution of such payments to Jowell HK as dividends.
Under
existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange
or SAFE by complying with certain procedural requirements. Therefore, our WFOE is able to pay dividends in foreign currencies to us without
prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures
under PRC foreign exchange regulations, such as the overseas investment registrations by the shareholders of the Company who are PRC
residents. Approval from or registration with appropriate government authorities is, however, required where the RMB is to be converted
into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. For
our Hong Kong subsidiary and the holding company (“Non-PRC Entities”), there is no restrictions on foreign exchange for such
entities and they are able to transfer cash among these entities, across borders and to US investors. Also, there is no restrictions
and limitations on the abilities of Non-PRC Entities to distribute earnings from their businesses, including from subsidiaries to the
parent company or from the holding company to the U.S. investors as well as the abilities to settle amounts owed.
We
are a holding company, and we rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we
may incur. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other distributions to us. Current PRC regulations permit our WFOE to pay dividends to the Company only
out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our
WFOE and VIE in China are required to set aside at least 10% of their after-tax profits each year, if any, to fund a statutory reserve
until such reserve reaches 50% of its registered capital. Each such entity in China is also required to further set aside a portion of
its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion
of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate
future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except
in the event of liquidation. In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at
a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties
or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC resident enterprises
are tax resident. Pursuant to the tax agreement between mainland China and the Hong Kong Special Administrative Region, the withholding
tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from a standard rate
of 10%. However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying
a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is
no assurance that the reduced 5% withholding rate will apply to dividends received by our Hong Kong subsidiary from our PRC subsidiaries.
This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiary.
As
of the date of this report, neither WFOE or any of our subsidiary in Hong Kong has not made any dividends or distributions to the Company,
the Company has not made any dividends or distribution to its investors. We intend to keep any future earnings to re-invest in and finance
the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Under the Cayman
Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in
no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course
of business.
As
of the date of this report, no dividends or distributions have been made between the holding company, its subsidiaries, and consolidated
VIE, or to investors including the U.S. investors, except our VIE Shanghai Juhao made a cash dividend of $1.6 million to its shareholders
in July 2019.
The
holding company, its subsidiaries, and VIE do not have any plan to distribute dividend or settle amounts owed under the VIE Agreements
in the foreseeable future. The cash transfer among the holding company, its subsidiaries and VIE is typically transferred through payment
for intercompany services or intercompany borrowing between holding company, subsidiaries and VIE.
3.A.
Selected Financial Data
In
the table below, we provide you with historical selected financial data for our company. The selected consolidated statements of operations
data for the fiscal years ended December 31, 2021, 2020 and 2019 and the selected consolidated balance sheets data as of December 31,
2021 and 2020 have been derived from our audited consolidated financial statements, which are included in this annual report beginning
on page F-1. The selected consolidated balance sheet data for the year ended December 31, 2019 have been derived from our audited
consolidated balance sheet as of December 31, 2019, which is not included in this annual report. Our historical results do not necessarily
indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are
qualified in their entirety by reference to, our audited consolidated financial statements and related notes and “Item 5. Operating
and Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and presented in accordance
with US GAAP.
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
| | |
| |
Current assets | |
$ | 46,306,781 | | |
$ | 30,014,644 | |
Total non-current assets | |
$ | 12,421,137 | | |
$ | 3,850,210 | |
Total assets | |
$ | 58,727,918 | | |
$ | 33,864,854 | |
Total current liabilities | |
$ | 15,050,826 | | |
$ | 12,152,917 | |
Total non-current liabilities | |
$ | 3,993,641 | | |
$ | 2,967,193 | |
| |
For the years ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
| |
| | |
| | |
| |
Revenue | |
$ | 170,911,999 | | |
$ | 96,879,173 | | |
$ | 61,775,903 | |
Operating expenses | |
$ | 177,904,502 | | |
$ | 91,766,357 | | |
$ | 60,071,451 | |
Net income (loss) | |
$ | (6,389,076 | ) | |
$ | 3,586,692 | | |
$ | 1,278,359 | |
|
|
For the years ended December 31, |
|
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(18,033,959 |
) |
|
$ |
6,889,374 |
|
|
$ |
(856,332 |
) |
Net cash used in investing activities |
|
$ |
(6,637,408 |
) |
|
$ |
(116,746 |
) |
|
$ |
(46,135 |
) |
Net cash provided by financing activities |
|
$ |
27,212,138 |
|
|
$ |
10,794,585 |
|
|
$ |
636,702 |
|
Net increase (decrease) in cash |
|
$ |
3,005,672 |
|
|
$ |
18,232,544 |
|
|
$ |
(216,258 |
) |
3.B.
Capitalization and Indebtedness
Not
Applicable.
3.C.
Reasons For The Offer And Use Of Proceeds
Not
Applicable.
3.D.
Risk Factors
An
investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described
below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary
shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in
many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently
foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects
could be materially and adversely affected.
Risks
Related to Our Business
We
historically have received a substantial part of our supplies from our related party suppliers, which might cause conflict of interest
between the Company and such suppliers.
Historically, a substantial part of our supplies
came from the Longrich Group, a related party. For the year ended December 31, 2021 and 2020, the Longrich Group accounted for approximately
45% and 87% of the total purchases, respectively. Longrich Group is controlled by Mr. Zhiwei Xu, a major shareholder, Chairman of the
Board and Chief Executive Officer of the Company.
Although
we believe our transactions with the related parties are negotiated independently on the basis of a fair market value determination,
transactions with the entities in which related parties hold ownership interests present potential for conflicts of interest, as the
interests of these entities and their shareholders may not align with the interests of the Company and our shareholders with respect
to the negotiation of, and certain other matters related to, our purchase products and services from such entities. Conflicts of interest
may also arise in connection with the exercise of contractual remedies under these transactions, such as the treatment of events of default.
Our
Board of Directors has authorized the Audit Committee to review and approve all related party transaction. We rely on the laws of Cayman
Islands, which provide that directors owe a duty of care and a duty of loyalty to our company. Nevertheless, we may have achieved more
favorable terms if such transactions had not been entered into with related parties and these transactions, individually or in the aggregate,
may have an adverse effect on our business and results of operations or may result in government enforcement actions or other litigation.
We
rely on a limited number of vendors, and the loss of our significant vendor could harm our business, and the loss of any one of such
vendors could have a material adverse effect on our business.
We consider our major vendors to be those vendors
that accounted for more than 10% of overall purchases in any given fiscal period. For the year ended December 31, 2020, one major supplier-
the Longrich Group, a related party, accounted for approximately 87% of the total purchases. For the year ended December 31, 2021, two
major suppliers, the Longrich Group and a third-party supplier, accounted for approximately 45% and 24% of the total purchases, respectively. We have not entered into long-term contracts with this
significant vendor and instead rely on individual orders with such vendor. Although we believe that we can locate replacement vendors
readily on the market for prevailing prices, any difficulty in replacing a vendor on terms acceptable to us could negatively affect our
performance to the extent it results in higher prices or a slower supply chain. If we lose any or all of them, or any
of them increase the prices or change the terms of the business they do with us, our sales may be adversely affected.
If
we become subject to additional scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to
expend significant resources to investigate and resolve the matter which could harm our business operations and our reputation and could
result in a loss of your investment in our Ordinary Shares, especially if such matter cannot be addressed and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and
negative publicity by investors, financial commentators and regulatory agencies. Much of the scrutiny, criticism and negative publicity
has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stock of many U.S.-listed China-based companies has decreased in value and, in some cases,
has become virtually worthless. Many of these companies have been subject to shareholder lawsuits and SEC enforcement actions and have
conducted internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism
and negative publicity will have on us, our business. If we become the subject of any unfavorable allegations, whether such allegations
are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company.
This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our business operations
will be severely hindered and your investment in our Ordinary Shares could be rendered worthless.
We
face fierce competition in the health and nutritional supplements and cosmetic markets in China. We may not be able to keep pace with
competition in our industry, which could adversely affect our market share and result in a decrease in our future sales and earnings.
The
competition in the national health and nutritional supplements and cosmetics markets of the China is fierce. We compete primarily on
the basis of our technology, comprehensive customer service and brand recognition. Our competitors may compete with us in the following
ways:
| ● | provide
products and services that are similar to ours, or that are more attractive to customers than ours; |
| ● | provide
products and services we do not offer; |
| ● | offer
aggressive rebates to gain market share and to promote their businesses; |
| ● | adapt
at a faster rate to market conditions, new technologies and customer demands; |
| ● | offer
better, faster and more reliable technology; and |
| ● | market,
promote and provide their services more effectively. |
Our
main competitors include health and nutritional supplements and cosmetic retail companies, including traditional offline retail stores,
social e-commerce platforms, general business to consumers, or B2C, platforms and traditional distributors, as well as online platforms
specialized in health and nutritional supplements or cosmetics. These companies may have much more financial, technological, R&D,
marketing, distribution, retail and other resources than we do. They may also have a longer operating history, a larger customer base
or a wider and deeper market coverage. In addition, when we expand to other markets, we will face competition from new domestic or foreign
competitors, which may also enter our current market.
Although
we do not compete against other platforms, products and service providers solely based on prices, if our competitors offer their products
and services at lower prices, we may be forced to provide aggressive discounts or rebates to our customers and our revenue may decrease.
In
addition, in recent years, with the emergence of new internet business model and new retail industry, the low-price strategy of e-commerce
has led to greater pricing pressure. If this trend continues, it may lead to further competitive pressure on prices. The new partnership
and strategic alliance in the health and nutritional supplements and cosmetic industries will also change market dynamics, which may
adversely affect our business and competitive position.
Technologies
adopted by us and our competitors are developing rapidly, and new developments often lead to price competition, outdated products and
changes in market patterns. Any significant increase in competition could have a significant negative impact on our revenue and profitability,
as well as on our business and prospects. We cannot assure you that we will be able to constantly distinguish our products and services
from our competitors, maintain and improve our relationship with different participants in health and nutritional supplements and cosmetic
industries, or increase or even maintain our existing market share. We may lose market share. If we cannot compete effectively, our financial
situation and operating results may deteriorate seriously.
We
use third-party logistics and express delivery companies to complete and deliver orders placed on our platform. If these logistics and
express companies fail to provide reliable and timely delivery services, our business and reputation, as well as our financial situation
and operating results, may be adversely affected.
We
have contractual arrangements with a number of third-party logistic companies to deliver our products to our customers. We also use them
to deliver products from our fulfillment centers to delivery stations or to deliver commodity products. The interruption or failure of
these third-party delivery services may hinder timely or correct delivery of our products to our consumers. These disruptions may be
caused by events beyond our control or those beyond the control of delivery companies, such as bad weather, natural disasters, pandemic,
transportation disruptions or labor unrest. We may not be able to find replacement delivery companies in a short period of time to provide
timely and reliable delivery services, or we may not find them at all. Our business and reputation may be affected if the product is
not delivered in proper conditions or on time.
In
the direct sales business model, we manage inventory and delivery products with our own integrated processing system. In our market business
model, many of third-party sellers who sell their products on our platform use their own facilities to store products and use their own
or third-party delivery systems to deliver products to distributors and consumers that place orders on our platform, which makes it difficult
to ensure that such customers and distributors get consistent quality products and services for all products sold through our online
platform. If any market seller fails to control the quality of the products it sells on our platform, or if it fails to deliver the products
or delays the delivery of the products or delivers products that are substantially different from the product description, or if it sells
counterfeit or unauthorized products through our platform, or if it does not have the necessary licenses or permits required by relevant
laws and regulations, our reputation and brand name, may be adversely affected. We may also face claims and may be liable for damages
related to such claims.
Our
sales people may not always receive accurate information for the background and regulatory checks on the sellers using our platform or
control the quality of the products they sell on our platform, as well as whether they deliver the products they sell on our platform
timely and correctly, which may cause a significant negative impact on our business, financial situation, and operating results.
Internet
and network system limitations or failures could harm our business.
Our
businesses depend on the integrity and performance of the technology, computer and network systems supporting them. If our systems cannot
expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response
times and delays in the introduction of new products and services. These consequences could result in financial losses and decreased
customer service and satisfaction. If transaction volumes increase unexpectedly or other unanticipated events occur, we may need to expand
and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately
project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases
in a timely manner.
If
we fail to adopt new technologies or adapt our website, mobile application and systems to changing customer requirements or emerging
industry standards, our business may be materially and adversely affected.
To
remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our internet platform.
Our competitors are constantly developing innovations and introducing new products to increase their customer base and enhance user experience.
As a result, in order to attract and retain customers and compete against our competitors, we must continue to invest significant resources
in research and development to enhance our information technology and improve our existing products and services for our customers. The
internet and the online retail industry are characterized by rapid technological evolution, changes in customer requirements and preferences,
frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices,
any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify,
develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry
standards and practices in a cost-effective and timely way. The development of website, mobile application and other proprietary technology
entails significant technical and business risks. There can be no assurance that we will be able to use new technologies effectively
or adapt our website, mobile application, proprietary technologies and systems to meet customer requirements or emerging industry standards.
If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether
for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations may be materially
and adversely affected.
We
lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a
more diversified company.
Our
current primary business activities focus on the sale of health and nutritional supplements, cosmetics products and household products.
Because our focus is limited in this way, any risk affecting the health and nutritional supplements, cosmetics and household products
industries could disproportionately affect our business. Our lack of product and business diversification could inhibit the opportunities
for growth of our business, revenues and profits.
We may continue to
incur net losses in the future.
We had incurred a net loss of $6,389,076 and a
net profit of $3,586,692 in fiscal year of 2021 and 2020, respectively. We cannot assure you that we will be able to generate net income
or will have retained earnings in the future. We anticipate that our operating expenses will increase in the foreseeable future as we
seek to continue to grow our business, attract clients and partners and further enhance and develop our services and other offerings.
These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to
offset these higher expenses. As a result of the foregoing and other factors, we may incur additional net losses in the future and may
not be able to maintain profitability on a quarterly or annual basis.
We
may need additional capital, and financing may not be available on terms acceptable to us, or at all.
Although
we believe that our current cash and cash equivalents, anticipated cash flows from operating activities will be sufficient to meet our
anticipated working capital requirements and capital expenditures in the ordinary course of business for at least 12 months following
this report, we may need additional cash resources in the future if we experience changes in business conditions or other developments.
We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital
expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on
hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity
would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and
could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts
or on terms acceptable to us, if at all.
We
may incur substantial debt in the future, which may adversely affect our financial condition and negatively affect our operations.
We
may decide in the future to finance our business and operation through incurring debt. The incurrence of debt could have a variety of
negative effects, including:
| ● | default
and foreclosure on our assets if our operating revenue is insufficient to repay debt obligations; |
| ● | acceleration
of obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments when
due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation
of that covenant; |
| ● | our
inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing
while the debt security is outstanding; |
| ● | diverting
a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital
expenditures, acquisitions and other general corporate purposes; and |
| ● | creating
potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate. |
The
occurrence of any of these risks could adversely affect our operations or financial condition.
Our
quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.
Our
quarterly results of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics, may vary
significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of
our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter
are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the market price of our
Ordinary Shares. Factors that may cause fluctuations in our quarterly financial results include:
| ● | our
ability to attract new clients and retain existing clients; |
| ● | changes
in our mix of products and services and introduction of new products and services; |
| ● | the
amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure; |
| ● | our
decision to manage client volume growth during the period; |
| ● | the
impact of competitors or competitive products and services; |
| ● | increases
in our costs and expenses that we may incur to grow and expand our operations and to remain competitive; |
| ● | network
outages or security breaches; |
| ● | changes
in the legal or regulatory environment or proceedings, including with respect to security, privacy, or enforcement by government regulators,
including fines, orders or consent decrees; |
| ● | general
economic, industry and market conditions; and |
| ● | the
timing of expenses related to the development or acquisition of technologies or businesses. |
Despite
our marketing efforts, we may not be able to promote and maintain our brand in an effective and cost-efficient way and our business and
results of operations may be harmed accordingly.
We
believe that developing and maintaining awareness of our brand and business effectively is critical to attracting new and retaining existing
clients. Successful promotion of our brand and our ability to attract quality clients depends largely on the effectiveness of our marketing
efforts and the success of the channels we use to promote our services. Despite our marketing efforts, it is
likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased
revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we
fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition
would be adversely affected, which may impair our ability to grow our business.
From
time-to-time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management
attention, disrupt our business and adversely affect our financial results.
We
may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our marketplace
and better serve our customers. These transactions could be material to our financial condition and results of operations if consummated.
If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even
if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic
investments or acquisitions will involve risks commonly encountered in business relationships, including:
| ● | difficulties
in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business; |
| ● | inability
of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; |
| ● | difficulties
in retaining, training, motivating and integrating key personnel; |
| ● | diversion
of management’s time and resources from our normal daily operations; |
| ● | difficulties
in successfully incorporating licensed or acquired technology and rights into our platform and products; |
| ● | difficulties
in maintaining uniform standards, controls, procedures and policies within the combined organizations; |
| ● | difficulties
in retaining relationships with customers, employees and suppliers of the acquired business; |
| ● | risks
of entering markets in which we have limited or no prior experience; |
| ● | regulatory
risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals,
as well as being subject to new regulators with oversight over an acquired business; |
| ● | assumption
of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights
or increase our risk for liability; |
| ● | failure
to successfully further develop the acquired technology; |
| ● | liability
for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws,
commercial disputes, tax liabilities and other known and unknown liabilities; |
| ● | potential
disruptions to our ongoing businesses; and |
| ● | unexpected
costs and unknown risks and liabilities associated with strategic investments or acquisitions. |
We
may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business
strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended
benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to
the successful development of new or enhanced our existing products and services or that any new or enhanced products and services, if
developed, will achieve market acceptance or prove to be profitable.
Our
business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to
continue in their present positions, our business may be severely disrupted.
Our
business operations depend on the continued services of our senior management, particularly the executive officers named in this report.
While we have the ability to provide different incentives to our management, we cannot assure you that we can continue to retain their
services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to
replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition
and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain
qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there
is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises
between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements
in China or we may be unable to enforce them at all.
If
the basic salary of certain employees fails to meet the local minimum salary standard, we may be faced with labor dispute or compensation.
The remuneration we pay to our employee in general consists of basic
salary, subsidy and performance bonus subject to different department. For marketing staff, a great proportion of their remuneration is
the performance bonus. In accordance with the Labor Contract Law of People’s Republic of China, if the salary paid by the
employer to its employee is below the local minimum salary standard, the labor administrative authorities shall order the employer to
pay the shortfall; where payment is not made within the stipulated period, the employer shall be ordered to pay additional compensation
to the employee based on 50% to 100% of the amount payable. In principle, each province has its own local minimum standard and the local
minimum salary standard is subject to change each year. Our basic salary has been meeting the current local minimum salary standard. However,
we cannot assure you that we can adjust the employees’ basic salary in time to meet the changing minimum standard. In such case,
we may be faced with labor dispute or compensation.
Competition
for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We
believe our success depends on the efforts and talent of our employees, including risk management, software engineering, information
technology, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and
retain qualified and skilled employees. Competition for highly skilled marketing, technical, risk management and financial personnel
is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation
and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may
be able to offer more attractive terms of employment.
In
addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek
to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and
the quality of our services and our ability to serve borrowers and lenders could diminish, resulting in a material adverse effect to
our business.
If
we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We
believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and
cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain
these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including
our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We
do not have any business insurance coverage.
Insurance
companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies.
Currently, the Company does not carry any business interruption insurance, product liability insurance or any other business insurance
policies. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance
on commercially reasonable terms make it impractical for us to have such insurance. However, as a result the Company may incur uninsured
losses, and any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could
have an adverse effect on our results of operations and financial condition.
We
may have exposure to greater than anticipated tax liabilities.
We
are subject to enterprise income tax, value-added tax, and other taxes in each province and city in China where we have operations. Our
tax structure is subject to review by various local tax authorities. The determination of our provision for income tax and other tax
liabilities requires significant judgment. In the ordinary course of our business, there are many transactions and calculations where
the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by the relevant
tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial results in the
period or periods for which such determination is made.
We
may be subject to allegations, lawsuits and negative publicity claiming the sale, distribution, marketing and advertising of counterfeit
or substandard products in our retail and wholesale businesses of health and nutritional supplements and cosmetic products.
We
may face charges, litigation and administrative penalties related to the sale, distribution, marketing and advertising of counterfeit
or substandard products in our retail and wholesale businesses of health and nutritional supplements and cosmetic products, which may
damage our brand and reputation and have a significant adverse impact on us. The impact on our business, financial situation, operating
results and business prospects.
Certain
products distributed or sold in the retail and wholesale markets of health and nutritional supplements and cosmetic products in China
may be manufactured without appropriate license or approval, and/or may have fraudulent labelling errors in their content and/or manufacturer.
These products are often referred to as counterfeit or unqualified products.
The
current regulatory control and enforcement system of counterfeit and inferior products in China is not mature enough to completely eliminate
the production and sale of counterfeit products. The selling price of fake and inferior products is usually lower than that of genuine
products. In some cases, the appearance of fake and inferior products is very similar to that of genuine products. Therefore, the existence
of counterfeit products may quickly erode our sales volume and revenue from related products.
In addition, counterfeit or substandard products may or may not have
the same chemical composition as genuine products, which may make them less effective than genuine products, completely ineffective, or
more likely to lead to serious side effects. We may not be able to identify counterfeit or substandard products we purchased from suppliers.
Any unintentional or unknowingly sale of counterfeit or substandard products in our product distribution or retail business, or illegal
use of our brand name by third parties to sell counterfeit or substandard products, may cause negative publicity, fines and other administrative
penalties to us, and even lead to lawsuits related to the sale, marketing and advertising of these products. In addition, the persistence
of counterfeit and inferior products may enhance the overall negative image of distributors and retailers among consumers, and may seriously
damage the reputation and brand of other sellers including us. Similarly, consumers can buy counterfeit and substandard products that
compete directly with those distributed or sold in our retail and wholesale businesses, which may have a significant negative impact on
the sales of related products in our product portfolio and further affect our business, financial situation, operating results and prospects.
If
counterfeit products are sold on our internet platform, our reputation and financial results could be materially and adversely affected.
Suppliers
and third-party merchants on our internet platform are separately responsible for sourcing the products that are sold on our internet
platform. Although we have adopted measures to verify the authenticity of products sold on our internet platform and to immediately remove
any counterfeit products found on our internet platform, these measures may not always be successful. Potential sanctions under PRC law,
if we were to negligently participate or assist in infringement activities associated with counterfeit goods, include injunctions to
cease infringing activities, rectification, compensation, administrative penalties and even criminal liability, depending on the gravity
of such misconduct. Furthermore, counterfeit products may be defective or inferior in quality as compared to authentic products and may
pose safety risks to our customers. If our customers are injured by counterfeit products sold on our internet platform, we may be subject
to lawsuits, severe administrative penalties and criminal liability. See “— We may be subject to product liability claims
if our customers are harmed by the products sold on our internet platform.” We believe our brand and reputation are extremely
important to our success and our competitive position. The discovery of counterfeit products sold on our internet platform may severally
damage our reputation and cause customers to refrain from making future purchases from us, which would materially and adversely affect
our business operations and financial results.
We
may be subject to product liability claims if our customers are harmed by the products sold on our internet platform.
We
sell products manufactured by third parties, some of which may be defectively designed or manufactured, of inferior quality or counterfeit.
For example, cosmetic products in general, regardless of their authenticity or quality, may cause allergic reactions or other illness
that may be severe for certain customers. Sales and distributions of products on our internet platform could expose us to product liability
claims relating to personal injury and may require product recalls or other actions. Third parties that have suffered such injury may
bring claims or legal proceedings against us as the retailer of the products or as the marketplace service provider. Although we would
have legal recourse against the manufacturers, suppliers or third-party merchants of such products under PRC law, attempting to enforce
our rights against the manufacturers, suppliers or third-party merchants may be expensive, time-consuming and ultimately futile. Defective,
inferior or counterfeit products or negative publicity as to personal injury caused by products sold on our platform may adversely affect
consumer perceptions of our company or the products we sell, which could harm our reputation and brand image. In addition, we do not
currently maintain any product liability insurance or third-party liability insurance coverage for the products offered through third-party
merchants. As a result, any material product liability claim or litigation could have a material and adverse effect on our business,
financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts
in defending them and could have a negative impact on our reputation.
We
collect, process and use data, some of which contains personal information. Any privacy or data security breach could damage our reputation
and brand and substantially harm our business and results of operations.
As
a technology-based platform, our business generates and processes a large quantity of personal, transaction, behavioral and demographic
data. We face risks inherent in handling and protecting large volumes of data, including protecting the data hosted in our system, detecting
and prohibiting unauthorized data share and transfer, preventing attacks on our system by outside parties or fraudulent behavior or improper
use by our employees, and maintaining and updating our database. Any system failure, security breach or third parties attacks or attempts
to illegally obtain the data that results in any actual or perceived release of user data could damage our reputation and brand, deter
current and potential customers from using our services, damage our business, and expose us to potential legal liability.
We
also have access to a large amount of confidential information in our day-to-day operations. Each order contains the names, addresses,
phone numbers and other contact information of the sender and recipient of an order placed and delivered through our platforms. The content
of the item delivered may also constitute or reveal confidential information. Although we have data security polices and measures in
place, we cannot assure you that the information will not be misappropriated, as our personnel handle the orders and have access to the
relevant confidential information.
We
are subject to local laws and regulations relating to the collection, use, storage, transfer, disclosure and security of personally identifiable
information with respect to our customers and employees including any requests from regulatory and government authorities relating to
this data. Further, PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. We
expect that these areas will receive greater public scrutiny and attention from regulators, which could increase our compliance costs
and subject us to heightened risks and challenges. If we are unable to manage these risks, we could become subject to penalties, fines,
suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely
affected.
We
may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We
regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success,
and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality agreements with all
our employees and officers as well as non-compete agreements with our executive officers to protect our proprietary rights. Thus, we
cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated,
or that such intellectual property will be sufficient to provide us with competitive advantages. In addition, because of the rapid pace
of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may
not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all and we
might have to invest on research and development on our own technologies in such areas.
It
is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject
to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation.
Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies
available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce
our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we
take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce
our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources.
We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become
available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property
owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting
or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of
operations.
We
may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We
cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks,
patents, copyrights, know-how or other intellectual property rights held by third parties. We have in the past and may in the future
be subject to legal proceedings and claims relating to the intellectual property rights of others. For example, in 2018 Shanghai Juhao
was sued by an individual for copyright infringement for the use Shanghai Juhao’s logo. Although the case was dismissed by the
court as Shanghai Juhao had already registered its logo/drawing as its trademark before the plaintiff registered her drawing for copyright,
there is no guarantee that there will not be any other similar lawsuits brought against us in the future. In addition, there may be third-party
trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services
or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual
property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against
us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims,
regardless of their merits.
Additionally,
the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks,
patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure
you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property
rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property,
and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations
may be materially and adversely affected.
We
face risks related to health epidemics, severe weather conditions and other outbreaks.
In recent years, there have been outbreaks of
epidemics in various countries, including China. Beginning in late 2019, there was an outbreak of a novel strain of coronavirus (COVID-19)
which has spread quickly to many parts in China, the U.S. and globally In March 2020, the World Health Organization declared COVID-19
a pandemic. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities
in China and in the U.S. Starting from March 2020, businesses in China began to reopen, and the interruptions to businesses were gradually
removed. However, due to the recent outbreak of Omicron variant in many cities in China, including
Xi’an, Hong Kong, Shanghai, Guangzhou and Suzhou, local governments have imposed new restrictions and quarantine requirements
with travel restrictions and temporary closure of office buildings and facilities, and the
employees at our Shanghai office have been working from home since March 30, 2022.
Substantially
all of our revenues and our sales are concentrated in China. Consequently, our results of operations have been and may continuously be
adversely affected to the extent that the COVID-19 outbreak or any other epidemic harm the Chinese and global economy. Any potential
impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration
and severity of the COVID-19 outbreak and the actions taken by government authorities and other entities to contain the COVID-19 outbreak
or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:
| ● | temporary
closure of offices, travel restrictions or suspension of shipment of our products to our customers Our suppliers have been negatively
affected during the outbreak, and could continue to be negatively affected, which could have an effect on their ability to supply and
ship products to us if there is a resurgence of COVID-19 in China; |
| ● | our
customers that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase our products, which may materially
adversely impact our revenue; |
| ● | our
customers may require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable
and require us to record additional allowances for doubtful accounts. We have provided significant sales incentives to our customers
and distributors during the outbreak and may continue to provide such incentives in the future, which may in turn materially adversely
affect our financial condition and operating results; |
| ● | the
business operations of our authorized physical stores and distributors have been negatively impacted by the outbreak and could continue
to be negatively impacted if there is any resurgence of COVID-19 in China, which may negatively impact their purchase of our products
and our distribution channel, or result in loss of customers and business, which may in turn materially adversely affect our financial
condition and operating results; |
| ● | any
disruption of our supply chain, logistics providers, customers or our marketing activities could adversely impact our business and results
of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to us
and customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us; |
| ● | many
of our customers, authorized store owners, distributors, suppliers and other partners are individuals and small and medium-sized enterprises
(SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic
conditions. If the SMEs that we work with cannot weather the COVID-19 outbreak and the resulting economic impact, or cannot resume business
as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted; |
| ● | the
global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak, which could materially
adversely affect our stock price and ability to seek financing from capital market. |
Because
of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus
cannot be reasonably estimated at this time, our consolidated results for the year 2022 may be adversely affected.
In
general, our business could be adversely affected by the effects of epidemics, including, but not limited to, COVID-19, avian influenza,
severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, severe weather conditions such as a snowstorm, flood or
hazardous air pollution, or other outbreaks. In response to an epidemic, severe weather conditions, or other outbreaks, government and
other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary
closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments, including
but not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or visits with
clients and partners for a prolonged period of time. Various impact arising from a severe condition may cause business disruption, resulting
in material, adverse impact to our financial condition and results of operations.
The
relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our
management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such
as those imposed by the Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”). Our senior management does not have much experience
managing a publicly-traded company. Such responsibilities include complying with federal securities laws and making required disclosures
on a timely basis. Our senior management may be unable to implement programs and policies in an effective and timely manner or that adequately
respond to the increased legal, regulatory and reporting requirements associated with being a publicly traded company. Our failure to
comply with all applicable requirements could lead to the imposition of fines and penalties, distract our management from attending to
the management and growth of our business, result in a loss of investor confidence in our financial reports and have an adverse effect
on our business and stock price.
Risks
Related to Our Corporate Structure
If the PRC government
deems that the contractual arrangements in relation to our consolidated variable interest entity do not comply with PRC regulatory restrictions
on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the
future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign
ownership of internet-based businesses, including value-added telecommunications services, is subject to restrictions under current
PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a
value-added telecommunication service provider (except for the e-commerce business) in accordance with the Foreign Investment Entry
Clearance Negative List (the 2021 version), promulgated in 2021, or the Negative List, and other applicable laws and regulations. As provided
for under the Negative List, “e-commerce business” is an exception to the above restriction on
foreign investment. However, the above Negative List does not define the “e-commerce business,” and its interpretation
and enforcement involve significant uncertainties, therefore, we cannot assure you that whether our online retail business and
distribution of online information falls into the “e-commerce business” and thus, whether we are permitted to conduct
our value-added telecommunication services in the PRC through our subsidiaries in which foreign investors own more than 50% of
equity interests.
We
are a Cayman Islands exempted company with limited liability and our PRC subsidiary is considered a foreign invested enterprise. To comply
with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into among WFOE,
our VIE and the shareholders of our VIE. As a result of these contractual arrangements, we exert control over our VIE and consolidate
its operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see
“4.C. Organizational Structure - Variable Interest Entity Arrangements.”
In
the opinion of our PRC counsel, Yiyou Tianyuan Law Firm, our current ownership structure, the ownership structure of our PRC subsidiary
and our consolidated VIE, and the contractual arrangements among WFOE, our VIE and the shareholders of our VIE are common practices for
the companies listed on stock exchanges in Hong Kong or the U.S. engaging in the businesses on Negative List in China and these contractual
arrangements are valid and binding in accordance with their terms and applicable PRC laws and regulations currently in effect. However,
Yiyou Tianyuan Law Firm has also advised us that there are substantial uncertainties regarding the interpretation and application of
current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is
consistent with the opinion of our PRC counsel.
If
the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the value-added
telecommunication service business, the relevant PRC regulatory authorities, including the China Securities Regulatory Commission (CSRC),
would have broad discretion in dealing with such violations or failures, including, without limitation:
| ● | discontinuing
or placing restrictions or onerous conditions on our operations; |
| ● | imposing
fines, confiscating the income from the WFOE or our VIE, or imposing other requirements with which we or our VIE may not be able to comply; |
| ● | requiring
us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering
the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective
control over our VIE; |
| ● | restricting
or prohibiting our use of the proceeds of foreign offerings to finance our business and operations in China; or |
| ● | taking
other regulatory or enforcement actions that could be harmful to our business. |
The
imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition,
it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our
VIE in our consolidated financial statements, if the PRC government authorities were to find our VIE structure and contractual arrangements
to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct
the activities of our VIE or our right to receive substantially all of the economic benefits and residual returns from our VIE and we
are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate
the financial results of our VIE in our consolidated financial statements. Either of these results, or any other significant penalties
that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.
We
rely on contractual arrangements with our VIE and the shareholders of our VIE for our business operations, which may not be as effective
as direct ownership in providing operational control.
We have relied and expect to continue to rely
on contractual arrangements with our VIE, Shanghai Juhao, to operate our platform. These contractual arrangements may not be as effective
as direct ownership in providing us with control over our consolidated variable interest entity. For example, our consolidated variable
interest entity and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their
operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions
that are detrimental to our interests.
If we had direct ownership of our VIE, we would
be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, which in turn could implement
changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual
arrangements, we rely on the performance by our consolidated variable interest entity and their shareholders of their obligations under
the contracts to exercise control over our consolidated variable interest entity. The shareholders of our consolidated variable interest
entity may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist
throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated variable
interest entity. Although we have the right to replace any shareholder of our consolidated variable interest entity under the contractual
arrangement, if any shareholder of our consolidated variable interest entity is uncooperative or any dispute relating to these contracts
remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation
and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factors—Any
failure by our consolidated variable interest entity or its shareholders to perform their obligations under our contractual arrangements
with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with our consolidated
variable interest entity may not be as effective in ensuring our control over the relevant portion of our business operations as direct
ownership would be.
Any
failure by our consolidated VIE or their shareholders to perform their obligations under our contractual arrangements with them would
have a material adverse effect on our business.
If
our consolidated VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have
to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under
PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective
under PRC laws. For example, if the shareholders of our VIE were to refuse to transfer their equity interest in the VIE to us or our
designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith
toward us, then we may have to take legal action to compel them to perform their contractual obligations.
All the agreements under our contractual arrangements are governed
by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted
in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is
not as well established as in some other jurisdictions, such as in the United States. As a result, uncertainties in the PRC legal system
could limit our ability to enforce these contractual arrangements. Some regulations might be unfavorable to VIEs. However, despite there
are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest
entity should be interpreted or enforced under PRC laws and there remain significant uncertainties regarding the ultimate outcome of such
arbitration should legal action become necessary. Currently, most of the Chinese companies listed on overseas stock exchanges and are
in the internet-based business such as e-commerce or online-gaming have adopted a VIE structure. In addition, under PRC laws, rulings
by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable
by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties
may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional
expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other
obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated
variable interest entity, and our ability to conduct our business may be negatively affected. See “Risk Factors—Risks Related
to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal
protections available to you and us.”
The
shareholders of our consolidated VIE may have potential conflicts of interest with us, which may materially and adversely affect our
business and financial condition.
The shareholders of Shanghai Juhao and their interests in Shanghai
Juhao may differ from their interests of our Company as a whole. These shareholders may breach, or cause our consolidated variable interest
entity to breach, the existing contractual arrangements we have with them and our consolidated variable interest entity, which would have
a material adverse effect on our ability to effectively control our consolidated variable interest entity and receive economic benefits
from them. For example, the shareholders may be able to cause our agreements with Shanghai Juhao to be performed in a manner adverse to
us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure
you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts
will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we
could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their
equity interests in Shanghai Juhao to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot
resolve any conflict of interest or dispute between us and the shareholders of Shanghai Juhao, we would have to rely on legal proceedings,
which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
If
the custodians or authorized users of our controlling non-tangible assets, including chops and seals of our VIE, fail to fulfill their
responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
Under
PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using
the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with
the relevant local branch of the State Administration for Market Regulation (“SAMR”), formerly known as the State Administration
for Industry and Commerce. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives
sign the documents.
We use two major types of chops: corporate chops and finance chops.
Chops are seals or stamps used by a PRC company to legally authorize documents, often in place of a signature. We use corporate chops
generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company
name, and for legal letters in China. We use finance chops generally for making and collecting payments, including issuing invoices. Use
of corporate chops must be approved by department manager and office of the president, and use of finance chops must be approved by our
finance department. The chops of our subsidiary and consolidated VIE are generally held by the relevant entities so that documents can
be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiary and
consolidated VIE in China have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts
set forth otherwise.
In
order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated
key employees of the office of the president or finance departments. Our designated legal representatives generally do not have access
to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives
of our subsidiary and consolidated VIE, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is
a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiary
and consolidated VIE with contracts against our interests, as we would be obligated to honor these contracts if the other contracting
party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated
legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder
or board resolution to designate a new legal representative to take legal action to seek the return of the chop, apply for a new chop
with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated
legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever
reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could
involve significant time and resources to resolve the matter, while distracting management from our operations, and our business operations
may be materially and adversely affected.
Contractual arrangements
in relation to our consolidated variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine
that we or our PRC consolidated variable interest entity owe additional taxes, which could negatively affect our financial condition
and the value of your investment.
Under
applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the
PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires
every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties
to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related
party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the
PRC tax authorities determine that the contractual arrangements between WFOE, our wholly-owned subsidiary in China, our consolidated
VIE in China, and the shareholders of our VIE were not entered into on an arm’s length basis in such a way as to result in an impermissible
reduction in taxes under applicable PRC laws, rules and regulations, and adjust our VIE’s income in the form of a transfer pricing
adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE
for PRC tax purposes, which could in turn increase its tax liabilities without reducing WFOE’s tax expenses. In addition, if WFOE
requests the shareholders of our VIE to transfer their equity interests in the VIE at nominal or no value pursuant to these contractual
arrangements, such transfer could be viewed as a gift and subject our WFOE and VIE to PRC income tax. Furthermore, the PRC tax authorities
may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations.
Our financial position could be materially and adversely affected if our consolidated variable interest entity’ tax liabilities
increase or if it is required to pay late payment fees and other penalties.
We may lose the ability
to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if the entity goes bankrupt or
become subject to a dissolution or liquidation proceeding.
Our
consolidated VIE holds certain assets that are material to the operation of our business, including domain names, software and equipment
for the online platform. Under the contractual arrangements, our consolidated VIE may not and their shareholders may not cause it to,
in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior
consent. However, in the event the shareholders of our consolidated VIE breach the contractual arrangements and voluntarily liquidate
our consolidated VIE or our consolidated VIE declare bankruptcy and all or part of its assets become subject to liens or rights of third-party
creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which
could materially and adversely affect our business, financial condition and results of operations. If our consolidated VIE undergoes
a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets,
thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition
and results of operations.
Risks
Related to Doing Business in China
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and results of operations.
The
operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations
may be influenced by the political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy.
The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation, among other things.
The
Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities
are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange
transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s
Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order
to affect the remittance.
The
Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and
the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still
owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development
by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through
allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies.
While
the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by government control over capital investments or changes in
tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases,
to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s
economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and
materially and adversely affect our business and results of operations.
If
the Chinese government determines that the contractual arrangements through which we control our VIE do not comply with applicable regulations,
our business could be adversely affected.
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 contractual arrangements with Shanghai Juhao and its shareholders.
Although we have been advised by our PRC counsel that based on their understanding of the current PRC laws, rules and regulations, the
contractual arrangements, as well our ability to enforce our rights thereunder, comply with all applicable PRC laws, rules and regulations,
and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we cannot assure you
that the PRC regulatory authorities will not determine that our corporate structure and contractual arrangements violate PRC laws, rules
or regulations. In addition, new PRC laws, rules and regulations may be introduced from time to time to impose additional requirements
that may be applicable to our contractual arrangements. If the PRC government determines that the contractual arrangements constituting
part of our VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future,
the value of our securities may decline or become worthless if the determinations, changes, or interpretations result in our inability
to assert contractual control over the business and assets of our VIE that conduct all or substantially all of our operations in China.
The
Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business
and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant
governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of
existing or new Chinese laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure
would not be found in violation of any current or future Chinese laws or regulations. As a result, we may be subject to sanctions, including
fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could
significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which
could materially and adversely affect our business, financial condition and results of operations and the value of our securities may
decline in value or become worthless.
We
conduct our operations in China through our VIE Shanghai Juhao, which entered into a series of contractual arrangements by and among
WFOE, our VIE and its shareholders. These contractual agreements enable us to (i) exercise control over our VIE, (ii) receive substantially
all of the economic benefits of our VIE, and (iii) have an exclusive call option to purchase all or part of the equity and asset interests
in our VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we exert control over our VIE
and consolidate financial results of our VIE in our financial statements under U.S. GAAP.
In
the opinion of our PRC legal counsel, (i) the ownership structures of our VIE and WFOE in China are not in violation of mandatory provisions
of applicable PRC laws and regulations currently in effect; and (ii) the agreements under the contractual arrangements among WFOE, our
VIE and its shareholders governed by PRC law are valid and binding upon each party to such agreements and enforceable against each party
thereto in accordance with their terms and applicable PRC laws and regulations currently in effect. However, we have been further advised
by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC
laws and regulations. If we or our VIE are determined to be in violation of any existing or future PRC laws, rules or regulations or
fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have
broad discretion in dealing with such violations, including:
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revoking the business and
operating licenses of Shanghai Juhao and/or voiding the contractual arrangements; |
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discontinuing or restricting
the operations of Shanghai Juhao; |
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imposing conditions or
requirements with which we or Shanghai Juhao may not be able to comply; |
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requiring us to restructure
the relevant ownership structure or operations; |
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restricting or prohibiting
our use of the proceeds from our offering to finance our business and operations in China; or |
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imposing fines or other
forms of economic penalties. |
As
we do not have direct ownership of Shanghai Juhao, the imposition of any of these penalties may have a material adverse effect on our
financial condition, results of operations and prospects. If occurrences of any of these events result in our inability to direct the
activities of our VIE and its subsidiaries in China, and/or our failure to receive the economic benefits and residual returns from our
consolidated variable interest entity, and we are not able to restructure our ownership structure and operations in a satisfactory manner,
we may not be able to consolidate the financial results of our VIE in our consolidated financial statements in accordance with U.S. GAAP.
Uncertainties
and quick change in the interpretation and enforcement of Chinese laws and regulations with little advance notice could result in a material
and negative impact our business operations, decrease the value of our securities and limit the legal protections available to you and
us.
The
PRC legal system is based on written statutes, and prior court decisions have limited value as precedents. Since these laws and regulations
are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are
not always uniform and enforcement of these laws, regulations and rules involves uncertainties. The enforcement of laws and that
rules and regulations in China can change quickly with little advance notice and the risk that the Chinese government may intervene or
influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-
based issuers, could result in a material change in our operations and/or the value of our securities.
On
July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly
issued an announcement to crack down on illegal activities in the securities market and promote the high-quality development of the capital
market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement
and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system
of extraterritorial application of the PRC securities laws. Since this announcement is relatively new, uncertainties still exist in relation
to how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed
implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations
will have on companies like us and our securities. Any actions by the Chinese government to exert more oversight and control over offerings
that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability
to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
On
February 15, 2022, Cybersecurity Review Measures published by Cyberspace Administration of China, National Development and Reform Commission,
Ministry of Industry and Information Technology, Ministry of Public Security, Ministry of State Security, Ministry of Finance, Ministry
of Commerce, People’s Bank of China, State Administration of Radio and Television, China Securities Regulatory Commission, State
Secrecy Administration and State Cryptography Administration became effective, which provides that, Critical Information Infrastructure
Operators (“CIIOs”) that intend to purchase internet products and services and Data Processing Operators (“DPOs”)
engaging in data processing activities that affect or may affect national security shall be subject to the cybersecurity review by the
Cybersecurity Review Office. On November 14, 2021, CAC published the Administration Measures for Cyber Data Security (Draft for Public
Comments), or the “Cyber Data Security Measure (Draft)”, which requires cyberspace operators with personal information of
more than 1 million users who want to list abroad to file a cybersecurity review with the Office of Cybersecurity Review. As confirmed
by our PRC counsel, we are currently not subject to cybersecurity review with the Cyberspace Administration of China (“CAC”)
under these new measures, because we operate our online platforms and our data processing activities do not affect or may not affect
national security. Nevertheless, the aforementioned measures and any related implementation rules to be enacted may subject us to additional
compliance requirement in the future.
We
cannot rule out the possibility that the PRC government will institute a licensing regime or pre-approval requirement covering our
industry at some point in the future. If such a licensing regime or approval requirement were introduced, we cannot assure you that we
would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business
and impede our ability to continue our operations.
From
time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Since PRC administrative and
court authorities have significant discretion in interpreting and implementing statutory and contractual terms, however, it may be more
difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy in the PRC legal
system than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules
(some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of
our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainties over the scope
and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes
in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.
Increases
in labor costs in the PRC may adversely affect our business and results of operations.
The economy in China has experienced increases in inflation and labor
costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC
laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury
insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant
government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers
who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs,
including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased
labor costs to our customers by increasing the prices of our products and services, our financial condition and results of operations
may be adversely affected.
Uncertainties
with respect to the PRC legal system could adversely affect us.
The
PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil
law system may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system
of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly
enhanced the protection afforded to various forms of foreign investments in China. However, China has not developed a fully integrated
legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular,
the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities
have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate
the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment
on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties
may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.
In
addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources
and management attention.
Uncertainties in
the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.
The
PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations
are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are
not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
In
particular, PRC laws and regulations concerning the valued added telecom service and online retail industry are developing and evolving.
Although we have taken measures to comply with the laws and regulations that are applicable to our business operations, and avoid conducting
any activities that may be deemed as illegal under the current applicable laws and regulations, the PRC government authority may promulgate
new laws and regulations regulating the valued added telecom service and online retail industry in the future. Even though we are at
present fully licensed to conduct our business, we cannot assure you that any new laws or regulations which require new certifications
will not be passed in the future and we might not be able to obtain such new certifications to continuously conduct our business as we
currently do. Moreover, developments in valued added telecom service and online retail may lead to changes in PRC laws, regulations and
policies or in the interpretation and application of existing laws, regulations and policies that may limit or restrict online retail
for health and nutritional supplements and cosmetic products like us, which could materially and adversely affect our business and operations.
Furthermore, we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry at some
point in the future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required
license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our
operations.
Because
we are a Cayman Islands corporation and all of our business is conducted in the PRC, you may be unable to bring an action against us
or our officers and directors or to enforce any judgment you may obtain. It may also be difficult for you or overseas regulators to conduct
investigations or collect evidence within China.
We
are incorporated in the Cayman Islands and conduct our operations primarily in China. All of our assets are located outside of the United
States. In addition, majority of our directors and officers reside outside of the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in the United States in the event that you believe we have
violated your rights, either under United States federal or state securities laws or otherwise, or if you have a claim against us. Even
if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may not permit you to enforce a
judgment against our assets or the assets of our directors and officers.
It
may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example, in China,
there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside
China or otherwise with respect to foreign entities. Although the authorities in China may establish a regulatory cooperation mechanism
with its counterparts of another country or region to monitor and oversee cross-border securities activities, such regulatory cooperation
with the securities regulatory authorities in the Unities States may not be efficient in the absence of practical cooperation mechanism.
Furthermore, according to Article 177 of the PRC Securities Law, or “Article 177,” which became effective in March 2020,
no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory
of the PRC. Article 177 further provides that Chinese entities and individuals are not allowed to provide documents or materials related
to securities business activities to foreign agencies without prior consent from the securities regulatory authority of the PRC State
Council and the competent departments of the PRC State Council. While detailed interpretation of or implementing rules under Article
177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection
activities within China may further increase difficulties faced by you in protecting your interests.
The
Holding Foreign Companies Accountable Act, or the HFCA Act, and the related regulations are evolving quickly. Further implementations
and interpretations of or amendments to the HFCA Act or the related regulations, or a PCOAB’s determination of its lack of sufficient
access to inspect our auditor, might pose regulatory risks to and impose restrictions on us because of our operations in mainland China.
A potential consequence is that our ordinary shares may be delisted by the exchange. The delisting of our ordinary shares, or the threat
of our ordinary shares being delisted, may materially and adversely affect the value of your investment. Additionally, the inability
of the PCAOB to conduct full inspections of our auditor deprives our investors of the benefits of such inspections.
The
Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. In accordance with the HFCA Act, trading
in securities of any registrant on a national securities exchange or in the over-the-counter trading market in the United States
may be prohibited if the PCAOB determines that it cannot inspect or fully investigate the registrant’s auditor for three consecutive
years beginning in 2021, and, as a result, an exchange may determine to delist the securities of such registrant. On June 22, 2021, the
U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require
the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections
for two consecutive years instead of three, thus reducing the time period before our securities may be prohibited from trading or delisted
if our auditor is unable to meet the PCAOB inspection requirement.
On
November 5, 2021, the SEC adopted the PCAOB rule to implement HFCA Act, which provides a framework for the PCAOB to determine whether
it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position
taken by one or more authorities in that jurisdiction.
On
December 2, 2021, SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The
rules apply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting
firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (the “Commission-Identified
Issuers”). A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual
report for each year in which it was identified. If a registrant is identified as a Commission-Identified Issuer based on its annual
report for the fiscal year ended December 31, 2021, the registrant will be required to comply with the submission or disclosure requirements
in its annual report filing covering the fiscal year ended December 31, 2022.
On
December 16, 2021, the PCAOB issued its determinations (the “Determination”) that they are unable to inspect or investigate
completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong. The Determination includes
lists of public accounting firms headquartered in mainland China and Hong Kong that the PCAOB is unable to inspect or investigate completely.
On
February 4, 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing Pre-Eminence in Technology
and Economic Strength (COMPETES) Act of 2022 (the “America COMPETES Act”). If the America COMPETES Act is enacted into law,
it would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if
its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
The
enactment of the HFCA Act and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory
access to audit information could cause investors uncertainty for affected issuers and the market price of our ordinary shares could
be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement.
The
lack of access to PCAOB inspections prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based
in China and Hong Kong. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB
to conduct inspections of auditors in China and Hong Kong makes it more difficult to evaluate the effectiveness of these accounting firm’s
audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections.
Our auditor, Friedman LLP, an independent registered public accounting
firm that is headquartered in the United States, as an auditor of companies that are traded publicly in the United States and a firm registered
with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts inspections to assess its compliance with
the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis, with the last inspection conducted
in June 2018, and it is not subject to the determinations announced by the PCAOB on December 16, 2021. However, the recent developments
would add uncertainties to us and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent
criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of
personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit. If it is later determined
that the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction
or any other reasons, the lack of inspection could cause the trading in our securities to be prohibited under the Holding Foreign Companies
Accountable Act, and as a result Nasdaq may delist our securities. If our securities are unable to be listed on another securities exchange,
such a delisting would substantially impair your ability to sell or purchase our securities when you wish to do so, and the risk and uncertainty
associated with a potential delisting would have a negative impact on the price of our ordinary shares. Further, new laws and regulations
or changes in laws and regulations in both the United States and China could affect our ability to list our ordinary shares on Nasdaq,
which could materially impair the market for and market price for our securities.
Substantial
uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the
viability of our current corporate structure, corporate governance and business operations.
On
March 15, 2019, the National People’s Congress, or the NPC, approved the Foreign Investment Law, which has taken effect on January
1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture
Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-owned Enterprise Law, together with
their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize
its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate
legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation
to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to
the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it
does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment
through contractual arrangements would not be interpreted as a type of indirect foreign investment activity under the definition in the
future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means
stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway
for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as
a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in
violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative
regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure, corporate governance and business operations.
We
may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business
and results of operations.
The
PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their
interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine
what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We
only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment in businesses
providing value-added telecommunication services (VATS) in China, including internet information provision services. This may significantly
disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects
on us.
The
evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May
2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement
of the State Council Information Office, Ministry of Industry and Information Technology (“MIIT”), and the Ministry of Public
Security). The primary role of this new agency is to facilitate policy-making and legislative development in this field, to direct and
coordinate with the relevant departments in connection with online content administration, and to deal with cross-ministry regulatory
matters in relation to the internet industry.
Our
online platform, operated by our VIE Shanghai Juhao, may be deemed to be providing commercial internet content-related services and online
data processing and transaction processing services, which would require Shanghai Juhao to obtain an Electronic Data Interchange (EDI)
License. Each of EDI License is under the category of value-added telecommunications business operating licenses, or VATS License. The
Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, issued
by the MIIT in July 2006, prohibits domestic telecommunications service providers from leasing, transferring or selling telecommunications
business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor
for their illegal operation of a telecommunications business in China. The circular also requires each license holder to have the necessary
facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license.
According to the recent practice in China, if any commercial internet content-related service or online data processing and transaction
processing service is to be carried out via mobile apps, such mobile apps are required to be registered on the VATS License of the operator
of such mobile apps. Our Juhao mobile app has been registered on the VATS License held by Shanghai Juhao. However, Shanghai Juhao did
not apply for a value-added telecommunications business license until 2017 as its business operations were small and service fees generated
by third party stores was immaterial for the Company. Although our PRC counsel believes that it is unlikely such operation without appropriate
license will be considered as a material violation of the applicable regulation and that the possibility that the Company be penalized
is remote due to the immaterial amount generated from the valued-added telecommunication business, if there is any enforcement action
by government agencies due to such violation which affects our eligibility of existing license or future license application, it may
significantly disrupt our business, subject us to sanctions, enforcement, or have other harmful effects on our operation and financial
conditions.
The
interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating
to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in,
and the businesses and activities of, internet businesses in China, including our business. Although we believe that we currently have
obtained necessary license to practice our business, we cannot assure you that we will be always able to meet all of requirements in
the future to renew the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses
or obtain new ones.
We
rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have,
and any limitation on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to
conduct our business.
We are a holding company, and we rely on dividends and other distributions
on equity paid by our PRC subsidiary for our cash and financing requirements, including the funds necessary to pay dividends and other
cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future,
the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax
authorities may require our WFOE to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated
variable interest entity in a manner that would materially and adversely affect its ability to pay dividends and other distributions to
us. See “Risk Factors—Risks Related to Our Corporate Structure—Contractual arrangements in relation to our consolidated
variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated
variable interest entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.”
Under
PRC laws and regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of its accumulated
after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise
is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds,
until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise
may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds
and staff welfare and bonus funds are not distributable as cash dividends.
Any
limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit
our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and
conduct our business. See also “Risk Factors —If we are classified as a PRC resident enterprise for PRC income tax purposes,
such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion
may delay or prevent us from using the proceeds of our offerings and financings in the U.S. to make loans to or make additional capital
contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our
business.
We
are an offshore holding company conducting our operations in China through our PRC subsidiaries and our VIE. We may make loans to our
PRC subsidiaries and VIE subject to the approval from governmental authorities and limitation of amount, or we may make additional capital
contributions to our wholly foreign-owned subsidiaries in China.
Any
loans to our wholly foreign-owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are subject
to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly foreign-owned subsidiaries in China
to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration
of Foreign Exchange, or SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity
and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly
or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations;
(ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products
unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where
it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not
for self-use (except for the foreign-invested real estate enterprises).
SAFE
promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement
of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant
Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration
of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration
of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted
from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used
for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred
to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested
enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated
capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear
whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the
State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital
Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes
the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company
to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of
SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly
limit our ability to transfer any foreign currency we hold to our PRC subsidiaries, which may adversely affect our liquidity and our
ability to fund and expand our business in China.
In
light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies,
we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or VIE or future capital contributions by us to our
wholly foreign-owned subsidiaries in China. As a result, uncertainties exist as to our ability to provide prompt financial support to
our PRC subsidiaries or VIE when needed. If we fail to complete such registrations or obtain such approvals, our ability to use the funds
that we raise outside of China to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially
and adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations
in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
Substantially
all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations
in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets
and the proceeds from offerings in the U.S. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiary
and consolidated variable interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable
or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our
results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to
vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations
and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative impact
on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S.
dollars for the purpose of making payments for dividends on our Ordinary Shares or for other business purposes, appreciation of the U.S.
dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies
relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our
reported results of operations.
There
remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or
depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any
dividends payable on, our Ordinary Shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive
from offerings in the U.S. into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse
effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar
may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the market price of our Ordinary
Shares.
Very
limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into
any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge
our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your
investment.
Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency
out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company in the Cayman
Islands relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC
foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore,
our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that
the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the
overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from or registration with
appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access
in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our
shareholders.
Failure
to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
We
are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain
social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain
percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government
from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently
by the local governments in China given the different levels of economic development in different locations. As of the date of this report,
we believe that we have made adequate employee benefit payments. If we fail to make adequate payments in the future, we may be required
to make up the contributions for these plans. If we fail to make or supplement contributions of social security premiums within the stipulated
period, the social security premiums collection agency may enquire into the deposit accounts of the employer with banks and other financial
institutions. In an extreme situation, where we failed to contribute social security premiums in full amount and do not provide guarantee,
the social security premiums collection agency may apply to a Chinese court for seizure, foreclosure or auction of our properties of
value equivalent to the amount of social security premiums payable, and the proceeds from auction shall be used for contribution of social
security premiums. If we are subject to deposit, seizure, foreclosure or auction in relation to the underpaid employee benefits,
our financial condition and results of operations may be adversely affected.
The
approval of the China Securities Regulatory Commission may be required under a regulation adopted in August 2006, as amended, and, if
required, we cannot predict whether we will be able to obtain such approval.
The
Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions
of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission,
or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September
2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special
purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear.
Our
PRC counsel, Yiyou Tianyuan Law Firm, has advised us based on their understanding of the current PRC laws, rules and regulations that
the M&A Rules is not applicable to our listing and trading of our Ordinary Shares on the NASDAQ, given that:
| ● | we
established our PRC subsidiary, WFOE, by means of direct investment rather than by merger with or acquisition of PRC domestic companies;
and |
| ● | no
explicit provision in the M&A Rules classifies the respective contractual arrangements among WFOE and Shanghai Juhao, and their respective
shareholders as a type of acquisition transaction falling under the M&A Rules. |
Also,
our PRC counsel has advised us that since the M&A Rules became effective, many Chinese companies have adopted VIE structure and listed
and traded their stocks on the NASDAQ, and none of them has been required to obtain such approval.
However,
there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of any overseas offering
and the CSRC’s opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations
in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach
the same conclusion as we do. If the CSRC or any other PRC regulatory agencies subsequently determines that we need to obtain the CSRC’s
approval or if the CSRC or any other PRC government agencies promulgates any interpretation or implements rules that would require us
to obtain CSRC or other governmental approvals, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies.
Sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in
or restrictions on the repatriation of the proceeds from the offerings into the PRC, restrictions on or prohibition of the payments or
remittance of dividends by our PRC subsidiary, or other actions that could have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as well as the trading price of our Ordinary Shares. In addition, if the
CSRC or other PRC regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals, we may be
unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties
and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of Ordinary Shares.
The
M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules discussed in the preceding risk factor and some other regulations and rules concerning mergers and acquisitions established
additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and
complex, including requirements in some instances that MOFCOM be notified in advance of any change-of-control transaction in which a
foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that MOFCOM be notified in advance
of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by MOFCOM that
became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and
security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises
that raise “national security” concerns are subject to strict review by MOFCOM, and the rules prohibit any activities attempting
to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future,
we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and
other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
approval from MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our
ability to expand our business or maintain our market share.
PRC
regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase its
registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties
under PRC law.
SAFE
promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local
branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or
financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle
undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name, and
operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular
37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing
and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying
and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1,
2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE
or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment
or financing.
If
our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited
from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted
in our ability to contribute additional capital to our PRC subsidiary.
Our major shareholders have completed the initial registrations with
the local SAFE branch or qualified banks as required by SAFE Circular 37. To our knowledge, certain of our minority shareholders of the
Company who are also PRC resident individual shareholders have not completed their SAFE Circular 37 registration yet. Also, we may not
be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance
that these PRC residents will comply with our request to make or obtain any applicable registrations or continuously comply with all requirements
under SAFE Circular 37 or other related rules. The failure or inability of the relevant shareholders to comply with the registration procedures
set forth in these regulations may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities,
on the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital,
share transfer or liquidation to us and limit our ability to contribute additional capital into our PRC subsidiary. Moreover, failure
to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing
applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially
and adversely affected.
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC
plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices
on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed
Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China
for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company,
subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary
of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained
to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. Our executive
officers, directors and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one
year and have received stock awards from the Company are subject to these regulations. To our knowledge, the officers, directors and employees
of the Company who have received stock award and are also PRC residents have not completed their SAFE registration yet. Failure to complete
the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into
our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that
could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See
“4.B. Regulation—Regulations on Stock Incentive Plans.”
If
we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences
to us and our non-PRC shareholders.
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management
body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income
at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and
substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In
April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for
determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located
in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those
controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s
general position on how the “de facto management body” test should be applied in determining the tax resident status of all
offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise
group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject
to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the
day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource
matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets,
accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at
least 50% of voting board members or senior executives habitually reside in the PRC.
We
believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “10.E. Taxation—People’s
Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities
and uncertainties remain with respect to the interpretation of the term “de facto management body.” As all of our management
members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine
that we or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we or such
subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition,
we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we
are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our Ordinary Shares
may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case,
subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC
shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC
in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our Ordinary
Shares.
Regulatory
bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.
From time to time, the Company may receive requests from certain U.S.
agencies to investigate or inspect the Company’s operations, or to otherwise provide information. While the Company will be compliant
with these requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services
to us or with whom we associate, especially as those entities are located in China. Furthermore, an on-site inspection of our facilities
in China by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates,
are subject to the unpredictability of the Chinese enforcers, and may therefore be impossible to facilitate.
We
face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of our operating company’s
equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential
acquisitions we may pursue in the future.
The
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular,
equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular
698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became
effective in February 2015.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC
“resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise,
being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company
structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at
a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident
enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable
adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer
of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable
commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public
securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated
to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring
the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being
the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority
such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the
overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring
PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other
person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer
of equity interests in a PRC resident enterprise.
On
October 17, 2017, the SAT promulgated the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax
at Source (“Bulletin 37”), which became effective on December 1, 2017, and Circular 698 was then replaced effective December
1, 2017. Bulletin 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises.
We
face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions
involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may
pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request
our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of
being subject to filing obligations or being taxed, under Circular 59 or Circular 7 and Bulletin 37, and may be required to expend valuable
resources to comply with Circular 59, Circular 7 and Bulletin 37 or to establish that we and our non-resident enterprises should not
be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 7 and Bulletin 37 to make adjustments to the taxable capital
gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. We may pursue acquisitions
in China or elsewhere in the world in the future that may involve complex corporate structures. If we are considered a non-resident enterprise
under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under
SAT Circular 59 or Circular 7 and Bulletin 37, our income tax costs associated with such potential acquisitions will be increased, which
may have an adverse effect on our financial condition and results of operations.
In
addition, in accordance with the Individual Income Tax Law promulgated by the Standing Committee of NPC, later amended on August 31,
2018 and effective on January 1, 2019, where an individual carries out other arrangements without reasonable business purpose and obtains
improper tax gains, the tax authorities shall have the right to make tax adjustments based on a reasonable method, and levy additional
tax and collect interest if there is a need to levy additional tax after making tax adjustments. As a result, our beneficial owners,
who are PRC residents, may be deemed to have carried out other arrangements without reasonable business purpose and obtained improper
tax gains for such indirect transfer, and thus be levied tax.
Risks
Related to Our Ordinary Shares
Our
dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others
from pursuing any change of control transactions that holders of our Ordinary Shares may view as beneficial.
We
have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of matters
requiring the votes of shareholders, each ordinary share is entitled to one vote and each Preferred Share is entitled to two (2) votes.
The Preferred Shares may be converted into Ordinary Shares by its holder.
We
have authorized 50,000,000 Preferred Shares and our Chairman and Chief Executive Officer Mr. Zhiwei Xu, through Jowell Holdings Ltd.
beneficially owns all of the 750,000 issued and outstanding Preferred Shares.
As
a result of this dual-class share structure, the holder of our Preferred Shares will have concentrated control over the outcome of matters
put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers, consolidations,
liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. The
holder of Preferred Shares may take actions that are not in the best interest of us or our other shareholders. This concentration of
ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders
of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ordinary share.
This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential
merger, takeover or other change of control transactions that holders of Ordinary Shares may view as beneficial.
Our
Ordinary Shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to
raise money or otherwise desire to liquidate your shares.
While
our Ordinary Shares are trading on NASDAQ, our Ordinary Shares may be “thinly-traded”, meaning that the number of persons
interested in purchasing our Ordinary Shares at or near bid prices at any given time may be relatively small or non-existent. This situation
may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts, stock brokers, institutional
investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of
such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more
when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume
of trading activity that will generally support continuous sales without an adverse effect on share price. A broad or active public trading
market for our Ordinary Shares may not develop or be sustained.
If
securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding
our Ordinary Shares, the price of our Ordinary Shares and trading volume could decline.
Any
trading market for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about
us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price
of our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which could cause the price of our Ordinary Shares and the trading
volume to decline.
The
market price for our Ordinary Shares may be volatile.
The
trading price of our Ordinary Shares may be volatile and could fluctuate widely due to factors beyond our control. This may happen because
of the broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business
operations located mainly in China that have listed their securities in the United States. A number of Chinese companies have listed
or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant
volatility, including price declines after their initial public offerings. The trading performances of these Chinese companies’
securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general
and consequently may impact the trading performance of our Ordinary Shares, regardless of our actual operating performance.
The
market price for our Ordinary Shares may be volatile and subject to wide fluctuations due to factors such as:
| ● | the
perception of U.S. investors and regulators of U.S. listed Chinese companies; |
| ● | actual
or anticipated fluctuations in our operating results; |
| ● | changes
in financial estimates by securities research analysts; |
| ● | negative
publicity, studies or reports; |
| ● | conditions
in Chinese online retail and e-commerce for health and nutritional supplements and cosmetic products markets; |
| ● | our
capability to catch up with the technology innovations in the industry; |
| ● | changes
in the economic performance or market valuations of other online retail and e-commerce for health and nutritional supplements and cosmetic
products companies; |
| ● | announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | addition
or departure of key personnel; |
| ● | fluctuations
of exchange rates between RMB and the U.S. dollar; and |
| ● | general
economic or political conditions in China. |
In
addition, the securities market has from time-to-time experienced significant price and volume fluctuations that are not related to the
operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price
of our Ordinary Shares.
Volatility
in our ordinary share price may subject us to securities litigation.
The
market for our Ordinary Shares may have, when compared to seasoned issuers, significant price volatility and we expect that our share
price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in
the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
In
order to raise sufficient funds to enhance operations, we may have to issue additional securities at prices which may result in substantial
dilution to our shareholders.
If
we raise additional funds through the sale of equity or convertible debt, our current shareholders’ percentage ownership will be
reduced. In addition, these transactions may dilute the value of Ordinary Shares outstanding. We may have to issue securities that may
have rights, preferences and privileges senior to our Ordinary Shares. We cannot provide assurance that we will be able to raise additional
funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not
be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations
and financial condition.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect
to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine to pay
dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from WFOE. WFOE may, from time
to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of RMB into
U.S. dollars or other hard currency, and other regulatory restrictions.
You may face difficulties in protecting your interests, and your
ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman
Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (As Revised) of the Cayman
Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority
shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law
of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on
a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are
not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular,
the Cayman Islands have a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more
fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may
not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies
like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association
and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies) or to obtain copies
of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not,
and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our
shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder
motion or to solicit proxies from other shareholders in connection with a proxy contest.
Currently,
all of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States.
A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion
of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process
within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments
predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
As
a result of all of the above, our shareholders may have more difficulty in protecting their interests through actions against us or our
officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to United States domestic public companies.
We
are a foreign private issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable
to United States domestic public companies. For example:
| ● | we
are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company; |
| ● | for
interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that
apply to domestic public companies; |
| ● | we
are not required to provide the same level of disclosure on certain issues, such as executive compensation; |
| ● | we
are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; |
| ● | we
are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in
respect of a security registered under the Exchange Act; and |
| ● | we
are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and
trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction. |
We
are required to file an annual report on Form 20-F within four months of the end of each fiscal year. Press releases relating to financial
results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with
or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers.
As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a
U.S. domestic issuer.
Because
we are a foreign private issuer and are exempt from certain NASDAQ corporate governance standards applicable to U.S. issuers, you may
have less protection than you would have if we were a domestic issuer.
The
Nasdaq Listing Rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign
private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. The Company currently follows
the requirements of the Nasdaq Listing Rules without relying on the exemption provided for foreign private issuers under Marketplace
Rule 5615(a)(3). However, we may choose to rely on such exemption to follow certain corporate governance practices of our home country
practice in the future. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our
board to consist of independent directors. Thus, although a director must act in the best interests of the Company, it is possible that
fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease
as a result. In addition, the Nasdaq Listing Rules also requires U.S. domestic issuers to have a compensation committee, a nominating/corporate
governance committee composed entirely of independent directors, and an audit committee with a minimum of three independent directors.
We, as a foreign private issuer, are not subject to these requirements. The Nasdaq Listing Rules may require shareholder approval for
certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and
material revisions to those plans, certain ordinary share issuances. We will comply with the requirements of the Nasdaq Listing Rules
in determining whether shareholder approval is required on such matters and have appointed a nominating and corporate governance committee.
However, we may consider following home country practice in lieu of the requirements under the Nasdaq Listing Rules with respect to certain
corporate governance standards in the future which may afford less protection to investors.
Although
as a foreign private issuer we are exempt from certain corporate governance standards applicable to US domestic issuers, if we cannot
satisfy, or continue to satisfy, the listing requirements and other rules of Nasdaq Capital Market, our securities may not be listed
or may be delisted, which could negatively impact the price of our securities and your ability to sell them.
Our
Ordinary Shares are approved for listing on the Nasdaq Capital Market, however, we cannot assure you that they will continue to be listed
on Nasdaq Capital Market.
In
addition, in order to maintain our listing on the Nasdaq Capital Market, we will be required to comply with certain rules the Nasdaq
Capital Market, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of publicly held
shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable rules of the Nasdaq
Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy the Nasdaq
Capital Market criteria for maintaining our listing, our securities could be subject to delisting.
If
the Nasdaq Capital Market delists our securities from trading, we could face significant consequences, including:
| ● | a
limited availability for market quotations for our securities; |
| ● | reduced
liquidity with respect to our securities; |
| ● | a
determination that our Ordinary Shares is a “penny stock,” which will require brokers trading in our Ordinary Shares to adhere
to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Ordinary Shares; |
| ● | limited
amount of news and analyst coverage; and |
| ● | a
decreased ability to issue additional securities or obtain additional financing in the future. |
We
are an “emerging growth company” within the meaning of the Securities Act, and if we take advantage of certain exemptions
from disclosure requirements available to emerging growth companies, this could make it more difficult to compare our performance with
other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until
private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class
of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS
Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging
growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period,
which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as
an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This
may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging
growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences
in accountant standards used.
As
an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure
may make our Ordinary Shares less attractive to investors.
For
as long as we remain an “emerging growth company”, as defined in the JOBS Act, we will elect to take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”,
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from
the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments
not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or
rights available to shareholders of more mature companies. If some investors find our Ordinary Shares less attractive as a result, there
may be a less active trading market for our Ordinary Shares and our share price may be more volatile.
If
we are classified as a passive foreign investment company, United States taxpayers who own our ordinary shares may have adverse United
States federal income tax consequences.
We
will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75%
or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average
quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production
of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat our VIE (including its
subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise effective control over the operation
of such entity but also because we are entitled to substantially all of its economic benefits, and, as a result, we consolidate its results
of operations in our consolidated financial statements. Assuming that we are the owner of our VIE (including its subsidiaries) for U.S.
federal income tax purposes, and based upon our current and expected income and assets, including goodwill, and the value of our ordinary
shares, we do not believe that we were a PFIC for the taxable year ended December 31, 2021 and we do not expect to be a PFIC for
the foreseeable future. However, there can be no assurance that we will not be a PFIC for the current taxable year. In addition, there
can be no assurance that we will not be a PFIC for any future taxable year. PFIC status is a factual determination that must be tested
each taxable year and will depend on the composition of our assets and income in each such taxable year.
We
will be classified as a PFIC for any taxable year if either (i) at least 75% of our gross income for the taxable year is passive
income or (ii) at least 50% of the value of our assets (based on a quarterly value of the assets during the taxable year) is attributable
to assets that produce or are held for the production of passive income. In determining the average percentage value of our gross assets,
the aggregate value of our assets will generally be deemed to be equal to our market capitalization (determined by the sum of the aggregate
values of our outstanding equity) plus our liabilities. Accordingly, we could become a PFIC if our market capitalization were to decrease
significantly while we hold substantial cash, cash equivalents or other assets that produce or are held for the production of passive
income. In addition, because there are uncertainties in the application of the relevant PFIC rules, it is possible that the Internal
Revenue Service, or IRS, may challenge our classification of certain income and assets as non-passive or our valuation of our tangible
and intangible assets, which could result in a determination that we were a PFIC for the current or subsequent taxable years.
If
we were classified as a PFIC in any taxable year in which a U.S. Holder (as defined in “Item 10. Additional Information—10.E.
Taxation—United States Federal Income Taxation”) holds the ordinary shares, the U.S. Holder would generally be subject
to additional taxes and interest charges on certain “excess” distributions we make and on the gain, if any, recognized on
the disposition or deemed disposition of such U.S. Holder’s ordinary shares, even if we are no longer a PFIC in the year of distribution
or disposition. Moreover, such U.S. Holder would also be subject to special U.S. tax reporting requirements. For more information on
the U.S. tax consequences to U.S. Holders that would result from our classification as a PFIC, see “Item 10. Additional Information—10.E.
Taxation—United States federal income taxation—Passive foreign investment company.”
Our
memorandum and articles of association, as amended, contain anti-takeover provisions that could have a material adverse effect on the
rights of holders of our Ordinary Shares.
Our
amended and restated memorandum and articles of association, as amended, contain certain provisions to limit the ability of others to
acquire control of our company or cause us to engage in change-of-control transactions, including a provision that grants authority to
our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders
and to determine, with respect to any series of preferred shares without action by our shareholders, the terms and rights of that series.
These provisions could have the effect of depriving our shareholders to sell their shares at a premium over the prevailing market price
by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
Our
board of directors may refuse or delay the registration of the transfer of Ordinary Shares in certain circumstances.
Except
in connection with the settlement of trades or transactions entered into through the facilities of a stock exchange or automated quotation
system on which our Ordinary Shares are listed or traded from time to time, our board of directors may resolve to refuse or delay the
registration of the transfer of our Ordinary Shares. Where our directors do so, they must specify the reason(s) for this refusal or delay
in a resolution of the board of directors. Our directors may also refuse or delay the registration of any transfer of Ordinary Shares
if the transferor has failed to pay an amount due in respect to those Ordinary Shares. If our directors refuse to register a transfer,
they shall, as soon as reasonably practicable, send the transferor and the transferee a notice of the refusal or delay in the approved
form.
This,
however, will not affect market transactions of the Ordinary Shares purchased by investors. Where the Ordinary Shares are listed on a
stock exchange, the Ordinary Shares may be transferred without the need for a written instrument of transfer, if the transfer is carried
out in accordance with the rules of the stock exchange and other requirements applicable to the Ordinary Shares listed on the stock exchange.
We
will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth
company.”
As
a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley
Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ Capital Market, impose various requirements on the corporate
governance practices of public companies. We are an “emerging growth company,” as defined in the JOBS Act and will remain
an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion
of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed
to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million
as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year
period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable
generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in
the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new
or revised accounting standards until such time as those standards apply to private companies.
Compliance
with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming
and costly. After we are no longer an “emerging growth company,” or until five years following the completion of our initial
public offering, whichever is earlier, we expect to incur significant expenses and devote substantial management effort toward ensuring
compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company,
we have been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls
and procedures. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur additional
costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve
on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules
and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing
of such costs.
We
are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis
of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective,
which may adversely affect investor confidence in our company and, as a result, the value of our Ordinary Shares.
We
will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness
of our internal control over financial reporting for the year ending December 31, 2022, the first fiscal year beginning after our initial
public offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal
control over financial reporting and, after we cease to be an “emerging growth company,” a statement that our independent
registered public accounting firm has issued an opinion on our internal control over financial reporting.
We
are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform
the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation
in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control
over financial reporting, we will be unable to assert that our internal controls are effective.
If
we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent registered
public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence
in the accuracy and completeness of our financial reports, which would cause the price of our Ordinary Shares to decline, and we may
be subject to investigation or sanctions by the SEC.
To
comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls
and procedures and hiring accounting or internal audit staff.
At
such time that our independent registered public accounting firm is required to formally attest to the effectiveness of our internal
control over financial reporting, it may issue a report that is adverse in the event it is not satisfied with the level at which our
controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.
Our
Chairman of the Board and Chief Executive Officer will have substantial influence over our company and his interests may not be aligned
with the interests of our other shareholders.
Mr. Zhiwei Xu, our Chairman and member of our
Board of Directors and Chief Executive Officer currently owns 5,461,380 outstanding Ordinary Shares and 750,000 Preferred Shares (each
such Preferred Shares entitles the holder thereof to the rights to votes equal to two (2) Ordinary Shares) of the Company. As a result
of his significant shareholding, Mr. Xu has, and will continue to have, substantial influence over our business, including decisions regarding
mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate
actions. He may take actions that are not in the best interests of us or our other shareholders. This concentration of ownership may discourage,
delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the market price of our Ordinary Shares. These actions may be taken even if they
are opposed by our other shareholders. For more information regarding our principal shareholders and their affiliated entities, see “Item
6.E., “Share Ownership”.
ITEM 4. |
INFORMATION ON THE COMPANY |
| A. | History
and Development of the Company |
Jowell
Global Ltd. (“Jowell Global” or the “Company”) is an exempted company incorporated in the Cayman Islands with
limited liability on August 16, 2019 as a holding company. The Company, through its consolidated variable interest entity (“VIE”),
engages primarily in the sale of cosmetic products, nutritional supplements, and household products sourced from third party manufacturers
and distributors, and also offers an online marketplace that enables third-party sellers to sell their products to the Company’s
online consumers.
A
reorganization of the Company’s legal structure (“Reorganization”) was completed on November 1, 2019. The Reorganization
involved the incorporation of Jowell Global, a Cayman Islands holding company, Jowell Technology Limited (“Jowell Tech”),
a Hong Kong holding company on June 24, 2019, and Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a new wholly
foreign-owned entity (“WFOE”) by Jowell Tech under the laws of the People’s Republic of China (“China”
or the “PRC”) on October 15, 2019.
On
October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of contractual arrangements with Shanghai Juhao Information
Technology Co., Ltd. (“Shanghai Juhao”) and the shareholders of Shanghai Juhao, as amended on October 10, 2020. These agreements
include: 1) an Exclusive Business Cooperation and Management Agreement; 2) an Equity Interest Pledge Agreement; 3) an Exclusive Option
Agreements 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant to these agreements, Shanghai Jowell has the exclusive rights
to provide consulting services to Shanghai Juhao related to the business operation and management of Shanghai Juhao. For such services,
Shanghai Juhao agrees to pay service fees determined based on all of its net profit after tax payments to Shanghai Jowell or Shanghai
Jowell has obligation to absorb all of Shanghai Juhao’s losses. The agreements remain in effect until and unless all parties agree
to its termination, except the Exclusive Option Agreement that the effective term of 10 years and can be renewed for an additional 10
years. Until such termination, Shanghai Juhao may not enter into another agreement for the provision of management consulting services
without the prior consent of Shanghai Jowell. Also, pursuant to the equity interest pledge agreement between the shareholders of Shanghai
Juhao and Shanghai Jowell, such shareholders pledged all of their equity interests in Shanghai Juhao to Shanghai Jowell, to guarantee
Shanghai Juhao’s performance of its obligations under the Exclusive Business Cooperation and Management Agreement. Without Shanghai
Jowell’s prior written consent, the shareholders of Shanghai Juhao shall not transfer or assign the pledged equity interests, or
incur or allow any encumbrance that would jeopardize Shanghai Jowell’s interests. If Shanghai Juhao breaches its contractual obligations
under the aforesaid agreement, Shanghai Jowell, as the pledgee, will be entitled to certain rights and entitlements, including priority
in receiving payments by the evaluation or proceeds from the auction or sale of all or part of the pledged equity interests of Shanghai
Juhao, in accordance with legal procedures. In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore,
Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the
characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai
Juhao.
On
November 6, 2020, the Company effected a reverse stock split of its Ordinary Shares at a ratio of 1-for-3 pursuant to which all existing
shareholders of record on that date surrendered an aggregate of 42,298,849 Ordinary Shares, or 66.67% of the then outstanding Ordinary
Shares to the Company for no consideration. The shares surrendered were subsequently cancelled (“Reverse Split”).
We have adopted a dual-class share structure such
that our shares consist of Ordinary Shares and Preferred Shares. In respect of matters requiring the votes of shareholders, each Ordinary
Share is entitled to one (1) vote and each Preferred Share is entitled to two (2) votes. The Preferred Shares may be converted into Ordinary
Shares by its holder at any time at the option of the holder. We have authorized 50,000,000 Preferred Shares and our Chairman and Chief
Executive Officer Mr. Zhiwei Xu, directly and indirectly through Jowell Holdings Ltd., beneficially owns all 750,000 issued and outstanding
Preferred Shares and 5,461,380 Ordinary Shares and therefore will have substantial influence over our business, including decisions regarding
mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate
actions.
The Company has subsidiaries in countries and
jurisdictions including PRC and Hong Kong. Details of the subsidiaries and VIE of the Company are set out below:
Name of Entity | |
Date of
Incorporation | | Place of
Incorporation | |
% of
Ownership | | Principal
Activities |
|
Jowell Tech | |
June 24, 2019 | |
Hong Kong | |
100 | |
Holding Company |
|
Shanghai Jowell | |
October 15, 2019 | |
Shanghai, China | |
100 | |
Holding Company |
|
Shanghai Juhao* | |
July 31, 2012 | |
Shanghai, China | |
0 (VIE) | |
Online Retails |
|
| * | Shanghai Juhao has seven wholly owned Juhao Best Choice Stores,
located in the cities of Suzhou, Changshu and Wuhu, and twenty-eight wholly owned subsidiaries engaging online promotion of Shanghai
Juhao’s products and services located in the cities of Changshu, Nantong, Shanghai, Guangzhou and Hangzhou. |
On March 19, 2021, the Company closed its initial
public offering (“IPO”) of 3,714,286 ordinary shares, par value $0.0001 per share, priced at $7.00 per share. On March
23, 2021, the underwriter exercised its over-allotment option to purchase an additional 557,143 ordinary shares at a price of $7.00 per
share. The net proceeds of the Company’s IPO, including the proceeds from the sale of the over-allotment shares, totaled approximately
$25.7 million, after deducting underwriting discounts and other related expenses. The Ordinary Shares have been listed on the Nasdaq Capital
Market and trading under the ticker symbol “JWEL” since March 17, 2021.
On July 27, 2021, Shanghai Juhao entered into a Capital Increase Agreement
(the “Agreement”) with Suzhou Industrial Park Hongrun Rural Small Amount Loan Co., Ltd. (“Hongrun”) and its shareholders
identified on the signature pages thereto (the “Existing Shareholders”). Mr. Zhiwei Xu, the Chairman of the Board of Directors
and Chief Executive Officer of the Company is also the Chairman of the Board of Directors of Hongrun. Jiangsu Longrich Group Co., Ltd.,
the largest shareholder of Hongrun is also a related party of the Company. Pursuant to the Agreement, Shanghai Juhao contributed RMB 30
million (approximately $4.6 million) to Hongrun (the “Investment”) for 18.96% equity interest of Hongrun. Hongrun and Existing
Shareholders agree the Investment will only be used for making loans to the owners of Juhao Best Choice Stores for their
business development and expansion. Juhao Best Choice Stores are the community group-buying franchise stores launched by Shanghai
Juhao in April 2021.
Our
principal executive offices are located at 2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China 200082. Our telephone number
at this address is +86-21-5521-01874. Our registered office in the Cayman Islands is located at P.O. Box 31119 Grand Pavilion, Hibiscus
Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. Our agent for service of process in the United States is Cogency Global
Inc. located at 122 East 42nd Street, 18th Floor, New York, NY 10168. Investors should contact us for any inquiries through the address
and telephone number of our principal executive offices.
The
SEC maintains a web site at www.sec.gov that contains reports and other information regarding issuers that file electronically
with the SEC using its EDGAR system.
See
“Item 5. Operating and Financial Review and Prospects — B. Liquidity and Capital Resources — Capital Expenditures”
for a discussion of our capital expenditures.
We
are one of the leading cosmetics, health and nutritional supplements and household products e-commerce platforms in China. We offer our
own brand products to customers and also sell and distribute health and nutritional supplements, cosmetic products and certain household
products from other companies on our platform. In addition, we allow third parties to open their own stores on our platform for a service
fee based upon their sale revenues generated from their online stores and we provide them with our unique and valuable information about
market needs, enabling them to better manage their sales effort, as well as an effective platform to promote their brands. We currently
operate under four sales channels: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live streaming
marketing.
Shanghai Juhao started its operation in 2012 and
is among the first group of membership-based online-to-offline cosmetics, health and nutritional supplements and household products e-commerce
platforms in China. Today, we offer an online platform LHH Mall through Shanghai Juhao which holds an EDI (Electronic Data Interchange)
certification approved by the Shanghai Communication Administration pursuant to the requirement of MIIT dated February 1, 2019 valid for
5 years, selling our own brand products manufactured by third parties as well as international and domestic branded products from 200+
manufacturers. As of December 31, 2021, our platform had 2,237,358 VIP members who have registered on our platform, 238 merchants who
have opened their own stores on our platform, and 79% of products sold on our platform were cosmetics and health and nutritional supplements.
We also sell household products, such as pots and pans, smartphones, functional shoes, paper towels, cups, vacuum cleaners, massagers
and towels on our platform, and those products account for 21.0 % of the products sold on our platform for the year ended December
31, 2021.
Since
August 2017, we have been also selling our products in our authorized retail stores all across China. Operating under our brand name
of “Love Home Store” or “LHH Store”, the authorized retailers may operate as independent stores or store-in-shop
(an integrated store), selling products that they purchased through our online platform LHH Mall under their special retailer accounts
with us which provide them with major discounts. As of December 31, 2021, we had authorized 26,043 Love Home Stores in 31 provinces of
China, providing offline retail of our products.
On April 28, 2021, the Company announced it has officially launched
its “Juhao Best Choice” community group-buying store initiative to continue growing its offline retail market presence. The
community group-buying offline stores will sell fresh produce, foods and daily household consumer products in addition to the cosmetics
and health and nutritional supplements currently sold in the Company’s franchised LHH Stores. The community group-buying stores
aim to provide a more convenient shopping experience and high-quality produce and foods for consumers from local communities, towns and
villages across China. Juhao Best Choice stores will consolidate online and offline resources for store design and logistics services
and provide guidance and trainings for store owners with a unified system for store management, design, service criteria, SKU management
and product delivery. The Company will also provide the store owners with live-streaming marketing skill training and upgrade and expand
certain existing LHH Stores to Juhao Best Choice stores. As of December 31, 2021, Shanghai Juhao has opened seven self-operated Juhao
Best Choice community group buying stores in various cities in China as the experimental and demonstration stores for this development.
We
have relationships with leading cosmetics and health and nutritional supplements manufacturers and distributors in China, which not only
to provide us with high-quality products, but also supply chain services to our platform. By connecting these suppliers/distributors
with our online sales and offline authorized stores, we have created a closed-circle to brings tremendous convenience and cost savings
to our customers.
Through
our website at www.1juhao.com and mobile app, we engage primarily in the sales of cosmetic products, health and nutritional supplements
and household products sourced from manufacturers and distributors in China. Currently, we have three types of revenue streams deriving
from our three major product categories: cosmetic products, health and nutritional supplements and household products. Other than revenue
from product sales, we also earn service fees charged to third-party merchants for using our platform, which was immaterial.
For the fiscal year ended
December 31, 2021, approximately $78.8 million or 46.13% of our revenue were generated from the sales of cosmetic products, approximately
$56.1 million or 32.83% of our revenue were generated from the sales of health and nutritional supplements and $35.9 million or 21.03%
of our revenue were generated from the sales of household products.
For
the fiscal year ended December 31, 2020, approximately $18.7 million or 19.30% of our revenue were generated from the sales of cosmetic
products, approximately $52.4 million or 54.06% of our revenue were generated from the sales of health and nutritional supplements and
$25.7 million or 26.56% of our revenue were generated from the sales of household products.
For
the fiscal year ended December 31, 2019, approximately $18.47 million or 29.90% of our revenue were generated from the sales of cosmetic
products, approximately $22.67 million or 36.70% of our revenue were generated from the sales of health and nutritional supplements and
$20.63 million or 33.40% of our revenue were generated from the sales of household products.
Our
Sales Channels
We
currently utilize four sales formats: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live Streaming
Marketing.
Online
Direct Sales. The Online Direct Sales model is mainly selling the products under our own brands or third-party products
on our online shopping mall directly. We purchase these third-party products directly from manufacturers and suppliers and deliver them
to our customers. This model generates the highest profit-margin among all our sales models.
Authorized
Retail Store Distribution. Authorized Retail Store Distribution refers to our authorized physical retail stores that distributed
products all over the country and they purchase their products from us and distribute them to consumers. Those stores may also use a
small program developed by us which can be used on WeChat to promote products to their WeChat contacts who can place orders to purchase
products either from those authorized stores or from our platform which we provide sale discounts for such orders placed on our platform
but directed from our authorized stores. The material terms of the Love Home Health Franchise Store Contract with such store owners/franchisees
include: (i) Shanghai Juhao will provide training to franchisee, which should pass the examination of Shanghai Juhao to be qualified
as an authorized store; (ii) the franchisee shall obtain the business license, tax registration certificate and other relevant certificates
required for operation according to law at its own costs; (iii) the franchisee shall abide by the rules and policies issued by Shanghai
Juhao; (iv) during the term of the agreement, the franchisee may use Shanghai Juhao’s trademark and service mark and Shanghai Juhao
authorizes the franchisee to sell the products or services of Shanghai Juhao; (v) Shanghai Juhao may inspect the operation of the franchisee
from time to time; (vi) during the term of the agreement, the franchisee’s store structure, internal and external decoration shall
comply with the standards set by Shanghai Juhao; (vii) the franchisee shall purchase the products from Shanghai Juhao for at least RMB
4,000 every two months; (viii) the franchisee shall sell the products (or provide services) at the price specified by Shanghai Juhao;
(ix) the franchisee shall not transfer the operation right without authorization of Shanghai Juhao, and shall not conduct business beyond
its authorized territory (the area within 1.5 km radius of the address of the franchisee); (x) the franchisee will receive a 20% discount
of the retail price of the products sold directly on the LHH mall members; and (xi) the term of the agreement is usually one year subject
to renewal.
Third-party
Merchants. We hold an EDI certificate approved by Shanghai Bureau of Communication Management pursuant to the requirement of
the Ministry of Industry and Information Technology of the People’s Republic of China (“MIIT”), which allows our online
shopping mall to accept third-party platforms and companies to open their stores on our platform and to enrich the product categories
of our shopping mall, and give consumers more choices. The material terms of the Juhao Mall Marketplace and Service Agreement for third
party stores in Juhao Mall with such store owners include: (i) the third party store/merchant is responsible for stores set-up, sales,
inventory management, logistics and after-sales services and Shanghai Juhao will provide assistance and charge relevant service fees;
(ii) the merchant is responsible for the sales of its products on its online store, and the sales price shall be determined by the merchant,
but shall not be lower than the minimum price agreed by the parties; (iii) if the merchant’s customers make payment through Shanghai
Juhao’s online platform, Shanghai Juhao is obliged to pay the received payment to the merchant every month according to the payment
method agreed in the agreement; (iv) if the customer finds that the product has shortage, defective or damage, or the variety, model,
specification, color, quantity, shelf life and quality of the products is inconsistent with the order, he/she may reject the product
and the merchant shall timely reissue or replace the product; (v) the merchant guarantees that the quality of the products it sells has
met the national or international standards and met the general performance and use requirements of such product; (vi) the merchant guarantees
to Shanghai Juhao that there is no dispute with any third party on intellectual property rights and other rights of the products sold
on Juhao’s platform; (vii) the merchant shall provide after-sale service and support for the products that it sold; (viii) Shanghai
Juhao charges a fix service fee equals to 5% of the merchant’s store revenue and will also charge a performance fee between 0-5%
based upon the monthly performance of the merchant store, i.e. the higher the sales reaches, the lower performance fee will apply and
it will be no performance fee if the sales reaches RMB 100,000 in such month; and (ix) the term of the agreement is usually one year
subject to renewal.
Live
streaming marketing. We have started to use the most popular online sales model, Live Streaming/Broadcasting
Marketing. We train our authorized retail store owners to become live streamers participating in the live online broadcasting to market
and sell products. In addition, we constantly look for professional multi-channel network (MCN) agencies to work with their Key Opinion
Leaders (KOLs) to promote our products through live streaming on popular channels such as TikTok live, Kuaishou live and Taobao live.
We have also provided free live streaming marketing classes to LLH Store owners, potential Juhao Best Choice store owners and anyone who
is interested in livestreaming which help students and young people obtain related employment and help us identify online selling and
marketing talents for our marketing department.
Sales
of Products
We
have adopted three complementary sales formats on our internet platform for health and nutritional supplements, household products and
cosmetics, which are the main products sold in our mall: curated sales, series sales and flash sales, pursuant to which we either sell
products directly to customers as a principal or act as a service provider for third-party merchants who sell products on our internet
platform. We provide our customers with the same shopping experience regardless of whether the products are sold by us or by third-party
merchants.
Curated
sales. We believe the curated sales format embraces value, quality and convenience for our customers and enhances our trendsetting
image. We curate and recommend a carefully selected collection of branded products for a limited period of time at attractive prices.
We carefully select popular cosmetic products that primarily appeal to females. We select and update the products for curated sales every
day.
Series
sales. In addition to the curated sales, we also use our internet platform to produce series sales models that conform to the
trend, festivals and hot topics. We have selected multi category products in line with the theme in the series of topics, where consumers
can compare and purchase through brand, price, scope of application and other parameters. We create topics and shopping scenes, so as
to guide consumers to buy the products here. We collaborate with an extensive range of international and domestic suppliers and third-party
merchants, who offer diversified and branded beauty and health and nutritional supplements.
Flash
Sales. Our flash sales format features virtual stores of selected third-party merchants. Our flash sales products are selected
from products sold under our own brand or third-party merchant products. At least four products are sold with large discount and limited
quantity every day. Through the flash sales, we can increase the attention and stickiness of potential and existing consumers to our
platform, and can also promote the products and reduce the backlog risk for those high inventory products. The third-party merchants
need to register and reserve the spots for the flash sales with us in advance and we will arrange the products to be sold by flash sales
according to the recent sales data for various products and their categories on the platform, so that the selected products can achieve
best sales and recognition by the customers.
Products
Offerings
Product
Categories
We
offer high quality and affordable products. The following table illustrates the categories of products we sell on our platform:
Product Category |
|
Product
Description |
Health and nutritional supplements and foods |
|
Products that regulate
immune system, bone health products, beauty and beauty supplements |
Cosmetics |
|
Lipstick, foundation, cream,
eyebrow pencil, makeup remover, lip enamel, eye shadow, mascara, eye liner |
Skin care |
|
Eye cream, eye mask, sunscreen
cream, skin cream, moisturizing water, lotion, hand cream, cleansing cream, face cream, essence, facial mask |
Body Care |
|
Body wash, shampoo, hair
conditioner, hand sanitizer, essential oil, toothpaste, mouthwash, essential oil soap, styling gel |
For baby and children |
|
Lip balm, baby massage
oil, moisture cream, shower gel, shampoo, hand sanitizer, baby toothpaste, diaper, baby soap |
Washing items |
|
Detergent, washing powder,
washing tablet, washing liquid, kitchen cleaner, soap, pipe dredger |
Fragrances |
|
Traditional herbal lotion,
perfume for men and women, fragrant ball, air purifying box |
Food |
|
Fruits, vegetables, snacks,
roasted sunflower seeds and nuts, biscuits and pastries, health foods, beverages, wines, prepared products, kitchen seasoning, dry
grain and oil |
Electronics |
|
Large electronic appliances,
home appliances, kitchen appliances, cosmetic electronic appliances |
Apparel |
|
Men’s and women’s
clothes, men’s and women’s shoes, men’s and women’s bags, suitcases and accessories |
Household Products |
|
Home textile, home decoration,
maternal and infant products, kitchenware, daily life necessities, cosmetic products |
We
also sell the following products under our own brands
Product Category |
|
Product
Description |
Skin care |
|
Facial mask |
Body Care |
|
Body wash, shampoo, hair
conditioner |
For baby and children |
|
Lip balm, baby massage
oil, moisture cream, shower gel, shampoo, hand sanitizer, baby toothpaste, diaper, baby soap |
Food |
|
Roasted seeds and nuts,
beverages, prepared products |
Electronics |
|
Home appliances |
Apparel |
|
Suitcases and accessories |
Household Products |
|
Daily life necessities |
Exclusive
Products
To
enhance consumers’ attraction to our product offerings and online shopping mall, we enter into exclusive arrangements from time
to time with certain manufacturers and suppliers to offer exclusive products, including products under our owns brand names on our platform.
In addition, through exclusive arrangements with suppliers, we are able to offer selected SKUs and sets of cosmetic products under popular
brands exclusively on our platform, such as selected SKUs and sets of cosmetic products under the FRUITY brand of Longrich Group Co.,
Ltd, a related party. We do not substantially depend on any of our exclusive products suppliers.
Customers
Our
large, engaged and loyal customer base is the key to our success. The loyalty of our customer base is demonstrated by the repeat purchase
rates. In the past three years, the number of our repeat customers has grown greatly every year. In 2019, there were 56,516 customer-placed
orders on our platform, of which 29,393 or 52.01% are repeat customers. In 2020, there were 90,773 customer-placed orders on our platform,
of which 41,439 or 45.65% are repeat customers. In 2021, there were 195,880 customer-placed orders on our platform, of which 68,088 or
34.76% are repeat customers. In 2019, the number of repeat customers increased by 167.8% compared with 2018. In 2020, the number of repeat
customers increased by 40.98% compared with 2019. In 2021, the number of repeat customers increased by 64.31% compared with 2020. If
a customer returns to our platform and purchase from us within 30 days from his/her previous purchase, it is considered as a repeat customer.
Marketing
We believe that the most efficient form of marketing
for our business is to continuously roll out creative and cost-efficient marketing campaigns to establish our brand image as a trendsetter
for safe and healthy products. These marketing campaigns promote word-of-mouth referrals and enhance repeat customer visits to our internet
platform. We also use live streaming marketing, social media and self-media platform marketing such as our WeChat public information release
account to communicate with our customers and issue promotions and products information and live streaming promotion of our products through
TikTok Live, Kuaishou live and Taobao live. As a result, we have been able to build a large, engaged and loyal customer base
with relatively low customer acquisition cost. Our cost-effective marketing campaigns have allowed us to have relatively low marketing
expenses.
As part of our viral marketing strategy, we offer
various incentives to our existing customers in order to increase their spending and loyalty. Our customers can earn cash coupons for
eligible purchases and become VIP members by registered their information with us on our platform, which status offers them additional
benefits such as cash coupon rewards, exclusive products and free samples. We offer gifts and lucky draw promotions on our internet platform.
Our customers can also earn cash coupons for successful referrals of new members and customers. In addition, we conduct online advertising
via search engines, portals, advertising networks, video sharing websites, and social networking and microblogging sites, we encourage
our customers to share their shopping experiences with us through social media and networking websites in China. Shanghai Juhao hosted
its Singles Day Shopping Festival and Double 12 Shopping Festival in November and December 2021 to promote products and our brand name
through extensive marketing campaign and incentives to our customers.
Our
Internet Platforms
Our
1juhao.com website
Integrating
convenience, aesthetics and functionality, our website aims to actively drive consumer spending by strategically featuring a carefully
selected catalog of popular items. We focus on creating a superior online shopping experience for our customers providing detailed product
descriptions, thoughtful peer reviews and multi-angle picture illustrations designed to assist our customers in making purchase decisions.
Our website interface is fully integrated with our warehouse management system, enabling us to track order and delivery status on a real-time
basis.
Our
Mobile Platform
We believe consumers will increasingly shop online
through mobile internet. Therefore, we have invested substantial resources to build a mobile application platform dedicated to providing
a superior mobile shopping experience. We use different sales channels to market and sell the products on our online shopping mall, except
for the products purchased and taken by walk-in customers at our authorized stores. For the products sold through our online shopping
mall which represent the majority of our sales, these are either purchased on our online portal/platform or through our mobile app. In
2019, we generated approximately 41.49% of Gross Merchandise Volume (“GMV”) from our mobile app and the remaining 58.51% was
generated on our online portal/platform. In 2020, we generated approximately 24.09% of GMV from our mobile app and the remaining 75.91%
was generated on our online portal/platform. In 2021, we generated approximately 20.83% of GMV from our mobile app and the remaining 79.17%
was generated on our online portal/platform
Our
Android- and iOS-based mobile applications allow customers to quickly and efficiently view, search, select and purchase products offered
on our platform. The layout of products offered on our mobile applications is intuitive and easy to use. Customers can browse our recommended
product selections, in particular our curated sales which are immediately accessible as soon as our mobile applications are activated
on their mobile devices, and make quick purchases at any time and regardless of their locations. In addition, customers can conveniently
browse and search for products based on brand, category, product functionality, and can sort product listings by popularity, price and
discount level. Users may also subscribe to future curated sales notifications from our mobile applications.
The
unique product offerings and functions on our mobile platform further enhance mobile user experience and engagement. Certain selected
products and sales events are offered exclusively on our mobile applications to increase their popularity. We also seek to provide customers
with a customized shopping experience through analyzing and understanding their transaction histories and browsing patterns on our mobile
application and develop targeted sales events to increase customer stickiness and enhance cross-selling opportunities. A direct dial
feature on our mobile platform allows users to call our customer service with a single click. We periodically send product promotional
information to our mobile application users through text messages and mobile push notifications. We also continuously work on developing
additional features to better utilize mobile device functionalities to enhance user experience.
Authorized
Physical Stores
Since August 2017, we have been also selling our products
in our authorized retail stores, namely LHH (Love Home) Stores. All products sold in these stores must be purchased on our online LHH
shopping platform though such retailers’ accounts with us so they can receive discounts on their orders, which are not available
for regular online customers. When an authorized store places orders on our platform, we can deliver products to the specific store or
directly to its end customers; all orders go through the retailer account number for each store for a major discount and we can track
sales for each store. We will review, evaluate and qualify potential physical stores before they can become authorized stores, including
business qualification and decoration requirements. As an important part of our strategy to better serve consumers, we had 26,043 offline
authorized stores spread out in 31 provinces in China as of December 31, 2021, providing both online and offline retail and wholesale
services to our customers. By connecting upstream suppliers, distributors and offline authorized store services, we have created a closed-loop
platform, which we believe brings convenience and cost savings to our consumers. We plan to develop additional authorized physical stores
to establish our presence in major cities in China and worldwide, to expand our market, build greater trust with our customers and to
further broaden our brand awareness.
Our
Suppliers and Third-Party Merchants
Since our inception, we have attracted a broad
group of suppliers for health and nutritional supplements, household products and cosmetic products and third-party merchants for beauty,
apparel and other lifestyle products. Our suppliers and third-party merchants include brand owners, brand distributors, resellers and
exclusive product suppliers. In 2018, 2019 and 2020, we worked with approximately 64, 64 and 122 suppliers and 145, 169 and 178 third-party
merchants, respectively. As of December 31, 2021, we had approximately 228 suppliers and 238 third-party merchants. We charge a service
fee to third party merchants that open stores on our platform based upon their sales volume generated from their online stores ranging
from 5% - 10% of their revenues. The higher the sale volume is, the lower service fee percentage will apply. We do not provide delivery
service for third party merchants and they purchase their own products and use their own delivery services. We believe our reputation
as a brand incubator and our ability to assist suppliers and third-party merchants in effectively selling their inventory and fulfilling
their demand for marketing will help us attract new suppliers and third-party merchants and build stronger ties with our existing ones.
Supplier
and Third-party Merchant Selection.
We
have implemented a strict and systematic selection process for suppliers and third-party merchants. Our merchandizing team is responsible
for identifying potential suppliers and third-party merchants globally based on our selection guidelines. Our key supplier and third-party
merchant selection criteria include company size, reputation, sales records in offline and online channels and product offerings. We
generally choose to work with reputable suppliers and third-party merchants with reliable track records and high-quality product offerings.
Once a potential supplier or third-party merchant is identified, we conduct due diligence reviews based on our selection criteria including
qualifications, background, product quality, pricing, payment terms and services. For our exclusive products, we typically identify suppliers
from trade shows and on-site visits based on our selection criteria, including the relevant qualifications and governmental permits.
We also conduct detailed factory auditing on the supplier’s manufacturing capability and production process to control product
quality.
Supply
Arrangements.
We
generally enter into framework supply agreements with suppliers and third-party merchants annually based on our standard form. We constantly
communicate with our suppliers and third-party merchants to keep them informed of any changes to the inventory levels of their products
in order for them to timely respond to our sales demands. Before hosting a major sales event, we provide advance notice to our suppliers
and third-party merchants so that they can prepare ample stock to meet potential surge in demand and increased purchases.
Product
Selection.
Our
merchandizing team members possess insightful knowledge and understanding of existing and potential customers’ needs and preferences.
Before selecting each product, we consider and analyze historical sales data, fashion trends, seasonality and customer feedbacks to project
how many items of a particular product we should offer for curated sales, in our online shopping mall or for flash sales. To maximize
the outcome of our curated sales, we carefully plan our product mix to achieve a balanced and complementary product offering across different
product categories.
Quality
Control.
In
addition to our product selection process, we believe we have one of the most stringent quality assurance and control procedures in the
e-commerce industry for products delivered through our logistics network in China. We are currently collaborating with a leading institution
in China to conduct periodic laboratory tests on randomly selected samples of products provided by our suppliers and third-party merchants.
The tests are designed to analyze the chemical composition of sample products to ensure their authenticity and quality. Any non-compliant
products identified will subject the supplier or third-party merchant to fines as well as permanent termination of business relationship
with such supplier or third-party merchant. We commit to the high-quality standards of products offerings sold through our internet platform.
Furthermore,
we diligently examine the product sourcing channel and qualification of our suppliers, carefully inspect all products delivered to our
logistics centers, and reject or return products that do not meet our quality standards or the purchase order specifications. We also
reject any products with broken or otherwise compromised packaging. In addition, we check all products before shipment from our warehouse
shipping center to our customers to ensure there is no apparent damage, and conduct random periodic quality checks on our inventory.
For non-compliant products, we immediately take them off from our internet platform. Furthermore, we typically require suppliers and
third-party merchants to pay deposits or provide advance payment guarantees. For products that are not processed by our logistics centers,
we carefully scrutinize the product sourcing channels of third-party merchants and impose penalties, typically in amounts equal to several
times the value of the relevant products.
Inventory
Management.
We
generally do not pay in advance for the products that we purchase from our suppliers, except for Longrich Group which usually delivers
the products on the same day or the next day of the payment. Most of our suppliers of products deliver products within 30 days of our
order and grant us a credit term of 30 to 50 days.
Our
largest supplier is Longrich Group including its subsidiaries, a related party of the Company. Since its establishment in 1986, Longrich
Group grew to five manufacturing factories and ten R & D bases in the world. Longrich Group has built a large-scale, flexible and
intelligent production line and manufacturing process around its core business of cosmetics products.
Payment
and Fulfillment
Payment
We
provide our customers with a number of payment options including cash on delivery (for selected cities), bank transfers, online payments
with credit cards and debit cards issued by major banks in China, and payment through major third-party online payment platforms, such
as Alipay and WeChat Pay.
As
part of our marketing efforts, we distribute cash coupons that can be used by our members to offset the purchase price of our products.
Furthermore, our customers can use the account balances on our platform accumulated from prior product refunds to make future purchases.
Fulfillment
We
have established a logistics and delivery network with nationwide coverage. We have adopted a flexible logistics model supported by our
robust and advanced warehouse management system. We use third-party nationwide and regional delivery companies to ensure reliable and
timely delivery.
Our
logistics center is strategically located in Changshu city in Eastern China.
Our
warehouse management system enables us to closely monitor each step of the fulfillment process from the time a purchase order is confirmed
and the product stocked in our logistics centers, up to when the product is packaged and picked up by delivery service providers for
delivery to a customer. We closely monitor the speed and service quality of the third-party merchants that open stores on our platform
through customer surveys and feedbacks from our customers to ensure customer satisfaction.
Delivery
Services
We
deliver orders placed on our internet platform to all areas in China through reputable third-party delivery companies with nationwide
coverage, and regional delivery companies. For delivery to remote regions of China, we use China Post. We generally include the delivery
cost in the cost of products, except in rare instance of bulk orders where we require the purchaser to pay for shipping expenses.
We
leverage our large-scale operations and reputation to obtain favorable contractual terms from third-party delivery companies. In order
to reduce the cost of third-party logistics as much as possible, we usually only sign a year-round agreement with one express company
to receive better rate. We regularly monitor and review the delivery companies’ performance and their compliance with our contractual
terms. We typically negotiate and enter into logistics agreements on an annual basis.
Customer
Service
We
believe our emphasis on customer service enhances our brand image and customer loyalty. Customers can access our sales and after-sales
service hotlines and online representatives 24 hours a day, 7 days a week.
Our
customer service center is located in our branch company in Changshu city. We train our customer service representatives to answer customer
inquiries and proactively educate potential customers about our products and promptly resolve customer complaints. Each representative
is required to complete mandatory training, conducted by experienced managers on product knowledge, complaint handling and communication
skills.
We
believe we have one of the most customer-friendly return policies in the online retail markets in China. For most of the products in
our online mall, we and our third-party merchants generally offer a 7-day product return policy, as long as the product is not used,
damaged, is returned in its original state and can be resold.
Once
a customer submits a return application request online, our customer service representatives will review and process the request or contact
the customer by e-mail or by phone if there are any questions relating to the request. Upon receipt of the returned product, we credit
the customer’s Juhao member or payment account with the purchase price. We fully cover the return shipment costs for our products.
We believe our hassle-free return policies help build customer trust and increase customer loyalty and our sales.
Technology
Our
technology systems are designed to enhance efficiency and scalability, and play an important role in the success of our business. We
rely on our copyright protected APP software and other internally developed proprietary technologies to improve our website and management
systems in order to optimize every aspect of our operations for the benefit of our customers, suppliers and third-party merchants.
We
have adopted a service-oriented architecture supported by data processing technologies which consists of front-end, mid-end and back-end
modules. Our network infrastructure is built upon self-owned servers located in data centers operated by third-party internet data center
providers. We are implementing enhanced cloud architecture and infrastructure for our core data processing system to augment our existing
virtual private network as we continue to expand our operations, enabling us to achieve significant internal efficiency through a virtual
and centralized network platform.
Our
front-end modules facilitate the online shopping processes of our customers. Our front-end modules are supported by our content distribution
network, dynamic and distributed cluster and a core database, providing our customers with quicker access to the product display they
are interested in, and facilitating faster processing of their purchases. We have designed our systems to cope with our maximum peak
concurrent visitors at all times. As a result of such foresight, we are able to provide our customers constantly smooth online shopping
experience. Our mid-end modules support our daily administrative and business operations and our back-end modules support our supply
chain and greatly enhance the efficiency of our operations.
Our business intelligence systems enable us to effectively
gather, analyze and make use of internally-generated customer behavior and transaction data as permitted under laws and regulations. We
regularly use this information in planning our marketing initiatives for upcoming curated sales and merchandizing for our online shopping
mall. We have developed most of the key business modules in-house. We also acquired software use right from a reputable third-party provider,
and work closely with these third-party providers to customize the software for our operations. We have implemented a number of measures
to prevent data failure and loss. We have developed a disaster tolerant system for our key business modules which includes real-time data
mirroring, real-time data back-up and redundancy and load balancing. We believe our module-based systems are highly scalable, which enable
us to quickly expand system capacity and add new features and functionality to our systems in response to our business needs and evolving
customers’ demands without affecting the operation of existing modules. In addition, we have also adopted rigorous security policies
and measures to protect our proprietary data and customer information.
Intellectual
Property
We regard our trademarks, software copyrights, service
marks, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely
on trademark, copyright and trade secret protection laws in the PRC, as well as confidentiality procedures and contractual provisions
with our employees, service providers, suppliers, third-party merchants and others to protect our proprietary rights. We believe that
more and more consumers will shop online through mobile internet.
Competition
The
retail markets of health and nutritional supplements, cosmetics and household products in China are fragmented and highly competitive.
We face competition from traditional health and nutritional supplements and cosmetic products retailers, such as traditional Chinese
medicine stores, health and nutritional supplements stores and department stores, and online cosmetic products retailers, such as Jumei,
Lefeng, as well as general e-commerce platforms, such as Suning.com Co., Ltd., which operates Suning.com, Alibaba Group, which
operates Taobao.com and Tmall.com, Amazon China which operates Amazon.cn, JD.com, Inc., which operates JD.com,
Vipshop Holdings Ltd., which operates VIP.com, and E-Commerce China Dangdang Inc., which operates Dangdang.com.
1.
Competitive advantages of Juhao’s online and offline new retail model
We have been using big data and artificial intelligence
technologies to collect and analyze consumers’ activities on our platform and their shopping patterns as permitted under laws and
regulations, such as the time each customer spends on our platform, the web pages such customer visits, how long the customer spends on
each web page, how often such customer visits our site, average spending amount that such customer spends each order and products she/he
purchase, the location of such customer, whether she/he is a repeat customer, from which search engine or portal such customer is directed
to our site and whether she/he use computer or mobile-app, etc. We also use big data and artificial intelligence to analyze our suppliers’
products, qualifications, production capacity, technology, management and credibility. Relying on the Internet, through the use of big
data, artificial intelligence and other advanced technologies, we continuously upgrade our product offering and service processes to improve
our business model so that it deeply integrates online service, offline experience and modern logistics.
Ecosystem
Our business platform includes an online shopping
platform, mobile app, physical stores, warehouse and shipping center and marketing channels which are embedded to improve our capability
to better meet our consumers’ requirements for convenient and comfortable shopping experience, which ultimately increase user stickiness.
Boundless
Through
the efficient integration of online platform and offline stores, consumers can enjoy shopping at any time and any place, through a series
of diversified channels such as physical stores, online shopping malls, live streaming shopping, self-media platform such as our WeChat
public information release account. Our customers can interact with companies or other consumers, including discussion of product experience,
product consultation and purchase of products and services.
Intelligent
Business Model
The important foundation for the existence and
development of our business model is the improvement of personalization, instantaneity, convenience, interaction, accuracy and fragmentation
in the shopping experience of our customers. In 2021, Shanghai Juhao started to use Zhonglun intelligent cashier cloud-based platform,
which is aimed to realize its online and offline interaction and launch a self-checking out system with self-service cashier equipment
in certain of its offline stores. In 2021, our Juhao Best Choice Stores has launched Qiyun Choice community group purchase business, combined
with 5G telecom, to further develop Juhao online and offline connection, aiming to the transformation to unmanned logistics for the last
kilometer of the delivery to destinations with our community stores. Also, Shanghai Juhao has established cooperation relationship with
ZTO Express in smart logistics and new community retail, which allows Shanghai Juhao to connect to ZTO’s cloud-based warehousing
system, and to transform to intelligent logistics relying on ZTO’s cloud warehouse system. We plan to continue to develop our “intelligent”
shopping method which will consist of the comprehensive application of 5G telecommunication, intelligent virtual clothes fitting room,
3D remote touch sensing, photo search, voice shopping, VR shopping, and virtual assistant.
Shopping
Experience
With the continuous growth of per capita disposable
personal income of Chinese urban residents and the great enrichment of consumption goods, we believe that consumption will gradually change
from price based to value- based shopping, and the quality of shopping experience will increasingly become the key factor for consumers.
In real life, people’s recognition and understanding of a brand often come from brick and mortar store, and our experiential business
mode is to embed products into all kinds of real life scenarios created by using off-line stores, which gives consumers a direct opportunity
to comprehensively and deeply understand goods and services, thus triggering consumers’ perception of the comprehensive feedback
including the sense of hearing, taste and other aspects, this can not only enhance people’s sense of participation and acceptance,
but also further discover the value of offline stores.
2.
Advantages of our Juhao e-commerce platform
We
have obtained an EDI license certificate issued by the Shanghai Communications Administration. In China, only a few major e-commerce
platforms have obtained this certificate, such as Taobao.com (an Alibaba Group company). This certificate not only allows us to sell
products sourced from third parties on our online shopping mall, but also allows us to have third-party merchants, enterprises or individuals
open stores on our e-commerce platform to sell their own products. We believe such distinctive advantage brings more consumers to our
Juhao platform and contributes to the growth of our business.
We
believe we can compete effectively against our competitors. However, some of our current and potential competitors may have longer operating
histories, larger customer bases, better brand recognition, stronger platform management and fulfillment capabilities and greater financial,
technical and marketing resources than we do. See “Risk Factors—Risks Related to Our Business—We face fierce
competition in the health and nutritional supplements and cosmetic markets in China. We may not be able to keep pace with competition
in our industry, which could adversely affect our market share and result in a decrease in our future sales and earnings.”
Regulations
This
section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
The
relevant regulations promulgated by such government authorities are described below.
Regulations
of operation and service of e-commerce and authorized retail store
We
operate under a license for value–added telecom businesses of the People’s Republic of China (EDI), authorized by the Ministry
of Industry and Information Technology of the People’s Republic of China, or MIIT, which has approved the Shanghai Juhao platform
for operating online data processing and transaction processing services. Our license was approved on February 1, 2019 and is valid for
5 years. Shanghai Juhao was at its early development stage between 2012 and 2017 and it did not apply for a value-added telecommunications
business license until 2017. At its early business development stage, the Company’s business operation was small and revenue from
service fees generated by third party stores was immaterial in the overall business and total revenue of the Company. Our PRC counsel
believes, due to the immaterial amount from valued-added telecommunication business from 2012 until we received the approval in 2019,
that it is unlikely that such operation without appropriate license will be considered as a material violation of the regulation by the
regulator and that the possibility that the Company be penalized is remote. In addition, Mr. Zhiwei Xu, a major shareholder of Shanghai
Juhao and our Chairman and CEO, has provided an indemnification letter to the Company and agreed that he will indemnify Shanghai Juhao
and Company for any losses and penalties imposed by government agencies due to the lack of a value-added telecommunication business license
prior to February 1, 2019.
Under the Telecommunications Regulations of the
People’s Republic of China and Administrative Measures on Internet Information Services, a telecommunications service provider is
required to procure operating licenses from the MIIT or its provincial counterparts, prior to the commencement of its operations, otherwise
such operator might be subject to sanctions including corrective orders and warnings from the competent administration authority, fines
and confiscation of illegal gains. In case of serious violations, the operator’s websites may be ordered to be closed. If there
is illegal income, the illegal income shall be confiscated. A fine ranging from three to five times the amount of the illegal income;
if there is no illegal income or the illegal income is less than RMB 50,000, a fine ranging from RMB 100,000 to RMB1,000,000 shall be
imposed; if the circumstances are serious, and the website shall be closed. If such operations disrupt the order of the telecommunications
market and constitute a criminal offence, criminal liability shall be pursued in accordance with the law. In addition to the requirement
to be approved as an EDI, in 2017 the MIIT published Order No. 321, which requires an EDI to submit annual report starting in 2021. The
Company has submitted and passed current annual report for 2021.
E-Commerce
Law of the PRC
On
January 26, 2014, the State Administration for Industry and Commerce, or the SAIC (which is the predecessor of the State Administration
for Market Regulation) promulgated the Administrative Measures for Online Trading, or the Online Trading Measures, which became
effective on March 15, 2014, to regulate all operating activities for product sales and services provision via the internet (including
mobile internet). It stipulates the obligations of online products operators and services providers and certain special requirements
applicable to third-party platform operators, and was replaced on May 1, 2021 by the Regulatory and Administrative
Measures for Online Trading, as promulgated by the SAMR on March 15, 2021. Furthermore, MOFCOM promulgated the Provisions on the Procedures for Formulating Transaction
Rules of Third-Party Online Retail Platforms (Trial) on December 24, 2014, which became effective on April 1, 2015, to
guide and regulate the formulation, revision and enforcement of transaction rules by online retail third-party platforms operators. These
measures impose more stringent requirements and obligations on third-party platform operators. For example, third-party platform operators
are obligated to make their transaction rules publicly available and file them with MOFCOM or their respective provincial counterparts,
examine and register the legal status of each third-party merchant selling products or services on their platforms and display on a prominent
location of the merchant’s webpage the information stated in the merchant’s business license or a link to its business license.
Where third-party platform operators also conduct self-operation of products or services on the platform, these third-party platform
operators must make a clear distinction between their online direct sales and sales of products by third-party merchants on their third-party
platforms to avoid misleading the consumers.
On
August 31, 2018, the Standing Committee of the National People’s Congress of China (“SCNPC”) promulgated the E-Commerce
Law of the PRC, or the E-Commerce Law, which became effective on January 1, 2019. The promulgation of the E-Commerce Law established
the basic legal framework for the development of China’s e-commerce business and clarified the obligations of the operators of
e-commerce platforms and the possible legal consequences if operators of e-commerce platforms are found to be in violation of legal obligations.
For example, pursuant to the E-Commerce Law, an operator of an e-commerce platform shall give appropriate reminders to and facilitate
the business operators on its platform who have not completed the formalities for the registration of market entities to complete such
formalities. Also, an operator of an e-commerce platform is legally obligated to verify and register the information of the business
operators on its platform, prepare emergency plans in response to possible cyber security incidents, keep the transaction information
for no less than three years from the date on which the transaction has been completed, establish rules on the protection of intellectual
property rights and conform to the principle of openness, fairness and justice. Violation of the provisions of the E-Commerce Law may
result in being ordered to make corrections within a prescribed period of time, confiscation of illegally obtained gains, fines, suspension
of business, inclusion of such violations in the credit records and possible civil liabilities.
The
Company’s business operation is online retail business which includes online data processing and transaction processing services,
therefore, the-above E-Commerce laws and regulations apply to the Company. We have set up all necessary formalities and requirements
in accordance with applicable E-Commerce laws and regulations for our customers and vendors who are using our E-Commerce platform and
taken necessary measures and steps to keep us, our business partners and customers in compliance with these laws and regulations.
Regulations
Relating to Foreign Investment
The
PRC Foreign Investment Law
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which has taken effect on January 1,
2020 and replaced three existing laws on foreign investments in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The Foreign Investment Law embodies a regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework for
the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.
According
to the Foreign Investment Law, “foreign investment” refers to investment activities directly or indirectly conducted
by one or more natural persons, business entities, or otherwise organizations of a foreign country (collectively referred to as “foreign
investor”) within China, and the investment activities include the following situations: (i) a foreign investor, individually
or collectively with other investors, establishes a foreign-invested enterprise within China; (ii) a foreign investor acquires stock
shares, equity shares, shares in assets, or other like rights and interests of an enterprise within China; (iii) a foreign investor,
individually or collectively with other investors, invests in a new project within China; and (iv) investments in other means as
provided by laws, administrative regulations, or the State Council.
According
to the Foreign Investment Law, the State Council will publish or approve to publish a catalogue for special administrative measures,
or the “negative list.” The Foreign Investment Law grants national treatment to foreign invested entities, except
for those foreign invested entities that operate in industries deemed to be either “restricted” or “prohibited”
in the “negative list”. Because the “negative list” has yet to be published by the State Council, it is unclear
whether it will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List)
promulgated by the NDRC and the MOFCOM. The Foreign Investment Law provides that foreign invested entities operating in foreign
restricted or prohibited industries will require market entry clearance and other approvals from relevant PRC governmental authorities.
Furthermore,
the Foreign Investment Law provides that foreign invested enterprises established according to the existing laws regulating
foreign investment may maintain their structure and corporate governance within five years after the implementing of the Foreign
Investment Law.
In
addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their
investments in the PRC, including, among others, that local governments shall abide by their commitments to the foreign investors; foreign-invested
enterprises are allowed to issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall
be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of
foreign investors is prohibited; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains,
proceeds out of asset disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds
received upon settlement by foreign investors within China, may be freely remitted inward and outward in RMB or a foreign currency. Also,
foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report investment information
in accordance with the requirements.
This
new Foreign Investment Law has provided a more transparent foreign investment environment in China. Particularly, this new law has changed
the regulatory procedure from a pre-approval requirement to the negative list system, which means the foreign invested company may engage
in any business activities that are not in the negative list and pre-approval is not required anymore.
Negative
List Relating to Foreign Investment
Investment
activities in the PRC by foreign investors are principally governed by the Special Administrative Measures (Negative List) for Admission of Foreign
Investment and the Catalog of Industries Encouraging Foreign Investment promulgated
and as amended from time to time by MOFCOM and National Development and Reform Commission (the “NDRC”). In June
2019, Special Administrative Measures (Negative List) for Admission of Foreign Investment (2019 Version) or the Negative List, replaced
2018 Version of the Negative List. In June, 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures (Negative List)
for Foreign Investment Access (2020 Version), or the Negative List, which was further replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2021
Version), as promulgated by the MOFCOM and the NDRC in December 2021 and became effective on January 1, 2022. Industries listed in the
Negative List are divided into two categories: restricted and prohibited. Industries not listed in the Negative List are generally deemed
as constituting a third “permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in permitted
industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are
required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level
government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in
the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations.
To
comply with PRC laws and regulations, we rely on contractual arrangements with our VIE to operate our e-commerce business in China. See
“Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with our VIE and the
shareholders of our VIE for our business operations, which may not be as effective as direct ownership in providing operational control.”
Shanghai Juhao, our VIE, engages in e-commerce retail
and related services, including online data processing and transaction processing service, which are within the category in which foreign
investment is classified into License Category pursuant to the most recently published Negative List 2021 version. In addition, we intend
to centralize our management and operation in the PRC to avoid being restricted from conducting certain business activities which are
important for our current or future business but are currently restricted or might be restricted in the future. As such, we believe the
contractual arrangements between the WFOE and our VIE are necessary and essential for our business operations. These contractual arrangements
with our VIE and its shareholders enable us to exercise effective control over the variable interest entity and hence consolidate its
financial results.
Regulations
Relating to Internet Information Security and Privacy Protection
The
PRC Constitution states that the PRC laws protect the freedom and privacy of communications of citizens and prohibit infringement on
such rights. PRC government authorities have enacted laws and regulations with respect to internet information security and protection
of personal information from any abuse or unauthorized disclosure, which include the Decision of the Standing Committee of the National
People’s Congress on Internet Security Protection enacted and amended by the SCNPC on December 28, 2000 and August 27,
2009, respectively, the Provisions on the Technical Measures for Internet Security Protection issued by the Ministry of Public
Security on January 13, 2006 and took effect on March 1, 2006, the Decision of the Standing Committee of the National People’s
Congress on Strengthening Network Information Protection promulgated by the SCNPC on December 28, 2012, the Several Provisions
on Regulating the Market Order of Internet Information Services promulgated by the MIIT on December 29, 2011, and the Provisions
on Protection of Personal Information of Telecommunication and Internet Users released by the MIIT on July 16, 2013. Internet
information in China is regulated from a national security standpoint.
The
Provisions on Protection of Personal Information of Telecommunication and Internet Users regulate the collection and use of users’
personal information in the provision of telecommunications services and internet information services in the PRC. Telecommunication
business operators and internet service providers are required to formulate and disclose their own rules for the collection and use of
users’ information. Telecommunication business operators and internet service providers must specify the purposes, manners and
scopes of information collection and uses, obtain consent from the relevant citizens, and keep the collected personal information confidential.
Telecommunication business operators and internet service providers are prohibited from disclosing, tampering with, damaging, selling
or illegally providing others with, collected personal information. Telecommunication business operators and internet service providers
are required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage
or loss. Once users terminate the use of telecommunications services or internet information services, telecommunications business operators
and internet information service providers shall stop the collection and use of the personal information of users and provide the users
with services for deregistering their account numbers.
The
Provisions on Protecting Personal Information of Telecommunication and Internet Users further define the personal information of
user to include user name, birth date, identification number, address, phone number, account number, passcode, and other information
that may be used to identify the user independently or in combination with other information and the timing, places, etc. of the use
of services by the users. Furthermore, according to the Interpretations on Several Issues Concerning the Application of Law in the
Handling of Criminal Cases Involving Infringement on Citizens’ Personal Information, or the Interpretations issued by the Supreme
People’s Court and the Supreme People’s Procuratorate on May 8, 2017 and took effect on June 1, 2017, personal
information means various information recorded electronically or through other manners, which may be used to identify individuals or
activities of individuals, including, but not limited to, the name, identification number, contact information, address, user account
number and passcode, property ownership and whereabouts.
The
Company is legally obligated to protect the information of its customers and vendors, especially for the personal data of its consumers,
such as identity, consuming pattern, and other personal information.
On
November 1, 2015, the Ninth Amendment to the Criminal Law of the PRC issued by the SCNPC became effective, pursuant to which,
any internet service provider that fails to comply with obligations related to internet information security administration as required
by applicable laws and refuses to rectify upon order is subject to criminal penalty for (i) any large-scale dissemination of illegal
information; (ii) any severe consequences due to the leakage of the user information; (iii) any serious loss of criminal evidence;
or (iv) other severe circumstances. Furthermore, any individual or entity that (i) sells or distributes personal information
in a manner which violates relevant regulations, or (ii) steals or illegally obtain any personal information is subject to criminal
penalty under severe circumstances.
On
June 1, 2017, the Cyber Security Law of the PRC, or the Cyber Security Law, promulgated by SCNPC took effect, which is formulated
to maintain the network security, safeguard the cyberspace sovereignty, national security and public interests, protect the lawful rights
and interests of citizens, legal persons and other organizations, and requires that a network operator, which includes, among others,
internet information services providers, take technical measures and other necessary measures to safeguard the safe and stable operation
of the networks, effectively respond to the network security incidents, prevent illegal and criminal activities, and maintain the integrity,
confidentiality and availability of network data. The Cyber Security Law reaffirms the basic principles and requirements set forth in
other existing laws and regulations on personal information protections and strengthens the obligations and requirements of internet
service providers, which include but are not limited to: (i) keeping all user information collected strictly confidential and setting
up a comprehensive user information protection system; (ii) abiding by the principles of legality, rationality and necessity in
the collection and use of user information and disclosure of the rules, purposes, methods and scopes of collection and use of user information;
and (iii) protecting users’ personal information from being leaked, tampered with, destroyed or provided to third parties.
Any violation of the provisions and requirements under the Cyber Security Law and other related regulations and rules may result in administrative
liabilities such as warnings, fines, confiscation of illegal gains, revocation of licenses, suspension of business, and shutting down
of websites, or, in severe cases, criminal liabilities. After the release of the Cyber Security Law, on May 2, 2017, Cyberspace
Administration of China issued the Measures for Security Reviews of Network Products and Services (Trial), or the Review Measures,
which become effective on June 1, 2017. The Review Measures establish the basic framework and principle for national security reviews
of network products and services.
The
recommended national standard, Information Security Technology Personal Information Security Specification, puts forward specific
refinement requirements on the collection, preservation, use and commission processing, sharing, transfer, public disclosure, etc. Although
it is not mandatory, in the absence of clear implementation rules and standards for the law on cyber security and other personal information
protection, it will be used as the basis for judging and making determinations. On November 28, 2019, The Notice of Identification Method
of Application Illegal Collection and Use of Personal Information was issued, which provides a reference for the identification of App
illegal collection and use of personal information, and provides guidance for App operators’ self-inspection and self-correction
and netizens’ social supervision.
As
an online retail platform operator and service provider, we are subject to these laws and regulations relating to the collection, use,
storage, transfer, disclosure and security of personally identifiable information with respect to our customers, vendors and employees
including any requests from regulatory and government authorities relating to this data. Further, PRC regulators have been increasingly
focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater public scrutiny
and attention from regulators, which could increase our compliance costs and subject us to heightened risks and challenges. If we are
unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses,
and our reputation and results of operations could be materially and adversely affected.
Regulations
Relating to Food Trade
General
Administration of Food Marketing
The
Food Safety Law of the People’s Republic of China has been implemented since June 2009, revised by the Chinese People’s
Congress in April 2015, December 29, 2018 and April 29, 2021. The Regulations for the Implementation of the Food Safety Law of the
People’s Republic of China took effect in July 2009, and was revised in February 2016 and October 2019. The State Council
standardized food safety in 2016, established a food safety supervision monitoring and evaluation system, and adopted food safety
standards. The State Council implements a food production and operation licensing system. Engaged in food production, sales,
catering services, and obtained business licenses in accordance with the law. The State Council implements strict supervision and
management of special foods such as health foods, medical formulas, and infant formulas.
The
“Food Management License Management Measures” promulgated by the State Food Product Supervision and Administration Bureau
in August 2015 and revised in 2017 regulates food business licensing activities, strengthens the supervision and management of food business,
and guarantees food safety. Food business operators engaged in food business activities shall receive a Food Business License at a business
location. The food business license is valid for five years.
Shanghai
Juhao holds a food business license issued on May 12, 2016, which was renewed on April 22, 2021 with an expiration date of April 21,
2026. This license is renewable every 5 years and the Company shall submit a renewal application with the authority 30 days before its
expiration date. In addition, under the requirements of other relevant provisions of the “Food Safety Law of the People’s
Republic of China” and “Regulations on the Administration of Production and Marketing of Alcoholic Products in Shanghai”,
we have also obtained the renewable “Retail License for Alcoholic Products” for alcohol related products on our platform
on September 4, 2020 which is valid for three years and we will apply for renewal before its expiration date on September 4, 2024.
Regulations
on product quality and customer protection
According
to the “Product Quality Law of the People’s Republic of China” which came into effect in September 1993 and the “Product
Quality Law of the People’s Republic of China” revised by the Chinese People’s Congress in 2000, 2009, and 2018 respectively,
the products sold must comply with relevant safety standards, and the seller should take measures to maintain quality of products. The
seller shall not make adulterated product. The qualified products shall not be impersonated as unqualified products. For the seller,
any violation of national or industry health and safety standards or other requirements may result in civil liability and administrative
penalties, such as compensation for damages, fines, confiscation of illegally sold products and sales proceeds, and even cancellation
of business licenses; Except for criminal responsibility according to law.
The
Law of the People’s Republic of China on the Protection of Consumer Rights and the Law on the Protection of Consumer Rights and
Interests came into effect in January 1994 and were revised by the Chinese People’s Congress in 2009 and 2013 respectively. The
operators should ensure that the services provided by the products are in line with the personal, property security requirements, and
provide consumers with real information about the quality, function, use and expiration date of the product or service. Consumers who
claim damages to products or services purchased or accepted on the Internet trading platform may claim damages from the seller or service
provider. The operator of the online trading platform cannot provide the real name, address and effective contact information of the
seller or service provider, and the consumer can also claim damages from the provider of the online trading platform. The operator of
the online trading platform knows or should know that the seller or service provider uses its platform to infringe the legitimate rights
and interests of the consumer. If the supplier fails to take necessary measures, it shall bear joint and several liability with the seller
or the service provider. In addition, if the operator deceives the consumer or sells a product that is known to be unqualified or defective,
it shall not only compensate the consumer for the loss, but also pay the additional damages in accordance with the price of the goods
or services three times.
In
January 2017, the State Administration for Industry and Commerce issued the “Interim Measures for the Reimbursement of Online
Purchase Products within 7 Days”, which was implemented since March 2017 and revised in October 2020, further clarifying the scope of rights for
consumers to return without reason, including exceptions and return procedures. And online trading; platform operators are
responsible for formulating seven-day unreasonable return rules and related consumer protection systems, and supervising merchants
to comply with these rules.
Because
we sell food products on our online shopping mall platform, these food safety laws and regulations are applicable to us.
Regulations
Relating to Online Advertising
Internet
advertising management
In April 2015, the National People’s Congress
enacted the “Advertising Law of the People’s Republic of China” or the “Advertising Law”, which was implemented
in September 2015 and revised in October 2018 and April 2021. The Advertising Law regulates the commercial advertising activities of the People’s
Republic of China and stipulates the obligations of advertisers, advertising operators, advertising publishers and advertising spokespersons.
It prohibits any advertisements from obscenity, pornography, gambling, superstition, obscenity, obscenity, etc. Content or violence related
content.
If
the advertiser violates the provisions of the advertising content, he shall order it to stop publishing and impose a fine of not less
than RMB 200,000; if the circumstances are serious, the business license may be revoked and may be banned by the relevant departments.
The advertisement review approval document can be revoked and the advertiser’s application will not be accepted within one year.
In addition, the advertising operators and advertising publishers who violate the regulations shall be fined between RMB 200,000 and
RMB 2 million to collect advertising fees; if the circumstances are serious, the “Advertising Operator Business License”
or “Advertising Business Permit” shall be revoked. Authorized publishers may be revoked.
In
July 2016, the State Administration for Industry and Commerce passed the Interim Measures for the Administration of Internet Advertising
or the Measures for the Administration of Internet Advertising, which came into effect in September 2016. According to the “Internet
Advertising Management Measures”, Internet advertisers are responsible for the authenticity of advertising content, and all online
advertisements must be marked with “advertising” so that viewers can easily identify them.
As
an online retail platform operator and service provider, the Company places advertisements of its products and also provides spaces for
vendors to publish their advertisements on our platform. Therefore, the Company is treated as an advertising publisher or advertiser,
and the on-line advertising laws and regulations apply to us.
Regulations
Relating to Intellectual Property Rights
The
PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain
names.
Copyright. Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC promulgated in February 2010
and revised in November 2021 (the “Copyright Law”), and related rules and regulations. Under the Copyright Law, the term
of protection for copyrighted software is 50 years.
Patent. The Patent Law of the PRC promulgated
in December 2008, which became effective in October 2009 and was recently revised by the SCNPC on October 17, 2020 (which revision will
become effective on June 1, 2021), provides for patentable inventions, utility models and designs. An invention or utility model for which
patents may be granted shall have novelty, creativity and practical applicability. The State Intellectual Property Office under the State
Council is responsible for examining and approving patent applications. The protection period is 20 years for inventions and 10 years
for utility models and designs, all of which commence from the date of application of patent rights under the current Patent Law of the
PRC. The protection period has been slightly amended in recent amendment which became effective on June 1, 2021. The terms of protection
for invention and utility patents will still be 20 years and 10 years, respectively, in general. The term of protection for a design patent
will be extended from 10 years to 15 years. In addition, for invention patents, in situations where a patent is only granted after 4 years
or more from its filing date or 3 years or more after a request for substantive examination date, the applicant can request for an extension
of protection term for any unreasonable delay.
Trademark.
The Trademark Law of the PRC promulgated in August 2013 which took effect in May 2014 (the “Trademark Law”), and revised
in 2019, and its implementation rules protect registered trademarks. The Trademark Office of National Intellectual Property Administration,
PRC, formerly the PRC Trademark Office of the State Administration of Market Regulation is responsible for the registration and administration
of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration.
Domain
Name. Domain names are protected under the Administrative Measures for the Internet Domain Names of the PRC promulgated by the
Ministry of Information and Industry of the PRC effective on December 20, 2004 and the Administrative Measures for Internet Domain Names
promulgated by MIIT, effective on November 1, 2017 (the “Domain Name Measures”). MIIT is the major regulatory body responsible
for the administration of the PRC internet domain names. The Domain Names Measures has adopted a “first-to-file” principle
with respect to the registration of domain names.
The
Company has registered its trademarks, copyrights and domain names with competent regulatory agencies in China. We may be from time to
time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. See “Risk
Factors: Risks Related to Our Business: We may be subject to intellectual property infringement claims, which may be expensive to defend
and may disrupt our business and operations.”
Regulations
Relating to Dividend Withholding Tax
Pursuant
to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment
in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or
establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between
Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the
withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from
a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of
the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular
81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding
tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and
(ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving
the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and
regulations. We believe our corporate structure has made us eligible for such reduced rate once we become a resident enterprise in Hong
Kong. The qualification of HK resident enterprise focuses on de facto management. As of the date of this report, we do not have a management
team in Hong Kong and would most likely not be considered a HK resident enterprise and therefore would not be eligible for the reduced
5% withholding tax rate.
Regulations
on Enterprise Income Tax
PRC
enterprise income tax is calculated based on taxable income, which is determined under (i) the PRC Enterprise Income Tax Law, or the
EIT Law, promulgated by the NPC and implemented in January 2008 and amended in March 2017 and December 2018, respectively, and (ii) the
implementation rules to the EIT Law promulgated by the State Council and most recently revised in April 2019. The EIT Law imposes a uniform enterprise
income tax rate of 25% on all resident enterprises in the PRC, including foreign-invested enterprises and domestic enterprises, unless
they qualify for certain exceptions.
In
addition, according to the EIT Law and its implementation rules, enterprises registered in countries or regions outside the PRC with
“de facto management bodies” located within China may be considered to be PRC resident enterprises and will be subject
to PRC enterprise income tax at the rate of 25% on their worldwide income. The implementation rules of the EIT Law define “de
facto management bodies” as establishments that exercise full and substantial control over and overall management of the
business, productions, personnel, accounts and properties of an enterprise. The only detailed guidance currently available for the
definition of “de facto management body” as well as the determination and administration of tax residency status
of offshore-incorporated enterprises are set forth in the Notice Regarding the Determination of Chinese-Controlled Overseas
Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies issued by the SAT in April 2009,
or Circular 82, and the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Overseas Incorporated Resident
Enterprises (Trial Version) issued by the SAT in July 2011, or Bulletin No. 45, which provides guidance on the administration as
well as the determination of the tax residency status of a Chinese-controlled offshore-incorporated enterprise, defined as an
enterprise that is incorporated under the law of a foreign country or territory and that has a PRC company or PRC corporate group as
its primary controlling shareholder.
According
to Circular 82, a Chinese-controlled offshore-incorporated enterprise will be regarded as a PRC resident enterprise by virtue of having
its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all
of the following conditions are met:
|
● |
the primary location of
the day-to-day operational management and the places where they perform their duties are in the PRC; |
|
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decisions relating to the
enterprise’s financial and human resource matters are made or are subject to approval of organizations or personnel in the
PRC; |
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● |
the enterprise’s
primary assets, accounting books and records, company seals and board and shareholder resolutions are located or maintained in the
PRC; and |
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● |
50% or more of voting board
members or senior executives habitually reside in the PRC. |
Bulletin
No. 45 further clarifies certain issues related to the determination of tax resident status and competent tax authorities. It also specifies
that when provided with a copy of Recognition of Residential Status from a resident Chinese-controlled offshore-incorporated enterprise,
a payer does not need to withhold income tax when paying certain PRC-sourced income such as dividends, interest and royalties to such
Chinese-controlled offshore-incorporated enterprise.
We
believe that we are not a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject
to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management
body.” If the PRC tax authorities determine that we or any of our subsidiaries outside of China is a PRC resident enterprise for
PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income,
which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.
Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized
on the sale or other disposition of our Ordinary Shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises
or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed
to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties
between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise.
Regulations
on Income Tax for Share Transfers
According
to the Announcement of the SAT on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfer by Non-Resident Enterprises,
or Circular 7, promulgated by the SAT in February 2015, if a non-resident enterprise, such as the Company, transfers the equity interests
of a PRC resident enterprise indirectly through transfer of the equity interests of an offshore holding company (other than a purchase
and sale of shares issued by a PRC resident enterprise through or in a public securities market) without a reasonable commercial purpose,
the PRC tax authorities have the power to reassess the nature of the transaction and treat the indirect equity transfer as a direct transfer.
As a result, the gain derived from such transfer, which means the equity transfer price less the cost of equity, will be subject to PRC
withholding tax at a rate of up to 10%. Under the terms of Circular 7, the transfer which meets all of the following circumstances shall
be directly deemed as having no reasonable commercial purposes: (i) over 75% of the value of the equity interests of the offshore holding
company are directly or indirectly derived from PRC taxable properties; (ii) at any time during the year before the indirect transfer,
over 90% of the total properties of the offshore holding company are investments within PRC territory, or in the year before the indirect
transfer, over 90% of the offshore holding company’s revenue is directly or indirectly derived from PRC territory; (iii) the function
performed and risks assumed by the offshore holding company are insufficient to substantiate its corporate existence; and (iv) the foreign
income tax imposed on the indirect transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties. In
October, 2017, the SAT issued the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source,
or Bulletin 37, which, among others, repeals certain rules stipulated in Circular 7. Bulletin 37 further details and clarifies the tax
withholding methods in respect of income of non-resident enterprises.
Regulations
on PRC Value-Added Tax and Business Tax
Pursuant
to applicable PRC tax regulations, any entity or individual conducting business in the service industry is generally required to pay
a business tax at the rate of 5% on the revenues generated from providing such services. However, if the services provided are related
to technology development and transfer, such business tax may be exempted subject to approval by the relevant tax authorities. Pursuant
to the Provisional Regulations on Value-Added Tax of the PRC and its implementation regulations, unless otherwise specified by relevant
laws and regulations, any entity or individual engaged in the sales of goods, provision of processing, repairs and replacement services
and importation of goods into China is generally required to pay a value-added tax, or VAT, for revenues generated from sales of products,
while qualified input VAT paid on taxable purchase can be offset against such output VAT.
In
November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added
Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the
Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax, which became effective on May 1, 2016. Pursuant
to the pilot plan and relevant notices, VAT is generally imposed in lieu of business tax in the modern service industries, including
the VATS, on a nationwide basis. VAT of a rate of 6% applies to revenue derived from the provision of some modern services. Certain small
taxpayers under PRC law are subject to reduced value-added tax at a rate of 3%. Unlike business tax, a taxpayer is allowed to offset
the qualified input VAT paid on taxable purchases against the output VAT chargeable on the modern services provided.
On
April 4, 2018, the Ministry of Finance and the State Administration of Taxation issued the Notice on Adjustment of VAT Rates, which
came into effect on May 1, 2018. According to the abovementioned notice, the taxable goods previously subject to VAT rates of 17%
and 11% respectively become subject to lower VAT rates of 16% and 10% respectively starting from May 1, 2018. Furthermore, according
to the Announcement on Relevant Policies for Deepening Value-added Tax Reform jointly promulgated by the Ministry of Finance, the State
Administration of Taxation and the General Administration of Customs, which became effective on April 1, 2019, the taxable goods
previously subject to VAT rates of 16% and 10% respectively become subject to lower VAT rates of 13% and 9% respectively starting from
April 1, 2019. Shanghai Juhao currently pays VAT at a rate of 13%.
Regulations
on Foreign Currency Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which were most
recently amended in August 2008. Under the Foreign Exchange Administration Regulations, payments of current account items, such as profit
distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without
prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate
government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account
items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities
outside of China.
In
August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment
and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises (“SAFE Circular 142”), regulating the conversion
by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE
Circular 142, provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only
be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments
within the PRC.
In
addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of
foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may
not, in any case, be used to repay RMB loans if the proceeds of such loans have not been used. Any violation of Circular 142 may result
in severe penalties, including substantial fines.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct
Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening
of various special purpose foreign exchange accounts, such as pre-establishment expense accounts, foreign exchange capital accounts and
guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits
and dividends by a foreign-invested enterprise to its foreign shareholders, no longer require approval or verification from SAFE, and
multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously.
In
addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC must be conducted by way of registration, and banks must process foreign exchange business
relating to direct investment in the PRC based on the registration information provided by SAFE and its branches.
In
July 2014, SAFE further reformed the foreign exchange administration system in order to satisfy and facilitate the business and capital
operations of Foreign-Invested Enterprises and issued the Circular of the State Administration of Foreign Exchange on the Pilot Reform
of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign-Invested Enterprises in Certain Areas
(“Circular 36”), in July 2014. This circular suspends the application of Circular 142 in certain areas and allows a Foreign-Invested
Enterprise registered in such areas to use the RMB capital converted from foreign currency registered capital for equity investments
within the PRC.
On
February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning
Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Pursuant to SAFE Notice 13, instead of applying for approvals
regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals
will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of
SAFE, will directly examine applications and manage registrations.
In
March 30, 2015, SAFE promulgated SAFE Circular 19, to expand the reform nationwide. SAFE Circular 19 came into force and replaced both
Circular 142 and Circular 36 on June 1, 2015. SAFE Circular 19 allows foreign-invested enterprises to make equity investments by using
RMB funds converted from foreign exchange capital. However, Circular 19 continues to prohibit foreign-invested enterprises from, among
other things, using RMB funds converted from foreign exchange capital for expenditure beyond the enterprise’s business scope, providing
entrusted loans, or repaying loans between non-financial enterprises.
On
June 9, 2016, SAFE issued SAFE Circular 16, which took effect on the same day. Compared to SAFE Circular 19, SAFE Circular 16 provides
that, in addition to foreign exchange capital, foreign debt funds and proceeds remitted from foreign listings should also be subject
to the discretional foreign exchange settlement. In addition, it also lifted the restriction that foreign exchange capital under the
capital accounts and the corresponding RMB capital obtained from foreign exchange settlement should not be used for repaying the inter-enterprise
borrowings (including advances by a third party) or repaying bank loans in RMB that had been sub-lent to the third party.
In
January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness
and Compliance Verification, or Circular 3, which stipulates several capital control measures with respect to the outbound remittance
of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board
resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic
entities shall hold income to account for previous years’ losses before remitting profits. Moreover, pursuant to Circular 3, domestic
entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts
and other proof when completing the registration procedures in connection with an outbound investment.
Based
on the forgoing, if we intend to provide funding to our wholly foreign owned subsidiaries through capital injection at or after their
establishment, we should file with the State Administration for Market Regulation or its local counterparts, via the foreign investment
comprehensive administrative system and register such funding with local banks for foreign exchange related matters.
In
October 2019, SAFE promulgated the Circular 28 to further promote facilitation of cross-border trade and investment and relaxed certain
restriction on foreign exchange settlement.
Regulations
on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE
issued SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE
Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities
to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore
entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing
or making offshore investments, using legitimate onshore or offshore assets or interests, while “round trip investment” refers
to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to hold the
ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents
or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further
Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect
on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather
than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of
overseas investment or financing.
PRC
residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration
as required before the implementation of SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified
banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change
of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers
or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and
the subsequent notice, or making misrepresentations about or failure to disclose controllers of the foreign-invested enterprise that
is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant
foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital,
share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject
relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.
The
major shareholders of the Company have completed the initial registrations with the local SAFE branch or qualified banks as required
by SAFE Circular 37. To our knowledge, certain of our minority shareholders of the Company who are also PRC resident individual shareholders
have not completed their SAFE Circular 37 registration yet. Failure to comply with the registration procedures set forth in the Circular
37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment
of dividends and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement
of foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign exchange administration
regulations.
Regulations
on Stock Incentive Plans
SAFE
promulgated the Stock Option Rules in February 2012, replacing the previous rules issued by SAFE in March 2007. Under the Stock
Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plans in an overseas publicly-listed
company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive
plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company
or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to
the stock incentive plan on behalf of the participants. In addition, the PRC agent is required to amend the SAFE registration with respect
to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or other material changes. The
PRC agent must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local
branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee
share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted
and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents
before distribution to such PRC residents.
The Board of Directors of the Company approved
and adopted Jowell Global Ltd. 2021 Omnibus Equity Plan (the “Equity Plan”) on August 2, 2021, which was approved at the stockholders’
meeting on September 10, 2021. The total aggregate ordinary shares of the Company authorized for issuance during the term of the Equity
Plan is limited to 4,000,000 shares. Our executive officers, director and other employees who are PRC citizens or who have resided in
the PRC for a continuous period of not less than one year and have received stock awards from the Company have not completed their SAFE
registration yet.
Regulations
on Dividend Distribution
Under
our current corporate structure, we may rely on dividend payments from WFOE, which is a wholly foreign-owned enterprise incorporated
in China, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested
enterprises include the newly enacted Foreign-Investment Law, which came into effect on January 1, 2020, and its implementation rules.
Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises
in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds
until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion,
allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are
not distributable as cash dividends.
Regulations
on M&A and Overseas Listings
Six
PRC regulatory agencies, including MOFCOM, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the M&A Rules, which became effective in September 2006 and was amended in June 2009. The M&A Rules, among
other things, require offshore SPVs formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled
by PRC companies or individuals, to obtain the approval of MOFCOM prior to publicly listing their securities on an overseas stock exchange.
In
the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations
and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining
approval from MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. The M&A Rules requires
a foreign investor to obtain the approval from MOFCOM or its local counterpart only upon (i) its acquisition of a domestic enterprise’s
equity interest; (ii) its subscription of the increased capital of a domestic enterprise; or (iii) establishes and operates
a foreign-invested enterprise with assets acquired from a domestic enterprise and such transactions raise “national defense and
security” concerns or through such transactions foreign investors may acquire de facto control over domestic enterprises that raise
“national security” concerns. It is unclear whether our business would be deemed to be in an industry that raises “national
defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanations
in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in
China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.
In
addition, Domestic Investment by Foreign-Invested Enterprises issued by MOFCOM in September 2000 is also currently in force governing
M&A.
See
“Risk Factors—Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission
may be required under a regulation adopted in August 2006, as amended, and, if required, we cannot predict whether we will be able to
obtain such approval.”
Regulations
Relating to Employment
Pursuant
to the Labor Law of PRC, promulgated by the NPC in July 1994 and revised in August 2009 and December 2018 (the “Labor Law”),
and the Labor Contract Law of PRC, promulgated by the Standing Committee of the NPC in June 2007 and amended in December 2012 (the “Labor
Contract Law”), employers must execute written employment contracts with full-time employees. If an employer fails to enter into
a written employment contract with an employee within one year from the date on which the employment relationship is established, the
employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s
salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to
the day prior to the execution of the written employment contract. All employers must compensate their employees with wages equal to
at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of
fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds,
namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity
insurance plan, and a housing provident fund, and contribute to the plans or funds based on local annual minimum salary standard or certain
percentage of the local annual average compensations to works (“Social Insurance Payment Base”). We participate in employee
benefit plans and have made contributions to such plans required by current PRC laws and regulations. If enterprises are required to
contribute to the plans or funds based on a higher Social Insurance Payment Base under the new regulations or policies in the future,
we may have to make more contributions to such plans for our employees.
We
intend to comply with the new regulations and policies applicable to employee benefit plans set forth through time. As of the date of
this report, we have signed written employment contracts with all of our employees and paid all the benefits package as required by law.
In addition, the PRC Individual Income Tax Law requires companies operating in China to withhold individual income tax on employees’
salaries based on the actual salary of each employee upon payment.
| C. | Organizational
structure |
Below
is the Company’s corporate structure chart as of the date of this report.
Variable
Interest Entity Arrangements
In
establishing our business, we have used a VIE structure. In the PRC, investment activities by foreign investors are principally
governed by the Guidance Catalog of Industries for Foreign Investment, which was promulgated and is amended from time to time by the
PRC Ministry of Commerce, or MOFCOM, and the PRC National Development and Reform Commission, or NDRC. In June 2018, the Guidance
Catalog of Industries for Foreign Investment was replaced by the Special Administrative Measures (Negative List) for Foreign
Investment Access (2019 Version), or the Negative List. In June 2020, the MOFCOM and the NDRC promulgated the Special Administrative
Measures (Negative List) for Foreign Investment Access (2020 Version), or the Negative List, which became effective on July 23,
2020. In December 2021, MOFCOM and NDRC promulgated the Special Administrative Measures (Negative List) for Foreign Investment
Access (2021 Version), or the Negative List, which became effective on January 1, 2022. Industries not listed in the Negative List
are generally open to foreign investment unless specifically restricted by other PRC regulations. Our Company and WFOE are
considered as foreign investors or foreign invested enterprises under PRC law.
The business we conduct through our VIE is within
the category for which foreign investment is currently restricted under the Negative List or other PRC Laws. In addition, we intend to
centralize our management and operation in the PRC without being restricted to conducting certain business activities which are important
for our current or future business but are restricted or might be restricted in the future. As such, we believe the agreements between
the WFOE and our VIE are necessary and essential to our business operations. These contractual arrangements with our VIE and its shareholders
enable us to exercise effective control over our VIE and hence consolidate its financial results.
WFOE effectively assumed management of the business
activities of our VIE through a series of agreements which are referred to as the VIE Agreements. The VIE Agreements are comprised of
a series of agreements, including an Exclusive Business Cooperation and Management Agreement, an Equity Interest Pledge Agreement, an
Exclusive Option Agreement, Powers of Attorney and Spousal Consent Letters. Through the VIE Agreements, WFOE has the right to advise,
consult, manage and operate the VIE for an annual consulting service fee in an amount equal to all of the VIE’s net profit after
tax. The shareholders of the VIE have pledged all of their right, title and equity interests in the VIE as security for WFOE to collect
consulting services fees provided to the VIE through the Equity Interest Pledge Agreement. In order to further reinforce WFOE’s
rights to control and operate the variable interest entity, the VIE’s shareholders have granted WFOE an exclusive right and option
to acquire all of their equity interests in the VIE through the Exclusive Option Agreement.
On
October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of contractual arrangements with Shanghai Juhao Information
Technology Co., Ltd. (“Shanghai Juhao”) and the shareholders of Shanghai Juhao, as amended on October 10, 2020. These agreements
include: 1) an Exclusive Business Cooperation and Management Agreement; 2) an Equity Interest Pledge Agreement; 3) an Exclusive Option
Agreements 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant to these agreements, Shanghai Jowell has the exclusive rights
to provide consulting services to Shanghai Juhao related to the business operation and management of Shanghai Juhao. For such services,
Shanghai Juhao agrees to pay service fees determined based on all of its net profit after tax payments to Shanghai Jowell or Shanghai
Jowell has obligation to absorb all of Shanghai Juhao’s losses. The agreements remain in effect until and unless all parties agree
to its termination, except the Exclusive Option Agreement that the effective term of 10 years and can be renewed for an additional 10
years. Until such termination, Shanghai Juhao may not enter into another agreement for the provision of management consulting services
without the prior consent of Shanghai Jowell. Also, pursuant to the equity interest pledge agreement between the shareholders of Shanghai
Juhao and Shanghai Jowell, such shareholders pledged all of their equity interests in Shanghai Juhao to Shanghai Jowell, to guarantee
Shanghai Juhao’s performance of its obligations under the Exclusive Business Cooperation and Management Agreement. Without Shanghai
Jowell’s prior written consent, the shareholders of Shanghai Juhao shall not transfer or assign the pledged equity interests, or
incur or allow any encumbrance that would jeopardize Shanghai Jowell’s interests. If Shanghai Juhao breaches its contractual obligations
under the aforesaid agreement, Shanghai Jowell, as the pledgee, will be entitled to certain rights and entitlements, including priority
in receiving payments by the evaluation or proceeds from the auction or sale of all or part of the pledged equity interests of Shanghai
Juhao, in accordance with legal procedures. In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore,
Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the
characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai
Juhao.
| D. | Facilities
and Property |
Our principal executive office is located in Shanghai,
China, where we lease approximately 700 square meters of office space. We also have other material leases of two office spaces for approximately
7,073 square meters, one warehouse space for approximately 6,440 square meters, one live broadcasting room space for approximately 1,146
square meters and one Juhao Best Choice Store space for approximately 3,956 square meters in Chuangshu City, Jiangsu Province. Our leases
can be renewed upon mutual agreement with our lessors. Our leased premises are leased from related parties who either have valid titles
to the relevant properties or proper authorization from the title holder to sublease the property, save as disclosed in the following
table:
Currently, we mainly lease the following properties
to conduct our business:
Property Address |
|
Lessor |
|
Annual Rent |
|
Lease
Expiration
Date |
|
Purposes/Use |
|
2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China |
|
Shanghai Longrich Industrial Co. Ltd. |
|
RMB 661,500 |
|
December 31, 2022 |
|
Office |
|
No. 46-5 Xinzhuang Avenue, Xinzhuang County, Changshu City, Jiangsu Province, China |
|
Colori, Inc. |
|
RMB 1,803,200 |
|
December 31, 2022 |
|
Warehouse |
|
No. 26 Longrich Blvd, Longrich Industrial Park, Changshu City, Jiangsu Province, China |
|
Jiangsu Longrich Bioscience Co. Ltd. |
|
RMB 2,740,915 |
|
December 31, 2022 |
|
Office |
|
No. 38 Xinzhuang Avenue, Changnan Village, Xinzhuang County, Changshu City, Jiangsu Province, China |
|
Jiangsu Longrich Bioscience Co. Ltd. |
|
RMB503,128 |
|
December 31, 2022 |
|
Office |
|
Hanjia Building, Room 3201 Jianggan District, Hangzhou City, Zhejiang Province, China |
|
Meizhu Hu |
|
RMB 1,340,865 |
|
May 19, 2031 |
|
Office |
|
Chuangke, Longrich Industrial Park, Changshu City, Jiangsu Province, China |
|
Jiangsu Longrich Bioscience Co. Ltd. |
|
RMB 525,600 |
|
April 30, 2022 |
|
Live Broadcasting Room |
|
227 Provincial Rd, Xinzhuang County, Changshu City, Jiangsu Province, China |
|
Colori, Inc. |
|
RMB 1,028,560 |
|
August 31, 2024 |
|
Juhao Best Choice Store |
|
309 Dongping St. Suzhou Industrial Park, Suzhou City, Jiangsu Province, China |
|
Suzhou Tiangong Zhongchuang Enterprise Management Co., Ltd. |
|
RMB 711,522 |
|
November 30, 2022 |
|
Office |
|
We
believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
ITEM 4A. |
UNRESOLVED STAFF COMMENTS |
Not
Applicable
ITEM 5. |
OPERATING AND FINANCIAL
REVIEW AND PROSPECTS |
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated
financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain
forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item
3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
5A.
Operating Results
Overview
Jowell
Global Ltd. (“Jowell Global” or “we”) is an exempted company incorporated in the Cayman Islands with limited
liability on August 16, 2019, as a holding company. We, through the consolidated variable interest entity (“VIE”), focuses
on providing consumers with convenient and high-quality online retail experience through our retail platforms, www.1juhao.com, and mobile
app, as well as authorized retail stores. We also offer programs that enable third-party sellers to distribute their products through
our platforms. In an effort to differentiate our services, we focus on and specialize in the online retail and sales through our distribution
network of cosmetic products, health and nutritional supplements and household products.
We
completed a reorganization of our legal structure on November 1, 2019. The reorganization involved the incorporation of Jowell Global,
Jowell Technology Limited (“Jowell Tech”), a Hong Kong holding company; the incorporation of Shanghai Jowell Technology Co.,
Ltd. (“Shanghai Jowell”), a wholly foreign-owned entity (“WFOE”) formed by Jowell Tech under the laws of the
People’s Republic of China (“China” or the “PRC”).
As
part of the reorganization, on October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of agreements with Shanghai
Juhao Information Technology Co., Ltd. (“Shanghai Juhao”) and its shareholders, as amended on October 10, 2020. These agreements
include: 1) an Exclusive Business Cooperation and Management Agreement (“EBCMA”); 2) an Equity Interest Pledge Agreement
(“EIPA”); 3) an Exclusive Option Agreement (“EOA”); 4) Powers of Attorney (“POA”) and 5) Spousal
Consent Letters. Through these agreements, Shanghai Jowell has established the exclusive rights to receive the profits and obligation
to absorb losses from Shanghai Juhao. The agreements remain in effect unless all parties agree to its termination, except the EOA which
has an effective term of 10 years and can be renewed for an additional 10 years upon the end of the initial term. Until such termination,
Shanghai Juhao may not enter into another agreement for the similar provision without obtaining consent from Shanghai Jowell. Shanghai
Jowell has gained control over Shanghai Juhao and Shanghai Juhao is considered a Variable Interest Entity (“VIE”) under the
Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”.
Jowell Global, Jowell Tech, and Shanghai Jowell are
holding companies with no material operations of their own and do not hold any material assets. We conduct our operations primarily through
the VIE in China. We established the VIE structure through aforementioned VIE agreements. These VIE agreements are subject to restrictions
under current PRC laws and regulations. In the opinion of our PRC counsel, Yiyou Tianyuan Law Firm, our current ownership structure, the
ownership structure of our PRC subsidiary and the consolidated VIE, and the contractual arrangements among WFOE, the VIE and the shareholders
of the VIE are common practices for the companies listed on stock exchange in Hong Kong or the U.S. engaging in the businesses on Negative
List in China and these contractual arrangements are valid and binding in accordance with their terms and applicable PRC laws and regulations
currently in effect. However, Yiyou Tianyuan Law Firm has also advised us that there are substantial uncertainties regarding the interpretation
and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take
a view that is consistent with the opinion of our PRC counsel. If the PRC government finds that our contractual arrangements do not comply
with its restrictions on foreign investment in the online data processing and transaction processing services business, the relevant PRC
regulatory authorities, including the China Securities Regulatory Commission (CSRC), would have broad discretion in dealing with such
violations or failures, including, without limitation: requiring us to restructure our ownership structure or operations, including terminating
the contractual arrangements with the VIE and deregistering the equity pledges of the VIE, which in turn would affect our ability to consolidate,
derive economic interests from, or exert control over the VIE. For more detail, see “Risk Factors – Risks Related to Our
Corporate Structure - If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest
entity do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the
interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests
in those operations.”
In
2012, Shanghai Juhao started its operation, which was among the first membership -based e-commerce platforms for online-to-offline
sales of cosmetics, health and nutritional supplements and household products in China. Today, we offer an online platform Juhao Mall
which holds an EDI (Electronic Data Interchange) certification approved by the Shanghai Communication Administration pursuant to the
requirement of Ministry of Industry and Information Technology of China, selling our own brand products manufactured by third parties as
well as international and domestic branded products from 200+ other manufacturers. As of December 31, 2021 and 2020, our platform had
2,237,358 and 1,969,014 VIP members who have registered on our platform, respectively, 238 and 178 merchants who have opened their own
stores on our platform, respectively. In the years ended December 31, 2021 and 2020, 79.0% and 73.3% of the products sold on our platform
were cosmetics and health and nutritional supplements, respectively. We also sell household products, such as pots and pans, paper towels,
cups, vacuum cleaners, massagers, towels on our platform, and those products account for 21.0% and 26.6 % of the products sold on
our platform in 2021 and 2020, respectively.
We
believe that we are industry forerunners in turning data insight into valuable business intelligence in China. We continue to innovate
and develop new solutions for our e-commerce platform, which is supported by a strong IT infrastructure. We currently offer innovative
service modules on our platforms such as data analysis, CRM (customer relationship management), classification management, supply chain
management, online shopping consultation, price intelligence system, and precision marketing. Aimed at operational excellence, our service
modules are designed and built to satisfy the needs of participants for integrated and easy-to-use software systems. Our technology and
data solutions for our authorized Love Home Store enable users to monitor sales volume and pricing of products through our smart supply
chain. With service location-specific data, users are able to understand the needs of specific products in real time and gain valuable
market insight. We can use this information to recommend purchasing and inventory strategies to Love Home Store users in order to fundamentally
improve their procurement processes.
Since
August 2017, we have been also selling our products in authorized retail stores all across China. Operating under the brand name “Love
Home Store” or “LHH Store”, the authorized retailers may operate as independent stores or store-in-shop (an integrated
store), selling our products that they purchased through our online platform under their special retailer accounts with us which provide
them with major discounts. As of December 31, 2021 and 2020, we authorized 26,043 and 24,513 Love Home stores in 31 provinces of China,
respectively, providing offline retail and wholesale of our products.
On
April 28, 2021, the Company announced it has officially launched its “Juhao Best Choice” community group-buying store initiative
to continue growing its offline retail market presence. The community group-buying offline stores will sell fresh produce, foods and
daily household consumer products in addition to the cosmetics and health and nutritional supplements currently sold in the Company’s
franchised LHH Stores. The community group-buying stores aim to provide a more convenient shopping experience and high-quality produce
and foods for consumers from local communities, towns and villages across China. Juhao Best Choice stores will consolidate online and
offline resources for store design and logistics services and provide guidance and trainings for store owners with a unified system for
store management, design, service criteria, SKU management and product delivery. The Company will also provide the store owners with
live-streaming marketing skill training and upgrade and expand certain existing LHH Stores to Juhao Best Choice stores.
As of December 31, 2021, Shanghai Juhao has seven
wholly owned Juhao Best Choice Stores, located in the cities of Suzhou, Changshu and Wuhu, and twenty-eight wholly owned subsidiaries
engaging online promotion of our products and services located in the cities of Changshu, Nantong, Shanghai, Guangzhou and Hangzhou.
On March 19, 2021, the Company closed its initial
public offering (“IPO”) of 3,714,286 ordinary shares, par value $0.0001 per share, priced at $7.00 per share. On March
23, 2021, the underwriter exercised its over-allotment option to purchase an additional 557,143 ordinary shares at a price of $7.00 per
share. The net proceeds of the Company’s IPO, including the proceeds from the sale of the over-allotment shares, totaled approximately
$25.7 million, after deducting underwriting discounts and other related expenses. The Ordinary Shares have been listed on the Nasdaq Capital
Market and trading under the ticker symbol “JWEL” since March 17, 2021. In connection with the IPO, the Company issued to
the underwriter and its affiliates warrants to purchase ordinary shares of the Company that equals to 10% of the aggregate number of ordinary
shares sold by the underwriter in the IPO (the “Warrants”). On November 25, 2021, the warrants holders notified the Company
that they have elected to cashless exercise the Warrants for an aggregate of 137,111 ordinary shares of the Company. As of December 31,
2021, there was no warrants outstanding.
On July 27, 2021, Shanghai Juhao entered into a Capital Increase Agreement
(the “Agreement”) with Suzhou Industrial Park Hongrun Rural Small Amount Loan Co., Ltd. (“Hongrun”) and its shareholders
identified on the signature pages thereto (the “Existing Shareholders”). Mr. Zhiwei Xu, the Chairman of the Board of Directors
and Chief Executive Officer of the Company is also the Chairman of the Board of Directors of Hongrun. Jiangsu Longrich Group Co., Ltd.,
the largest shareholder of Hongrun is also a related party of the Company. Pursuant to the Agreement, Shanghai Juhao contributed RMB 30
million (approximately $4.6 million) to Hongrun (the “Investment”) for 18.96% equity interest of Hongrun. Hongrun and Existing
Shareholders agree the Investment will only be used for making loans to the owners of Juhao Best Choice Stores for their
business development and expansion. Juhao Best Choice Stores are the community group-buying franchise stores launched by Shanghai
Juhao in April 2021.
Key
Factors Affecting Our Results
Our
business and results of operations are affected by general factors affecting the online retail markets for health and nutritional supplements
and cosmetics in China, including China’s overall economic growth, the increase in per capita disposable income, the growth in
consumer spending and the retail industry and the expansion of internet penetration. Unfavorable changes in any of these general factors
could affect the demand for the products we sell and could materially and adversely affect our results of operations.
While
our business is influenced by general factors affecting China’s online retail industry, our operating results are more directly
affected by certain company specific factors, including:
| ● | our
ability to attract and retain customers at reasonable cost; |
| ● | our
ability to establish and maintain relationships with suppliers, third-party merchants and other service providers; |
| ● | our
ability to invest in growth and new technologies while improving operating efficiency; |
| ● | our
ability to control marketing expenses, while promoting our brand and internet platform cost-effectively; |
| ● | our
ability to source new products to meet customer demands; and |
| ● | our
ability to establish Juhao Best Choice Stores and continue to expand offline LHH Stores and increase the interactions between our online
platform and offline stores. |
| ● | our
ability to compete effectively and to execute our strategies successfully. |
Impact
of COVID-19
Beginning
in late 2019, there was an outbreak of COVID-19 (coronavirus) which has spread quickly to many parts in China, the U.S. and
globally. In March 2020, the World Health Organization declared the COVID-19 a pandemic. With an aim to contain the COVID-19
outbreak, the Chinese government has imposed various strictive measures across the country including, but not limited to, travel
restrictions, mandatory quarantine requirements, and postponed resumption of business operations until after the Chinese New Year
holiday in 2020. Starting from March 2020, businesses in China began to reopen, and the interruptions to businesses were gradually
removed. However, due to the recent outbreak of Omicron variant in China, many cities in China have imposed new restrictions and
quarantine requirements with office closures, including Shanghai city where our headquarters are located and the employees of our
VIE in Shanghai office have been working from home since March 30, 2022.
As
an online retailer and retail platform and because the COVID-19 is generally considered under control in China in 2021, our operations
in 2021 were not significantly negatively impacted by the pandemic. However, it is not possible to determine the impact of the COVID-19
pandemic on our business operations and financial results for 2022, which is highly dependent on numerous factors, including the duration
and spread of the pandemic and any resurgence of COVID-19 and new variants such as Omicron variant, efficacy and distribution of COVID-19
vaccines, and the actions taken by government authorities and other entities in China and elsewhere to contain COVID-19 such as the current
restrictions and office closures in Shanghai, almost all of which are beyond our control.
Results
of Operations
Certain
tables within this section may not reflect the exact amount or percentage due to rounding.
For
the Year Ended December 31, 2021 and 2020
The
following table summarized the results of our operations for the year ended December 31, 2021 and 2020, respectively, and provides information
regarding the dollar and percentage fluctuations during such periods.
| |
For the Year Ended December 31, | | |
| | |
| |
| |
2021 | | |
2020 | | |
Variance | |
| |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% of Revenue | |
| |
(in thousands, except for percentages) | |
Revenue | |
$ | 170,912 | | |
| 100.0 | % | |
$ | 96,879 | | |
| 100.0 | % | |
$ | 74,033 | | |
| 76.4 | % |
Operating Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Sales | |
| 159,259 | | |
| 93.2 | % | |
| 86,405 | | |
| 89.2 | % | |
| 72,854 | | |
| 84.3 | % |
Fulfilment | |
| 3,758 | | |
| 2.2 | % | |
| 2,270 | | |
| 2.3 | % | |
| 1,488 | | |
| 65.6 | % |
Marketing | |
| 9,380 | | |
| 5.5 | % | |
| 1,028 | | |
| 1.1 | % | |
| 8,352 | | |
| 812.5 | % |
General and Administrative | |
| 5,507 | | |
| 3.2 | % | |
| 2,064 | | |
| 2.1 | % | |
| 3,443 | | |
| 166.8 | % |
Total Operating Expenses | |
| 177,905 | | |
| 104.1 | % | |
| 91,766 | | |
| 94.7 | % | |
| 86,139 | | |
| 93.9 | % |
Income (loss) from Operations | |
| (6,993 | ) | |
| (4.1 | )% | |
| 5,113 | | |
| 5.3 | % | |
| (12,106 | ) | |
| (236.8 | )% |
Other Income (Expenses) | |
| 413 | | |
| 0.2 | % | |
| 6 | | |
| -% | | |
| 407 | | |
| (6,783.3 | )% |
Income (loss) before Income Taxes | |
| (6,580 | ) | |
| (3.8 | )% | |
| 5,119 | | |
| 5.3 | % | |
| (11,699 | ) | |
| (228.5 | )% |
Provision (benefit) for Income Taxes | |
| (191 | ) | |
| (0.1 | )% | |
| 1,532 | | |
| 1.6 | % | |
| (1,723 | ) | |
| (112.5 | )% |
Net Income (loss) | |
| (6,389 | ) | |
| (3.7 | )% | |
| 3,587 | | |
| 3.7 | % | |
| (9,976 | ) | |
| (278.1 | )% |
Other Comprehensive Income, net of tax | |
| 671 | | |
| 0.4 | % | |
| 783 | | |
| 0.8 | % | |
| (112 | ) | |
| (14.3 | )% |
Comprehensive Income (Loss) | |
$ | (5,718 | ) | |
| (3.3 | )% | |
$ | 4,370 | | |
| 4.5 | % | |
$ | (10,088 | ) | |
| (230.8 | )% |
Revenue
Through
our website at www.1juhao.com and mobile app, we engage primarily in the sales of cosmetic products, health and nutritional supplements
and household products sourced from manufacturers and distributors in China. Currently, we have three types of revenue streams deriving
from our three major product categories: cosmetic products, health and nutritional supplements and household products. Other than revenue
from product sales, we also earn service fees charged to third party merchants for using our platform, which was immaterial and is grouped
in “Others” presented below. The following sets forth the breakdown of our revenue by revenue stream for the years ended
December 31, 2021 and 2020, respectively.
|
|
For the Year Ended December 31, |
|
|
Variance |
|
|
|
2021 |
|
|
% |
|
|
2020 |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(in thousands, except for percentages) |
|
Cosmetic products |
|
$ |
78,841 |
|
|
|
46.2 |
% |
|
$ |
18,701 |
|
|
|
19.2 |
% |
|
$ |
60,140 |
|
|
|
321.6 |
% |
Health and Nutritional Supplements |
|
|
56,104 |
|
|
|
32.8 |
% |
|
|
52,372 |
|
|
|
54.1 |
% |
|
|
3,732 |
|
|
|
7.1 |
% |
Household Products |
|
|
35,943 |
|
|
|
21.0 |
% |
|
|
25,733 |
|
|
|
26.6 |
% |
|
|
10,210 |
|
|
|
39.7 |
% |
Other |
|
|
24 |
|
|
|
- |
% |
|
|
73 |
|
|
|
0.1 |
% |
|
|
(49 |
) |
|
|
(67.1 |
)% |
Total |
|
$ |
170,912 |
|
|
|
100.0 |
% |
|
$ |
96,879 |
|
|
|
100.0 |
% |
|
$ |
74,033 |
|
|
|
76.4 |
% |
Total revenue for the fiscal year
ended December 31, 2021 increased by about $74.0 million, or 76.4%, to $170.9 million from $96.9 million for the fiscal year ended
December 31, 2020.
Compared to the year ended December 31, 2020, sales
of cosmetic products increased by about $60.1 million or 321.6% in the year ended December 31, 2021. The increase in revenue of cosmetic
products is mainly due to increase in units sold and increase in weighted average unit price for products sold. Comparing to the year
ended December 31, 2020, we sold approximately 18.9 million or 170.0% more units in 2021 and an increase in the weighted average unit
price of $0.94 or 56.2%. The increase in units sold comparing 2021 with 2020 is mainly due to the expansion of our sales and distribution
network. In 2021, we sold products to 351 distributors compared to 12 distributors in 2020 and sales to these distributors represent approximately
71% of our consolidated revenue for cosmetic products in 2021 compared to 40% in 2020. The increase in weighted average unit price of
cosmetic products sold is mainly due to increased sales of premium brand products. Starting from 2021, we entered into distributing agreements
and have been authorized to distribute cosmetic products from Adidas, SK-II, Johnson & Johnson, Mentholatum, L’Oréal,
Shiseido and etc. through our platform and to the distributor.
Compared
to the year ended December 31, 2020, sales of health and nutritional supplements products increased by about $3.7 million or 7.1%. The
increase in health and nutritional supplements revenue is mainly due to increase in units sold. Comparing to the year ended December
31, 2020, we sold approximately 0.9 million or 28.3% more units in 2021. The increase is partially offset by slight decrease in unit
price of approximately $2.71 or 16.5%. The increase in quantity of products sold is mainly attributable to increased health related awareness
due to continual COVID-19 related concerns and our continual expansion of our customer base in China and our efforts in actively seeking
additional collaborations with retailers and distributors.
Our
household products revenue increased by about $10.2 million or 39.7% comparing 2021 to 2020. The increase in household products revenue
is mainly due to 41.1% increase in weighted average unit price for products sold and is partially offset by 1.0% decrease in quantity
sold. The significant increase in weighted average unit price for products sold is mainly due to the addition of premium brands to our
brands portfolio, such as Philips, Apple, Gree Electric, Midea and etc.
The average exchange rate for the fiscal years ended December 31, 2021
and 2020, was RMB1 to $0.1550 and RMB1 to $0.1450, respectively, representing a 6.9% favorable impact when exchange rates were used in
converting RMB to USD, which was included in the above analysis.
Operating
Expenses
Operating
expenses primarily consist of cost of sales, fulfilment expenses, marketing expenses and general and administrative expenses.
| |
For the Year Ended December 31, | | |
| | |
| |
| |
2021 | | |
2020 | | |
Variance | |
| |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% | |
| |
(in thousands, except for percentages) | |
Operating Expenses: | |
| | |
| | |
| | |
| | |
| | |
| |
Cost of Sales | |
$ | 159,259 | | |
| 93.2 | % | |
$ | 86,405 | | |
| 89.2 | % | |
$ | 72,854 | | |
| 84.3 | % |
Fulfilment | |
| 3,758 | | |
| 2.2 | % | |
| 2,270 | | |
| 2.3 | % | |
| 1,488 | | |
| 65.6 | % |
Marketing | |
| 9,380 | | |
| 5.5 | % | |
| 1,028 | | |
| 1.1 | % | |
| 8,352 | | |
| 812.5 | % |
General and Administrative Expenses | |
| 5,507 | | |
| 3.2 | % | |
| 2,064 | | |
| 2.1 | % | |
| 3,443 | | |
| 166.8 | % |
Total Operating Expenses | |
$ | 177,905 | | |
| 104.1 | % | |
$ | 91,766 | | |
| 94.7 | % | |
$ | 86,139 | | |
| 93.9 | % |
Our
total operating expenses increased by about $86.1 million or 93.9% from $91.8 million in 2020 to $177.9 million in 2021. All categories
of our operating expenses increased in 2021 compared to 2020. The increase is mainly attributable to: 1) the increase in sales and related
to the expansion of our operations; and 2) the appreciation of RMB against USD in fiscal year
2021. The average exchange rate for the fiscal years ended December 31, 2021 and 2020, was RMB1 to $0.1550 and RMB1 to $0.1450, respectively,
representing an increase of 6.9% when exchange rates were used in converting RMB to USD.
Cost
of sales
Cost of sales primarily consists of the purchase price
of merchandise that we sell directly on our platform and inbound shipping costs. The cost of sales for all of our three revenue streams
increased in 2021 comparing to 2020.
Cost of sales of cosmetic products increased by about
$57.5 million or 320.7% from $17.9 million in 2020 to about $75.5 million in 2021. The increase is attributable to 18.9 million more units
were sold and an increase in the weighted average unit cost of $0.9 or 55.8% in 2021 comparing to 2020. In 2021, we expanded our distribution
networks and sold products to significantly more local distributors and wholesalers. Furthermore, adding more leading brands to our cosmetic
brands portfolio also led to significant increase in the weighted average unit cost and quantity of products sold in 2021 comparing to
2020.
Cost of sales of health and nutritional supplements
increased by about $4.8 million or 10.2% from $46.8 million in 2020 to $51.6 million in 2021. The increase in cost of sales is mainly
due to increase in sales volume of our health and nutritional supplements in 2021.
Cost of sales of household products increased by about
$10.6 million or 48.8% from $21.6 million in 2020 to about $32.2 million in 2021. The increase was primarily due to 50.3% increase in
weighted average unit cost. The increase in weighted average unit costs of products sold of our household products is mainly due to we
sold more higher unit price products in 2021 than 2020.
Fulfillment
Expenses
Our fulfillment expenses primarily consist of costs
related to order fulfillment, including charges we paid for order preparing, packaging, outbound freight, and physical storage. Fulfillment
expenses increased by about $1.5 million or 65.6% in 2021 compared to 2020. The increase in our fulfillment expenses is primarily attributable
to the increase in warehouse rent which is mainly due to we rented more spaces in 2021 to store more products. The fulfillment expenses
as a percentage of total revenues were 2.2% in 2021, down from 2.3% in 2020. The decrease was mainly due to more larger customers elected
to self-pickup products purchased from the Company’s facilities which led to decrease in outbound freight costs as a percentage
of the revenues.
Marketing
Expenses
Marketing expenses increased by about $8.4 million
or 812.6% in 2021 compared to 2020. Marketing expenses constitute of 5.5% and 1.1% of our total revenue in 2021 and 2020, respectively.
The increase was primarily due to the increased marketing and promotion activities and the increased expenditure for further enhancing
brand awareness in strategic geographic areas. Specifically, compared to 2020, in 2021, we incurred about $3.1 million more advertisement
cost, $1.6 million more costs of marketing and promotion activities, and $3.1 million more payroll costs.
General
and Administrative Expenses
Compared to 2020, our general and administrative
expenses increased by about $3.4 million or 166.8% in 2021. The increase was primarily due to $1.5 million increase in payroll expenses
due to increased headcount in general and administrative personnel, $1.0 million increase in share-based compensation of services provided,
and $0.4 million increased expenditure as being a public company.
Income
(Loss) from Operations
| |
For the Year Ended December 31, | |
| |
2021 | | |
2020 | |
| |
Amount | | |
% of revenue | | |
Amount | | |
% of revenue | |
| |
(in thousands, except for percentage) | |
Income (Loss) from Operations | |
$ | (6,993 | ) | |
| (4.1 | )% | |
$ | 5,113 | | |
| 5.3 | % |
Loss from operations in 2021 was approximately
$7.0 million compared to income from operations of about $5.1 million in 2020. The decrease in income from operations is mainly attributable
to the implementation of our business expansion with significant increase in our marketing expenses and general and administration expenses
and cost of revenues.
Income
(Loss) Before Income Taxes
Loss
before income taxes is about $6.6 million in 2021 as compared to income before income taxes of about $5.1 million in 2020. The decrease
in income before income taxes is primarily due to our continual implementation of business expansion with significant increase in our
general and administration expenses, marketing expenses and cost of revenues.
Provision
(Benefit) for Income Taxes
Our benefit for income taxes was approximately $191,000 in 2021 as
compared to provision for income taxes of about $1.5 million in 2020. The effective income tax rate was 2.9% and 29.9% in 2021 and 2020,
respectively. The significant decrease in effective income tax rate is mainly due to: 1) we had a net operating income in 2020, but incurred
a net operating loss in 2021; 2) valuation allowances provided to certain entities which we expect to continually generate operating losses
in the foreseeable future; and 3) a higher loss generated by non-PRC entities not subject to PRC
tax impact.
Other
Comprehensive Income
Foreign
currency translation adjustments amounted to a gain of $671,000 and $783,000 in 2021 and 2020, respectively. The balance sheet amounts
with the exception of equity as of December 31, 2021 were translated at 1.00 RMB to 0.1572 US$ as compared to 1.00 RMB to 0.1531 US$
as of December 31, 2020. The equity accounts were stated at their historical rate. The average translation rates applied to the income
statements accounts for 2021 and 2020 were 1.00 RMB to 0.1550 US$ and 1.00 RMB to 0.1450 US$, respectively. The change in the value of
the RMB relative to the U.S. dollar may affect our financial results reported in U.S dollar terms without giving effect to any underlying
change in our business or results of operation.
For
the Year Ended December 31, 2020 and 2019
The
following table summarizes the results of our operations for the years ended December 31, 2020 and 2019, respectively, and provides information
regarding the dollar and percentage increase during such periods.
| |
For the
Year Ended | | |
For the
Year Ended | | |
| | |
| |
| |
December 31,
2020 | | |
December 31,
2019 | | |
Variance | |
| |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% | |
| |
(in thousands, except for percentages) | |
Revenue | |
$ | 96,879 | | |
| 100.0 | % | |
$ | 61,776 | | |
| 100.0 | % | |
$ | 35,103 | | |
| 56.8 | % |
Operating Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Sales | |
| 86,405 | | |
| 89.2 | % | |
| 56,081 | | |
| 90.8 | % | |
| 30,324 | | |
| 54.1 | % |
Fulfilment | |
| 2,270 | | |
| 2.3 | % | |
| 2,122 | | |
| 3.4 | % | |
| 148 | | |
| 7.0 | % |
Marketing | |
| 1,028 | | |
| 1.1 | % | |
| 723 | | |
| 1.2 | % | |
| 305 | | |
| 42.2 | % |
General and Administrative Expenses | |
| 2,064 | | |
| 2.1 | % | |
| 1,146 | | |
| 1.9 | % | |
| 918 | | |
| 80.1 | % |
Total Operating Expenses | |
| 91,766 | | |
| 94.7 | % | |
| 60,072 | | |
| 97.2 | % | |
| 31,694 | | |
| 52.8 | % |
Income from Operations | |
| 5,113 | | |
| 5.3 | % | |
| 1,704 | | |
| 2.8 | % | |
| 3,409 | | |
| 200.1 | % |
Other Income (Expenses) | |
| 6 | | |
| 0.0 | % | |
| 1 | | |
| 0.0 | % | |
| 5 | | |
| 500.0 | % |
Income before Income Taxes | |
| 5,119 | | |
| 5.3 | % | |
| 1,705 | | |
| 2.8 | % | |
| 3,414 | | |
| 200.2 | % |
Provision (Benefit) for Income Taxes | |
| 1,532 | | |
| 1.6 | % | |
| 427 | | |
| 0.7 | % | |
| 1,105 | | |
| 258.8 | % |
Net Income | |
$ | 3,587 | | |
| 3.7 | % | |
$ | 1,278 | | |
| 2.1 | % | |
| 2,309 | | |
| 180.7 | % |
Revenue
Through
our website at www.1juhao.com and mobile app, we engage primarily in the sales of cosmetic products, health and nutritional supplements
and household products sourced from manufacturers and distributors in China. Currently, we have three types of revenue streams deriving
from our three major product categories: cosmetic products, health and nutritional supplements and household products. Other than revenue
from product sales, we also earn service fees charged to third party merchants for using our platform, which was immaterial and is grouped
in “Others” presented below. The following sets forth the breakdown of our revenue by revenue stream for the years ended
December 31, 2020 and 2019, respectively.
| |
For the Years Ended December 31, | | |
Variance | |
| |
2020 | | |
% | | |
2019 | | |
% | | |
Amount | | |
% | |
| |
(in thousands, except for percentages) | |
Cosmetic products | |
$ | 18,701 | | |
| 19.30 | % | |
$ | 18,471 | | |
| 29.90 | % | |
$ | 230 | | |
| 1.25 | % |
Health and Nutritional Supplements | |
| 52,372 | | |
| 54.06 | % | |
| 22,672 | | |
| 36.70 | % | |
| 29,700 | | |
| 131.00 | % |
Household Products | |
| 25,733 | | |
| 26.56 | % | |
| 20,633 | | |
| 33.40 | % | |
| 5,100 | | |
| 24.72 | % |
Other | |
| 73 | | |
| 0.08 | % | |
| - | | |
| 0.00 | % | |
| 73 | | |
| n/a | |
Total | |
$ | 96,879 | | |
| 100.00 | % | |
$ | 61,776 | | |
| 100.00 | % | |
$ | 35,103 | | |
| 56.82 | % |
Compared
to the year ended December 31, 2019, sales of cosmetic products increased slightly by about $230,000 or 1.25% in 2020. The slight increase
in cosmetic products revenue is primarily due to 2.45% increase in weighted average unit price of the products sold and partially offset
by the slight decrease of 1.18% in the quantity of products sold. In 2019, we launched a new premium brand, Yasi. Along with our initial
introduction of the new brand to the market, we provided a relatively high marketing discount to promote the sale of the new brand products.
In 2020, as our sales of the new brand products were relatively stable, we lowered the discounts provided resulting in slight increase
in weighted average unit selling price and slight decrease in quantity sold.
Revenue
generated from health and nutritional supplements revenue stream increased by about $29.7 million or 131.00%. The significant increase
is mainly attributable to the increase in quantity sold of 119%, including snake & turtle powder capsule, Chrysalis Cordyceps, etc.
Additionally, the weighted average selling price of products sold in this revenue stream also increased by about 5.47% in 2020 comparing
to 2019. In 2020, due to the spread of COVID-19, health related concerns increased significantly in China. Customers showing much more
interest in purchasing and consuming our health and nutritional supplement products that regulate and enhance their immune system during
the pandemic. The increase in customer demand led to increase in quantity sold in 2020 comparing to 2019. Furthermore, due to government-imposed
stay home orders in early 2020 and the fear of infection during the outbreak of COVID-19, a significant portion of the consumers’
demand fulfilled through traditional offline retail stores before the pandemic was replaced by online purchases. This dramatic change
in consumer’s behavior also benefits us as an online retailer and led to increase in sales in the health and nutritional supplements
revenue stream.
Comparing
to the year ended December 31, 2019, in the year ended December 31, 2020, our household products revenue increased by about $5.1 million
or 24.7%. The increase is primarily attributable to the 50.9% increase in weighted average unit price for products sold and is partially
offset by the 17.4% decrease in quantity sold. The increase in weighted average unit price for products sold and the decrease in quantity
of products sold comparing the two periods is mainly due to the higher unit price products that we sold such as Longrich energy pot and
Longrich water purifier in 2020 than in 2019. Furthermore, in 2020, we released new products to the market, including massager and slow
cooker. The successful of these new products to the market also contributed to the increase in revenue generated from household products.
Operating
Expenses
Operating
expenses primarily consist of cost of sales, fulfilment expenses, marketing expenses and general and administrative expenses.
| |
For the
Year Ended | | |
For the
Year Ended | | |
| | |
| |
| |
December 31,
2020 | | |
December 31,
2019 | | |
Variance | |
| |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% | |
| |
(in thousands, except for percentages) | |
Operating Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of Sales | |
$ | 86,405 | | |
| 89.2 | % | |
$ | 56,081 | | |
| 90.8 | % | |
$ | 30,324 | | |
| 54.1 | % |
Fulfilment expenses | |
| 2,270 | | |
| 2.3 | % | |
| 2,122 | | |
| 3.4 | % | |
| 148 | | |
| 7.0 | % |
Marketing expenses | |
| 1,028 | | |
| 1.1 | % | |
| 723 | | |
| 1.2 | % | |
| 305 | | |
| 42.2 | % |
General and Administrative Expenses | |
| 2,064 | | |
| 2.1 | % | |
| 1,146 | | |
| 1.9 | % | |
| 918 | | |
| 80.1 | % |
Total Operating Expenses | |
$ | 91,766 | | |
| 94.7 | % | |
$ | 60,072 | | |
| 97.2 | % | |
$ | 31,694 | | |
| 52.8 | % |
Our total operating expenses increased by about
$31.7 million or 52.8% from $60.1 million in the 2019 to $91.8 million in 2020. All categories of our operating expenses increased in
2020 comparing to 2019. The increase is attributable to the increase in sales and expansion of our operations.
Cost
of Sales
Cost
of sales primarily consists of the purchase price of merchandise that we sell directly on our platform and inbound shipping costs. The
cost of sales for all of our three revenue streams increased comparing 2020 to 2019.
Compared
to 2019, the cost of sales of cosmetic products increased by about $883,000 or 5.2% from $17.1 million in 2019 to about $17.9 million
in 2020. The increase is due to an increase in the average unit cost of $0.10 or 6.4%. The increase is partially offset by the decrease
of 132,715 units or 1.18% in quantity sold comparing 2020 to 2019. The increase in average unit cost is mainly due to the change in the
mix of cosmetic products sold comparing the two periods. In 2020, we sold more high-end products with higher unit costs, including products
under our premium brand, Yasi, than in 2019.
The
cost of sales of health and nutritional supplements increased by about $25.8 million or 122.3% from $21.1 million in 2019 to $46.8 million
in 2020. The increase is primarily attributable to increase in quantity sold. Comparing to 2019, we have sold about 119% more units of
products in 2020. There is also a slight increase of about 1.49% in weighted average unit cost which also contribute to the increase
in cost of sales of health and nutritional supplements. The significant increase in quantity sold is due to arising health related concerns
in 2020 caused by the global spread of COVID-19.
The
cost of sales of household products increased by about $3.7 million or 20.5% from $18.0 million 2019 to $21.7 million in 2020. The increase
is due to increase of weighted average unit cost of $0.65 per unit or 45.84% comparing the two years. The increase is partially offset
by the decrease in quantity sold. Compared to 2019, the quantity sold decreased by about 17.4% in 2020. The increase in weighted average
unit cost and decrease in quantity sold are mainly due to change in the product mix. In 2020, we sold more high unit cost products than
in 2019.
Fulfillment
Expenses
Fulfillment
expenses increased by $148,000 or 7.0% in 2020 compared to 2019. Our fulfilment expenses primarily consist of costs related to order
fulfillment, including charges we paid for order preparing, packaging, outbound freight, and physical storage. The increase in our fulfillment
expenses is primarily attributable to the increase in outbound freight costs resulting from increased sales. Fulfillment expense as a
percentage of revenue decreased from 3.4% in 2019 to 2.3% in 2020. The decrease in fulfilment expense to revenue percentage is mainly
due to increase in sales to large local distributors who arrange their own freight.
Marketing
Expenses
Marketing
expenses increased by $305,000 or 42.2% in 2020 compared to 2019. The increase in marketing expenses is consistent with the increase
in sales and was primarily attributable to increase in payroll related expenses as we expanded our business in 2020.
General
and Administrative Expenses
Compared
to the 2019, in 2020 general and administrative expenses increased by $0.92 million or 80.1%. The increase was primarily attributable
to an increase in expenses related to preparation for the Nasdaq listing and initial public offering of approximately $0.9 million in
fiscal year 2020.
Income
from Operations
| |
For the
Year Ended | | |
For the
Year Ended | | |
| | |
| |
| |
December 31,
2020 | | |
December 31,
2019 | | |
Variance | |
| |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% of Revenue | | |
$ Amount | | |
% | |
| |
(in thousands, except for percentages) | |
Income from Operations | |
$ | 5,113 | | |
| 5.3 | % | |
$ | 1,704 | | |
| 2.8 | % | |
| 3,409 | | |
| 200.1 | % |
Income
from operations in the year ended December 31, 2020 and 2019 was $5.1 million and $1.7 million, respectively. The increase in income
from operations is mainly due to the increase in our revenue comparing the two periods. Income from operations accounted for 5.3% and
2.8% of revenue in 2020 and 2019, respectively. The slight increase in income from operations to revenue ratio is mainly attributable
to slight decrease in cost of sales and fulfilment expenses as a percentage to revenue.
Income
Before Income Taxes
Our
income before income taxes was $5.1 million for 2020, an increase of $3.4 million or 200.2% from $1.7 million in 2019. The increase was
primarily attributable to the increase in our revenue comparing the two years and slight decrease in cost of sales and fulfillment expenses
as a percentage to revenue.
Provision
for income taxes
Our
provision for income taxes was $1.5 million in 2020, an increase of $1.1 million or 258.8% from $0.4 million in 2019. The increase is
mainly attributable to increase in income before income taxes comparing the two years. We are subject to income taxes on entity basis
on income derived from the location in which each entity is domiciled. In 2020 and 2019, our main operating entity, Shanghai Juhao was
subject to a unified 25% enterprise income tax rate under the Enterprise Income Tax (“EIT”) Law of the PRC. Jowell Global
is incorporated in the Cayman Islands as an offshore holding company and is not subject to tax on income or capital gain under the laws
of the Cayman Islands. Jowell Tech is incorporated in Hong Kong as a holding company and is subject to Hong Kong’s two-tier tax
rates regime. In 2020, we have incurred certain costs at Jowell Global and Jowell Tech associated with our IPO and we were not able to
recognize any tax benefits according to local income tax laws. As a result, the effective tax rate increased from 25.1% in 2019 to 29.9%
in 2020.
Other
comprehensive income
Foreign
currency translation income was $783,000 and $2,000 in 2020 and 2019, respectively. The balance sheet amounts with the exception of equity
as of December 31, 2020 were translated at 1.00 RMB to 0.1531 US$ as compared to 1.00 RMB to 0.1435 US$ as of December 31, 2019. The
equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the
year ended December 31, 2020 and 2019 were 1.00 RMB to 0.1450 US$ and 1.00 RMB to 0.1447 US$, respectively. The change in the value of
the RMB relative to the U.S. dollar may affect our financial results reported in U.S dollar terms without giving effect to any underlying
change in our business or results of operation.
Operating
Activities
Net cash used in operating activities in 2021 was
$18.0 million. The principal items accounting for the difference between our net cash used by operating activities and our net loss including
increase in accounts receivable of about $4.7 million, increase in inventories of about $5.0 million, increase in advance to suppliers
of about $3.3 million and offset by increase in accounts payables – related parties of about $2.2 million. The increase in accounts
receivables is mainly due to significant increase in sales to local distributors and wholesalers which we provided certain credit terms
based on our evaluation of their creditworthiness. The increase in advance to suppliers and inventories is mainly due to our expansion
of our operation and significant increase in sales. The increase in accounts payables – related parties is mainly due to extended
credit term provided by our related party, Longrich Group for purchases made by us.
Net
cash provided by operating activities in 2020 was $6.9 million. The principal items accounting for the difference between our net cash
provided by operating activities and our net income in 2020 including increase in inventories of about $4.5 million and decrease in advance
to suppliers – related parties of about $7.6 million. The increase in inventories is mainly due to expansion of our operation and
increased the sales. The decrease in advance to suppliers – related parties is mainly due to significant advances made to our related
parties in 2019 was utilized in 2020.
Net
cash used in operating activities in 2019 was $0.9 million. The principal items accounting for the difference between our net cash used
by operating activities and our net income including increase in advance to suppliers – related parties of about $4.1 million and
increase in accounts payables of about $1.2 million. The increase in advance to suppliers – related parties is mainly due to our
related parties did not extend enough credit term to us for significant amount of purchases and requested us to make advance payment
for large purchase. The increase in accounts payables is mainly due to increase of purchases toward the end of 2019.
Investing
Activities
Net cash used in investing activities was approximately
$6.6 million, $117,000 and $46,000 in 2021, 2020 and 2019, respectively. In July 2021, we invested about $4.7 million (RMB 30 million)
to Suzhou Industrial Park Hongrun Rural Small Amount Loan Co., Ltd. (“Hongrun”) to acquire 18.96% equity interest of Hongrun.
The investment will be only used for making loans to the owners of Juhao Best Choice Stores for their business development and expansion.
Juhao Best Choice Stores are our new community group-buying stores lunched in Shanghai since April 2021. We expect Juhao Best Choice Stores
will expand our footage and brand awareness in offline group-buying stores in China and will ultimately become an important piece of our
Juhao retail platform. Besides of the $4.7 million investment made to Hongrun, we also paid an aggregate of about $2.0 million for acquisition
of fixed assets and software in 2021. Cash used in investing activities in 2020 and 2019 were used to purchase of fixed assets and software.
Financing
Activities
Net cash provided by financing activities in 2021
was about $27 million, including about $25.7 million received from our IPO as discussed in this report and $2.6 million from the proceeds
from short-term bank loans. The cash provided by financing activities in 2021 was partially offset by $1.1 million repayment of related
party loans.
Net cash provided by financing activities in 2020
was about $10.8 million, including $10 million received from private placement consummated on October 21, 2020 and $1.2 million proceeds
received from related party loans. The cash provided by financing activities in 2020 was partially offset by the payment of deferred offering
costs of $0.4 million related to our IPO completed in 2021.
Net
cash provided by financing activities in 2019 was about $0.6 million, including $2.3 million capital injection from our original shareholders.
The cash provided by financing activities were partially offset by $1.6 million dividend payment and $86,000 repayment of related party
loans.
Cash
Transfer within the Company and Restrictions on Dividends Distribution
The Company’s sales, purchases and expense
transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not
freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted
only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances
in currencies other than RMB may require certain supporting documentation in order to affect the remittance. Currently, our subsidiary
in the PRC may purchase foreign currencies to transfer cash within the Company among subsidiaries in and out of the PRC for, among other
things, payment of cash dividends to us, if any, by complying with certain procedural requirements. However, the relevant PRC governmental
authorities may limit or eliminate our ability to purchase foreign currencies in the future and therefore limit our ability to transfer
cash within the Company among subsidiaries in and out of the PRC. The limitation over cash transfer within the Company does not raise
additional liquidity risk as all of our liabilities are also denominated in RMB and we conduct our business primarily through our consolidated
VIE in China.
We
rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have.
Under PRC laws and regulations, our PRC subsidiary may pay dividends only out of its accumulated after-tax profits as determined in accordance
with PRC accounting standards and regulations. In addition, our subsidiary in the PRC is required to set aside at least 10% of its after-tax
profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity
in the PRC is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount
to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among
other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies,
the reserve funds are not distributable as cash dividends except in the event of liquidation. Therefore, these statutory reserves, along
with the registered capital of the PRC entities are considered as restricted. Amounts restricted that include paid in capital and statutory
reserve funds, as determined pursuant to PRC GAAP, are $41,224,415 and $14,567,851 as of December 31, 2021 and 2020, respectively.
In
2021, along with the consumption of the IPO, $23.7 million of the net proceeds received from the IPO have been transferred to the VIE
through intercompany loans, which were fully eliminated on our consolidated financial statements.
Off-balance
Sheet Commitments and Arrangements
We
have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are
not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred
to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest
in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging
or research and development services with us.
Assets
Held By and the Operations of Entities Apart From the Consolidated VIE
The Company and its subsidiaries are all holding
companies, except for the consolidated VIE. The only assets held by the Company and its subsidiaries are the cash in their bank accounts.
The uncertainties in the PRC legal system could cause the relevant regulatory authorities to find our current VIE Agreements with VIE
to be in violation of any existing or future PRC laws or regulations and could limit the Company’s ability to enforce its rights
under these contractual arrangements. Furthermore, the nominee shareholders of the VIE may have interests that are different from those
of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the VIE Agreements. In
addition, if the nominee shareholders do not remain the shareholders of the VIE, breach, or cause the VIE to breach, or refuse to renew
the existing contractual arrangements the Company has with them and the VIE, the Company may not be able to effectively control the VIE
and receive economic benefits from them, which may result in deconsolidation of the VIE.
Critical
Accounting Policies, Judgments and Estimates
We
prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and have been consistently applied. The consolidated financial statements include the accounts of the Company, its subsidiaries,
the VIE and the VIE’s subsidiaries. All intercompany transactions and balances between the Company, its subsidiaries and the VIE
are eliminated upon consolidation.
Consolidation
of Variable Interest Entity and its subsidiaries
A
VIE is an entity that either has a total equity investment that is insufficient to finance its activities without additional subordinated
financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights,
right to receive the expected residual returns of the entity. The variable interest holder, if any, that has a controlling financial
interest in a VIE is deemed to be the primary beneficiary of, and must consolidate, the VIE.
Shanghai
Jowell is deemed to have a controlling financial interest through a series of contracture agreements and be the primary beneficiary of
Shanghai Juhao because it has both of the following characteristics:
|
(1) |
The power to direct activities
at Shanghai Juhao that most significantly impact such entity’s economic performance, and |
|
(2) |
The obligation to absorb
losses of, and the right to receive benefits from, Shanghai Juhao that could potentially be significant to such entity. |
Pursuant
to the contractual arrangements with Shanghai Juhao, Shanghai Juhao shall pay service fees equal to all of its net profit after tax payments
to Shanghai Jowell. Such contractual arrangements are designed so that the Shanghai Juhao would operate for the benefit of Shanghai Jowell
and ultimately, the Company.
Use
of estimates
In
preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated
financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant items subject
to such estimates and assumptions include, but not limited to, the useful lives of property and equipment, allowance for doubtful accounts
and advance to suppliers, valuation of inventories, Impairment of long-lived assets, and assumptions related to the consolidation of
entities in which the Company holds variable interests. Actual results could differ from those estimates.
Leases
On
January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (as amended by ASU 2018-01, 2018-10,
2018-11, 2018-20, and 2019-01, collectively “ASC 842”). For all leases that were entered into prior to the effective date
of ASC 842, the Company has elected to utilize the package of practical expedients at the time of adoption, which allows the Company
to (1) not reassess whether any expired or existing contracts are or contain leases, (2) not reassess the lease classification of any
expired or existing leases, and (3) not reassess initial direct costs for any existing leases. The Company also has elected to utilize
the short-term lease recognition exemption and, for those leases that qualified, the Company did not recognize operating lease right-of-use
(“ROU”) assets or operating lease liabilities. The Company elected not to record assets and liabilities on its consolidated
balance sheet for new or existing lease arrangements with terms of 12 months or less.
Operating lease ROU assets and operating lease
liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted
by the deferred rent liabilities at the adoption date. As most of the Company’s leases do not provide an implicit rate, the Company
uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future
payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred.
The Company’s terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise
that option. Operating lease expense is recognized on a straight-line basis over the lease term.
Revenue
recognition
The
Company through its website www.1juhao.com and mobile applications, engages primarily in online sale of cosmetic products, health and
nutritional supplements and household products sourced from manufacturers and distributors in China, and also offers an online marketplace
that enables third-party sellers to sell their products to the Company’s consumers. Customers place their orders for products or
services online primarily through the Company’s website and mobile applications. Payment for the purchased products or services
is generally made either before delivery or upon delivery.
On
January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB
ASC Topic 606) using the modified retrospective approach. The results of applying Topic 606 using the modified retrospective approach
were insignificant and did not have a material impact on the Company’s consolidated financial condition, results of operations,
cash flows, business process, controls or systems.
Consistent
with the criteria of ASC 606, the Company recognizes revenues when the Company satisfies a performance obligation by transferring a promised
goods or services to a customer. Goods or services is transferred when the customer obtains control of it, which generally occurs upon
the delivery of the products to customers.
In
accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs
or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or
services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which
it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation
is to facilitate third parties in fulfilling their performance obligation for specified goods or services, revenues should be recognized
in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services
to be provided by other parties. Revenue is recorded net of value-added taxes.
The
Company recognizes revenue net of discounts and return allowances when the products are delivered and title passes to customers. Significant
judgement is required to estimate return allowances. For online direct sales business with return conditions, the Company reasonably
estimate the possibility of return based on the historical experience, changes in judgments on these assumptions and estimates could
materially impact the amount of net revenues recognized. The Company generally grants customers 7 days of free return upon receiving
goods according to PRC law regarding online purchased products. As of December 31, 2021 and 2020, no return allowances were recorded.
The
Company primarily sells cosmetic products, nutritional supplements and household products through online direct sales. The Company recognizes
product revenues from the online direct sales on a gross basis as the Company is a principal because it controls the promised good or
service before transferring it to a customer. This control is determined by the following indicators 1) The Company is the primary obligor
in the sales transaction and responsible for fulfilling the promise to provide the product and service. 2) The Company bears the inventory
risk. The Company will first indemnify customers for product damages and then request reimbursements from suppliers if the suppliers
are determined to be responsible for the damages. 3) The Company has discretion in establishing the prices and control over the entire
transaction. For the year ended December 31, 2021, 2020 and 2019, approximately $nil, $21.3 million and $50.19 million cost of products
were purchased, packed and delivered by the Company at the warehouse of a subsidiary of Jiangsu Longrich Group Co., Ltd (“Longrich
Group”), a supplier controlled by the CEO of the Company, which generated approximately $nil, $23.4 million and $54.39 million
revenues, respectively.
Other
than revenue from online direct sales, the Company also earns service fees charged to third-party sellers for participating in the Company’s
online marketplace, where the Company generally is acting as an agent and its performance obligation is to arrange for the provision
of the specified goods or services by those third-party sellers. During the years ended December 31, 2021, 2020 and 2019, revenue from
service fees were $23,782, $72,664 and $nil, respectively.
Unearned
revenue consists of payments received or awards to customers related to unsatisfied performance obligations at the end of the period,
included in deferred revenue in the Company’s Consolidated Balance Sheets. As of December 31, 2021 and 2020, the Company had
total deferred revenue of $2,154,042 and $1,701,321, respectively, which mainly represent the proceeds received for orders placed at
end of each period, while the deliveries were accomplished at the beginning of the next periods, when they were recognized as revenue.
Revenue
is recognized at a point in time when the goods are transferred to customers, and no remaining performance obligation in future periods.
The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization
period would have been one year or less. The Company has no material incremental costs of obtaining contracts with customers that the
Company expects the benefit of those costs to be longer than one year which need to be recognized as assets.
Income
taxes
The Company’s subsidiaries and VIE in China
and Hong Kong are subject to the income tax laws of the PRC and Hong Kong. No taxable income was generated outside the PRC for the years
ended December 31, 2021 and 2020. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740
requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement
of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if
it is more likely than not these items will either expire before the Company is able to realize their benefits, or future deductibility
is uncertain. As of December 31, 2021 and 2020, the Company did not have any significant unrecognized deferred tax assets and liabilities,
respectively.
ASC
740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or
expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification
accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim
periods and income tax disclosures. There were no material uncertain tax positions as of December 31, 2021 and 2020. As of December 31,
2021, the tax years ended December 31, 2017 through December 31, 2021 for the Company’s PRC subsidiaries remain open for statutory
examination by PRC tax authorities.
JOBS
Act
On
April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting
requirements for qualifying public companies. We will qualify as an “emerging growth company” and under the JOBS Act will
be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies.
We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised
accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result,
our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company
effective dates.
Quantitative
and Qualitative Disclosures about Market Risks
Liquidity
risk
We
are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet
our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures.
When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.
Inflation
risk
Inflationary
factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have
an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if
the revenues from our products do not increase with such increased costs.
Interest
rate risk
Our
exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand, interest-earning
instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase,
however, may raise the cost of any debt we incur in the future.
Foreign
currency translation and transaction
Our
operating transactions and assets and liabilities are mainly denominated in RMB. RMB is not freely convertible into foreign currencies
for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other things,
changes in China’s political and economic conditions and China’s foreign exchange policies. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
Recently
Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial
asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The
amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either
collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit
loss, which will be more decision useful to users of the financial statements. This ASU is effective for annual and interim periods beginning
after December 15, 2019 for issuers and December 15, 2020 for non-issuers. Early adoption is permitted for all entities for
annual periods beginning after December 15, 2018, and interim periods therein. In May 2019, the FASB issued ASU 2019-05, Financial
Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities to
elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar
financial assets. The updates should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the
first reporting period in which the guidance is effective (that is, a modified retrospective approach). In November 19, 2019, the
FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13 to be fiscal years beginning after December 15, 2022 and interim
periods therein. The Company adopted this ASU on January 1, 2021 and the adoption did not have a material impact on the Company’s
consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain
exceptions to the general principles in Topic 740, and also improves consistent application of and simplify U.S. GAAP for other areas
of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments
in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after
December 15, 2022. Early adoption of the amendments is permitted. The Company adopted this ASU on January 1, 2021 and the adoption did
not have a material impact on the Company’s consolidated financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material
effect on the consolidated financial position, statements of operations and cash flows.
5B. Liquidity and Capital Resources
Liquidity
and Capital Resources
We
are a holding company incorporated in the Cayman Islands. We conduct our operations primarily through our consolidated VIE and its subsidiaries
in China. As a result, our ability to pay dividends depends upon service fee paid by Shanghai Juhao. If Shanghai Juhao incurs debt on
its behalf in the future, the instruments governing its debt may restrict its ability to pay service fee to us. In addition, Shanghai
Juhao is permitted to pay service fee to us only out of its retained earnings, if any, as determined in accordance with PRC accounting
standards and regulations. Under PRC law, Shanghai Juhao is required to set aside at least 10% of its after-tax profits each year, if
any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. Additionally, Shanghai Juhao
may allocate a portion of its after-tax profits based on PRC accounting standards to its enterprise expansion fund and staff bonus and
welfare funds, at its discretion. Shanghai Juhao may also allocate a portion of its after-tax profits based on PRC accounting standards
to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash
dividends.
For the year ended December 31, 2021, we reported
a net loss of $6.4 million and negative operating cash flows of $18.0 million, which were primarily due to our vigorously implementing
our business strategy to drive more traffic to our online platform and attract more users and distributors.
On March 19, 2021, we closed our initial public
offering, raising net proceeds of approximately $25.7 million. We used part of the proceeds to expand our business and execute our growth
strategy by increasing marketing and promotion, optimizing the platform, enriching product selections and increasing cooperation with
leading brands at home and abroad, which brought more traffic to the online platform and attracted more users and distributors. As a result,
our revenue increased by approximately $74.0 million in 2021 from 2020, cost of sales increased by approximately $72.9 million in 2021
from 2020, and approximately $8.4 million more were spent on marketing in 2021 when compared to 2020. The growth in business also resulted
in an increase of $4.9 million in inventory and an increase of $2.5 million in prepayment for products purchased by the end of 2021, as
well as an increase of $4.5 million in outstanding balance of accounts receivable, which was mainly due to significant increase in sales
to local distributors and wholesalers which were provided with certain credit terms based on management’s assessment on their creditworthiness.
All these were the main reasons for the net loss and cash outflow of the Company in 2021.
Presently, our principal sources of liquidity
are from our operations, proceeds from our initial public offering and private placement, and bank loans. As of December 31, 2021, we
had cash and restricted cash of approximately $21.2 million and working capital of approximately $31.3 million. Approximately $18.2 million
of the cash was held by the VIE with banks and financial institutions inside China as we conducted our operations primarily through our
consolidated VIE in China. With the uncertainty of the current market and the impact of the COVID-19 pandemic, our management believes
it is necessary to enhance the collection of the outstanding balance of accounts receivable and other receivables, and to be cautious
on operational decisions and project selections. As of March 31, 2022, approximately $3.9 million, or 70%, of its accounts receivable
balance as of December 31, 2021 were collected, and approximately $2.7 million or 49% of its advances to suppliers balance as of December
31, 2021 were utilized.
As of December 31, 2021, we also had short-term
bank loan of approximately $2.7 million borrowed from a PRC bank, which has been subsequently renewed to March 2023. Management expects
that it would be able to renew the bank loan upon its maturity based on past experience and the Company’s good credit history.
Based on our current operating plan, we believe
that the above-mentioned measures, including cash and restricted cash on hand of approximately $21.2 million and bank borrowing, will
collectively provide sufficient liquidity for the Company to meet its future liquidity and capital requirements for at least next twelve
months from the date the Company’s consolidated financial statements are issued.
The following table sets forth summary of our
cash flows for 2021, 2020 and 2019:
| |
For the Years Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
| |
(in thousands) | |
Net cash provided by (used in) operating activities | |
$ | (18,034 | ) | |
$ | 6,889 | | |
$ | (856 | ) |
Net cash used in investing activities | |
| (6,637 | ) | |
| (117 | ) | |
| (46 | ) |
Net cash provided by financing activities | |
| 27,212 | | |
| 10,795 | | |
| 637 | |
Effect of exchange rate change on cash | |
| 465 | | |
| 665 | | |
| 49 | |
Net increase (decrease) in cash and cash equivalents | |
| 3,006 | | |
| 18,233 | | |
| (216 | ) |
Cash, beginning of the year | |
| 18,244 | | |
| 12 | | |
| 228 | |
Cash, end of the year | |
| 21,250 | | |
| 18,244 | | |
| 12 | |
5C. Research
and Development, Patents and Licenses, etc.
See
“Item 4. Information on the Company—B. Business Overview --“Intellectual Property.”
Other than as disclosed elsewhere in this annual
report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2021 to December 31,
2021 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources,
or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
| E. | Off-Balance Sheet
Arrangements |
We
have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition,
we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that
are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable
interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or product development services with us.
| F. | Tabular
Disclosure of Contractual Obligations |
Our operating lease contractual obligations as
of December 31, 2021 were as follows:
12 months ending December 31, | |
| |
2022 | |
$ | 1,532,876 | |
2023 | |
| 1,571,352 | |
2024 | |
| 1,508,798 | |
2025 | |
| 210,280 | |
thereafter | |
| 1,115,539 | |
Total lease payments | |
$ | 5,938,845 | |
On March 19, 2021, Shanghai Juhao entered into
a loan agreement with Shanghai Bank to borrow RMB 17 million for working capital needs. Interest of the loan is 4.6% per annum. The loan
is guaranteed by Jowell Tech, who signed a maximum pledge agreement with Shanghai Bank and agreed to pledge its deposit of $2.999 million
as collaterals to secure the RMB 17 million loans so that Shanghai Juhao may borrow from Shanghai Bank during the period of March 19,
2021 to March 18, 2022. As of December 31, 2021, the outstanding balance was RMB 17,000,000 (equivalent of $2,672,366 as of December 31,
2021). In March, 2022, Shanghai Juhao renewed this loan with Shanghai Bank with the same interest rate and a new maturity date of March
21, 2023. The pledge agreement was also renewed by Jowell Tech with Shanghai Bank on the same date.
See
“Forward-Looking Statements”.
ITEM 6. |
DIRECTORS, SENIOR MANAGEMENT
AND EMPLOYEES |
6.A. Directors and Executive Officers
The
following table sets forth information regarding our executive officers and directors as of the date of this report.
Directors
and Executive Officers |
|
Age |
|
Position/Title |
Zhiwei Xu |
|
68 |
|
Chief Executive
Officer, Director Chairman of the Board |
Mei Cai |
|
42 |
|
Chief Financial Officer |
Dan (Jessie) Zhao |
|
48 |
|
Director and Vice President |
Haitao Wang(1)(2)(3) |
|
53 |
|
Independent Director |
Y. Tristan Kuo(1)(2)(3) |
|
67 |
|
Independent Director |
William Morris(1)(2)(3) |
|
68 |
|
Independent Director |
| (1) | Member
of audit committee. |
| (2) | Member
of compensation committee. |
| (3) | Member
of corporate governance and nominating committee. |
Biography
Zhiwei
Xu. Mr. Zhiwei Xu was appointed as a member of the Board of Directors of the Company (the “Board”) on August 16, 2019,
and Chairman of the Board and the Chief Executive Officer of the Company on July 1, 2020. Since 1992, Mr. Xu has served as the Chairman
of the board of directors of Jiangsu Longrich Group Co., Ltd. Since 2012, Mr. Xu has served as the Chairman of the board of directors
of Shanghai Juhao Information Technology Co., Ltd. Mr. Xu graduated from EMBA program of Fudan Qiushi Continuing Education College in
August 2002.
Mei
Cai. Ms. Cai was appointed as the Chief Financial Officer of the Company on November 15, 2020. Ms. Cai has served as director of
CN Energy Group Inc. (Nasdaq: CNEY) since August 2019. From July 23, 2019 to November 11, 2020, Ms. Cai has served as the Chief
Financial Officer of China Eco-Materials Group Co., Limited. From October 2017 to July 22, 2019, Ms. Cai has served as manager of
Wealth Financial Services LLC. From December 2013 to September 2017, Ms. Cai served as audit manager at Friedman, LLP. From December
2006 to November 2013, Ms. Cai served as audit manager at Patrizio & Zhao, LLC. Ms. Cai graduated from Jiangsu Radio & TV
University with a major in Economic Management in December 2003. Ms. Cai is a U.S. citizen and resides in the U.S.
Dan
(Jessie) Zhao. Ms. Zhao was appointed as a member of the Board on December 15, 2019 and vice president of finance of the Company
on September 17, 2020. Since May 2019, Ms. Zhao has served as secretary of the board of directors of Shanghai Juhao Information Technology
Co., Ltd. Since April 2019, Ms. Zhao has served as supervisor of Nantong Zhuama Bioscience Co., Ltd. Since September 2017, Ms. Zhao has
served as legal representative and managing director of Suzhou GuanYunShang Investment Management Co., Ltd. which has no actual operation
yet. From April 1996 to May 2019, Ms. Zhao served in various positions at Jiangsu Longrich Group Co., Ltd. including head of investment
department, general manager of its subsidiary company, director of customer service department and director of planning and information
department. Ms. Zhao received her bachelor degree in Economics from Nanjing Audit University in June 2007. Ms. Zhao received her Senior
Customer Service Manager certificate from the American Certification Institute in August 2010. Ms. Zhao passed the fund practitioner
test of the Asset Management Association of China in April 2017.
Haitao
Wang. Mr. Haitao Wang was appointed as a member of the Board on December 15, 2019. Since August 2016, Mr. Wang has served as the
vice president of Qichen (Shenzhen) Fund Management Co. Ltd. and supervisor of Shanghai Xiandai Industrial Co., Ltd. From September 2010
to July 2016, Mr. Wang served as vice president of Beijing Hongtianxia Agriculture Development Joint-Stock Company. Mr. Wang graduated
from Heilongjiang Finance School in 1990 with a major in in planning and statistics.
Y.
Tristan Kuo. Mr. Kuo was appointed as a member of our board of directors on December 23, 2020. From November 1, 2019 to December
16, 2021, Mr. Kuo has served as a board member, chairman of the audit committee and a member of compensation committee and corporate
governance and nominating committee of Oriental Culture Holding LTD. (Nasdaq: OCG). Since April 2017, Mr. Kuo has served as chief financial
officer of Aerkomm Inc. (EuroNext-Paris: AKOM, OTCQX: AKOM). From April 2016 to February 2020, Mr. Kuo served as vice president of investor
relations and board secretary of Nutrastar International, Inc. From August 2015 to April 2017, Mr. Kuo served as chief financial officer
of Success Holding Group International, Inc. From December 2014 to August 2015, Mr. Kuo served as engagement partner of Tatum. From August
2014 to May 2015, Mr. Kuo served as a member of board of directors and chairman of the audit committee of KBS Fashion Group Limited (NASDAQ:
KBSF). From June 2012 to November 2013, Mr. Kuo served as chief financial officer of Crown Bioscience, Inc. Mr. Kuo was the chief financial
officer of China Biologic Products (NASDAQ: CBPO) from June 2008 to May 2012 and was the vice president-finance of China Biologic Products
September 2007 to May 2008. Mr. Kuo received Master of Arts in Accounting from The Ohio State University in February 1982 and his Bachelor
of Arts in Economics from Soochow University in Taiwan in May 1977. We believe that Mr. Kuo’s expertise and knowledge of accounting
and management will benefit the Company’s operations and make him a valuable member of the board of directors and its committees.
William
Morris. Mr. William Morris was appointed as a member of the Board on July 1, 2020. Since December 2018, Mr. Morris has served as
the trading advisor for WJM Trading Strategies, LLC. From December 2015 to February 2018, Mr. Morris was the Chief Investment Officer
of Dividend Trade Fund LLC. From October 2010 to July 2012, Mr. Morris served as Options Market Maker for VTrader Pro. Mr. Morris received
his bachelor of art degree in Psychology from the University of Dayton in April 1975.
6.B. Compensation
For the fiscal year ended December 31, 2021, we
paid an aggregate of approximately $404,000 in cash to our directors and executive officers. For
share incentive grants to our officers and directors, see “—Share Incentive Plans.” We have not set aside or
accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors.
Our
PRC subsidiaries and our variable interest entity are required by law to make contributions equal to certain percentages of each employee’s
salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident
fund.
Employment
Agreements, Director Agreements and Indemnification Agreements
We
have entered into employment agreements with each of our executive officers. Pursuant to these agreements, each of our executive officers
is employed for an initial term of one year, renewable upon mutual agreement of the Company and the executive officer.
The executive officers are entitled to a fixed
salary and to participate in our equity incentive plans, if any and other company benefits, each as determined by the Board or a committee
designated by the Board from time to time.
We
may terminate the executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts, such
as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or material breach of any term of
any employment or other services, confidentiality, intellectual property or non-competition agreements with the Company. In such case,
the executive officer will solely be entitled to accrued and unpaid salary through the effective date of such termination, and his/her
right to all other benefits will terminate, except as required by any applicable law. The executive officer is not entitled to severance
payments upon any termination.
The
executive officer may voluntarily terminate his/her employment for any reason and such termination shall take effect 30 days after the
receipt by Company of the notice of termination. Upon the effective date of such termination, the executive officer shall be entitled
to (a) accrued and unpaid salary and vacation through such termination date; and (b) all other compensation and benefits that were vested
through such termination date. In the event the executive officer is terminated without notice, it shall be deemed a termination by the
Company for cause.
Each
of our executive officers has agreed not to use for his/her personal purposes nor divulge, furnish, or make accessible to anyone or use
in any way (other than in the ordinary course of the business of the Company) any confidential or secret information or knowledge of
the Company, whether developed by him/herself or by others.
In
addition, each executive officer has agreed to be bound by non-competition restrictions during the term of his or her employment and
for six months following the last date of employment.
Each
executive officer also has agreed not to (i) solicit or induce, on his/her own behalf or on behalf of any other person or entity,
any employee of the Company or any of its affiliates to leave the employ of the Company or any of its affiliates; or (ii) solicit
or induce, on his/her own behalf or on behalf of any other person or entity, any customer or prospective customer of the Company or any
of their respective affiliates to reduce its business with the Company or any of its affiliates.
We
have entered into director agreements with each of our independent directors which agreements set forth the terms and provisions of their
engagement.
In
addition, we have entered into indemnification agreements with each of our directors and executive officers that provide such persons
with additional indemnification beyond that provided in our current memorandum and articles of association.
Share Incentive Plans
The Board of Directors of the Company approved
and adopted Jowell Global Ltd. 2021 Omnibus Equity Plan (the “Equity Plan”) on August 2, 2021, which was approved at the stockholders’
meeting on September 10, 2021. The total aggregate ordinary shares of the Company authorized for issuance during the term of the Equity
Plan is limited to 4,000,000 shares.
As
of April 22, 2022, 40,000 Restricted Stock Units were granted and outstanding under the Equity Plan. The following paragraphs summarize
the terms of the Equity Plan:
Administration. The Equity Plan
requires that a committee of non-employee directors to administer the Equity Plan. Currently, our Compensation Committee, which we refer
to hereto as the Committee, administers the Equity Plan.
Shares Subject to the Equity Plan.
The shares issuable under the Equity Plan are our ordinary shares that are authorized but unissued or reacquired ordinary shares, including
shares repurchased by the Company as treasury shares. The total aggregate ordinary shares of the Company authorized for issuance during
the term of the Equity Plan is limited to 4,000,000 shares.
Types of Awards and Eligibility.
The Equity Plan provides for five types of awards and they are: Stock Options, Stock Appreciation Rights (“SAR”), Unrestricted
Stock, Restricted Stock and Restricted Stock Units. The Eligible Persons under the Equity Plan include Employees, Outside Directors,
Consultants and New Hires of the Company or its subsidiaries, as selected by our Board or the designated committee thereof.
Vesting and Forfeiture. The
Committee determines the time and conditions under which the award will vest or the period of time after which the restriction shall lapse
as part of making an award. Vesting or the lapse of the period of restriction may, in the Committee’s discretion, be based solely
upon continued employment or service for a specified period of time, or may be based upon the achievement of specific performance goals
(individual, corporation or other basis), or both. Unless otherwise provided by the Committee, when a participant terminates employment
or service with us, all unexercised or unvested awards are forfeited, and if the termination is without cause, all outstanding vested
options and SARs will continue to be exercisable until the earlier of the expiration term or the date that is three months after such
termination date.
Prohibition on Repricing. Except
as required or permitted pursuant to a corporate transaction (including, without limitation, any recapitalization or reorganization),
in no event will an option or SAR be amended to reduce the exercise or base price or be canceled in exchange for cash, other awards or
options or SARs with an exercise price or base price less than the exercise price of the original option or base price of the original
SAR without shareholder approval.
Limits on Transfers of Awards/Beneficiary
Designation. All awards are exercisable only by the participant during the participant’s lifetime, and are transferable
only by will or by the laws of descent and distribution; provided, however, that the Committee may permit a transfer of an award, other
than an inventive stock option, to a family member of an individual, subject to such restrictions as the Committee may provide.
Term. The Equity Plan is effective
immediately upon the adoption by our Board of Directors, subject to shareholder approval, and will terminate on the earliest to occur
of (i) the 10th anniversary of the Equity Plan’s effective date, or (ii) the date on which all shares available for issuance
under the Equity Plan shall have been issued as fully-vested shares. Options may be granted at any time on or after the date the Board
of Directors adopt the Equity Plan, however, until the stockholders approve the Equity Plan, no options or SARs may be exercised, no restricted
stock may be issued, and no award may be settled in stock. If shareholder approval is not obtained within 12 months after the adoption
by our Board of Directors, all awards will be null and void.
On November 26, 2021,
the Compensation Committee of the Board of the Company granted Ms. Mei Cai, the Chief Financial Officer of the Company, 80,000 Restricted
Stock Units (“RSUs”) under the Company’s 2021 Omnibus Equity Plan. Each RSU represents the right to receive one
ordinary share of the Company. The restricted period for the RSUs shall lapse as to twenty-five percent (25%) of the RSUs on each of the
grant date, March 31, 2022, June 30, 2022 and September 30, 2022, respectively, subject to Ms. Cai remaining in the continuous service
of the Company or its affiliates on each applicable date. Ms. Cai also entered into a Restricted Stock Unit Award Agreement with the Company
on November 26, 2021. As of April 22, 2022, 40,000 shares have been issued to Ms. Cai and 40,000
Restricted Stock Units were outstanding.
On April 11, 2022, (the
“Grant Date”), the Compensation Committee of the Board of Directors (the “Board”) of the Company granted stock
awards of 500,500 ordinary shares of the Company (the “Shares”), pursuant to the Company’s 2021 Omnibus Equity Plan,
to sixteen officers, directors and employees of the Company and its controlled variable interest entity (the “Grantees”),
including: 120,000 shares to Zhiwei Xu, Chief Executive Officer and Chairman of the Board of the Company; 35,000 shares to Dan Zhao, Vice
President and a director of the Board of the Company; 3,500 shares to William Morris, a director of the Board of the Company, 3,500 shares
to Tristan Kuo, a director of the Board of the Company, and 3,500 shares to Haitao Wang, a director of the Board of the Company (collectively,
the “Grants”). The Grants vested immediately on the Grant Date and each of the Grantees also entered into an Unrestricted
Stock Award Agreement with the Company on April 11, 2022. As of April 22, 2022, the Shares have been issued to the Grantees, expect
for one grantee with 35,000 shares.
6.C. Board Practices
Terms
of Directors and Officers
Our directors may be elected by a resolution of
our board of directors, or by an ordinary resolution of our shareholders. Our directors are not subject to a term of office and hold office
until such time as they are removed from office by ordinary resolution of our shareholders. A director will cease to be a director if,
among other things, the director (a) gives notice in writing to the Company that he resigns the office of Director; (b) without special
leave of absence from the Board, is absent from meetings of the Board for three consecutive meetings and the Board resolves that his office
be vacated; (c) becomes bankrupt or makes any arrangement or composition with his creditors; or (d) dies or is found to be or becomes
of unsound mind.
Our
officers are elected by and serve at the discretion of the board of directors.
Our
board of directors currently consists of 5 directors. We have established an audit committee, a compensation committee and a corporate
governance and nominating committee. Each of the committees of the board of directors has the composition and responsibilities described
below.
Board
Diversity Matrix
The following table sets forth
Board level diversity statistics based on self-identification of members of our Board as of April 22, 2022.
Board Diversity Matrix (As of April 22, 2022) |
Country of Principal Executive Offices: |
P.R. China |
Foreign Private Issuer: |
Yes |
Disclosure Prohibited Under Home Country Law: |
No |
Total Number of Directors |
5 |
|
Female |
Male |
Non-Binary |
Did Not Disclose Gender |
Part I: Gender Identity |
Directors |
1 |
4 |
0 |
0 |
Part II: Demographic Background |
|
|
|
|
Underrepresented Individual in Home Country Jurisdiction |
|
|
1 |
|
LGBTQ+ |
|
|
0 |
|
Did Not Disclose Demographic Background |
|
|
0 |
|
Audit
Committee
William
Morris, Haitao Wang, and Y. Tristan Kuo are members of our Audit Committee; Mr. Kuo serves as the chairman of the Audit Committee. All
members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically
to members of audit committees.
We
have adopted and approved a charter for the Audit Committee. In accordance with our Audit Committee Charter, our Audit Committee
shall:
|
● |
evaluate the independence
and performance of, and assess the qualifications of, our independent auditor, and engage such independent auditor; |
|
|
|
|
● |
approve the plan and fees
for the annual audit, quarterly reviews, tax and other audit-related services, and approve in advance any non-audit service to be
provided by the independent auditor; |
|
● |
monitor the independence
of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law; |
|
● |
review the financial statements
to be included in our Annual Report on Form 20-F and Current Reports on Form 6-K and review with management and the independent auditors
the results of the annual audit and reviews of our quarterly financial statements; |
|
● |
oversee all aspects our
systems of internal accounting control and corporate governance functions on behalf of the board; |
|
|
|
|
● |
review and approve in advance
any proposed related-party transactions and report to the full Board on any approved transactions; and |
|
|
|
|
● |
provide oversight assistance
in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley
Act implementation, and make recommendations to the Board regarding corporate governance issues and policy decisions. |
We
have determined that Y. Tristan Kuo possesses accounting or related financial management experience that qualifies him as an “audit
committee financial expert” as defined by the rules and regulations of the SEC.
Compensation
Committee
William
Morris, Haitao Wang, and Y. Tristan Kuo are members of our Compensation Committee; Mr. Morris serves as the chairman of the Compensation
Committee. All members of our Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ.
We have adopted a charter for the Compensation Committee.
In
accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible for overseeing and making recommendations
to the board of directors regarding the salaries and other compensation of our executive officers and general employees and providing
assistance and recommendations with respect to our compensation policies and practices. The Compensation Committee shall:
|
● |
approve compensation principles
that apply generally to Company employees; |
|
|
|
|
● |
make recommendations to
the board of directors with respect to incentive compensation plans and equity-based plans taking into account the results of the
most recent rules to provide the shareholders with an advisory vote on executive compensation, generally known as “Say on Pay
Votes” (Section 951 in The Dodd-Frank Wall Street Reform and Consumer Protection Act), if any; |
|
|
|
|
● |
administer and otherwise
exercise the various authorities prescribed for the Compensation Committee by the Company’s incentive compensation plans and
equity-based plans; |
|
|
|
|
● |
select a peer group of
companies against which to benchmark/compare the Company’s compensation systems for principal officers elected by the board
of directors; |
|
|
|
|
● |
annually review the Company’s
compensation policies and practices and assess whether such policies and practices are reasonably likely to have a material adverse
effect on the Company; and |
|
|
|
|
● |
determine and oversee stock
ownership guidelines and stock option holding requirements, including periodic review of compliance by principal officers and members
of the board of directors. |
Corporate
Governance and Nominating Committee
William
Morris, Haitao Wang, and Y. Tristan Kuo are members of our Corporate Governance and Nominating Committee; Mr. Wang serves as the chairman
of the Corporate Governance and Nominating Committee. All members of our Corporate Governance and Nominating Committee are qualified
as independent under the current definition promulgated by NASDAQ. We have adopted a charter for the Corporate Governance and Nominating
Committee.
In accordance with its charter, the Corporate
Governance and Nominating Committee is responsible for identifying and proposing new potential director nominees to the board of directors
for consideration and reviewing our corporate governance policies. The Corporate Governance and Nominating Committee shall:
|
● |
Identify and screen individuals
qualified to become Board members consistent with the criteria approved by the board of directors, and recommend to the board of
directors director nominees for election at the next annual or special meeting of shareholders at which directors are to be elected
or to fill any vacancies or newly created directorships that may occur between such meetings; |
|
|
|
|
● |
Recommend directors for
appointment to Board committees; |
|
|
|
|
● |
Make recommendations to
the board of directors as to determinations of director independence; |
|
|
|
|
● |
Oversee the evaluation
of the board of directors; |
|
|
|
|
● |
Make recommendations to
the board of directors as to compensation for the Company’s directors; and |
|
|
|
|
● |
Review and recommend to
the board of directors the Corporate Governance Guidelines and Code of Business Conduct and Ethics for the Company. |
Director
Independence
Our
Board reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly, and the Company
has determined that William Morris, Haitao Wang, Y. Tristan Kuo are “independent directors” as defined by NASDAQ.
6.D. Employees
As of December 31, 2021, we had a total of 242
employees. We had a total of 110 and 57 employees as of December 31, 2020 and 2019, respectively. The following table sets forth the breakdown
of our employees as of December 31, 2021 by function:
Category | |
Number of Employees | | |
Percentage of workforce | |
Management | |
| 35 | | |
| 14.46 | % |
Fulfillment Center | |
| 137 | | |
| 56.61 | % |
IT | |
| 7 | | |
| 2.89 | % |
Finance and Accounting | |
| 25 | | |
| 10.33 | % |
Investment | |
| 2 | | |
| 0.83 | % |
Quality Control | |
| 4 | | |
| 1.65 | % |
Customer Service | |
| 15 | | |
| 6.2 | % |
Product Development | |
| 6 | | |
| 2.48 | % |
Design | |
| 5 | | |
| 2.07 | % |
HR | |
| 5 | | |
| 2.07 | % |
Benefits | |
| 1 | | |
| 0.41 | % |
Total | |
| 242 | | |
| 100 | % |
As
of December 31, 2021, 8 of our employees were based in Shanghai, where our principal executive offices are located, and 234 employees
were located in Changshu City.
We understand that our success depends on our
ability to attract, train and retain our employees. Therefore, as part of our human resources strategy, we offer employees competitive
salaries, stock awards, performance-based cash bonuses and promotions, engagement activities, various welfare as well as other incentives.
We design and provide training to our employees regularly in order to enhance their professional skills and foster their career development.
We also recognize the importance of keeping our employees safe. In response to the COVID-19 pandemic, we implemented changes that we determined
were in the best interest of our employees and have followed local government orders to prevent the spread of COVID-19.
As
required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds,
namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and
a maternity insurance plan, and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans
at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local
government from time to time. As of the date of this report, we have made adequate employee benefit payments. However, if we were found
by the relevant authorities that we failed to make adequate payment, we may be required to make up the contributions for these plans
as well as to pay late fees and fines. See “Risk Factors—Risks Related to Doing Business in China—Failure to make
adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
We
enter into standard labor and confidentiality agreements with our employees. We believe that we maintain a good working relationship
with our employees, and we have not experienced any major labor disputes.
6.E. Share Ownership
The following table sets forth information with
respect to the beneficial ownership of our ordinary shares as of April 22, 2022 for:
|
● |
each beneficial owner of
5% or more of our outstanding ordinary shares; |
|
|
|
|
● |
each of our directors and
executive officers; and |
|
|
|
|
● |
all of our directors and
executive officers as a group. |
Beneficial
ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable
upon the exercise of options that are immediately exercisable or exercisable within 60 days of the date hereof.
Except
as otherwise indicated, all of the shares reflected in the table are ordinary shares and all persons listed below have sole voting and
investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information
is not necessarily indicative of beneficial ownership for any other purpose.
The calculations in the table below are based
on 26,163,465 ordinary shares issued and outstanding as of the date of April 22, 2022.
Except
as otherwise indicated in the table below, addresses of our directors, executive officers and named beneficial owners are in care of
Jowell Global Ltd., 2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China 200082. Our telephone number at this address +86-21-5521-01874.
| |
Ordinary Shares Beneficially Owned | |
Name of Beneficial Owners | |
Number | | |
% | |
Directors and Executive Officers: | |
| | |
| |
Zhiwei Xu (1) | |
| 5,461,380 | | |
| 20.9 | |
Mei Cai (2) | |
| 38,200 | | |
| * | |
Dan (Jessie) Zhao | |
| 35,000 | | |
| * | |
Y. Tristan Kuo | |
| 3,500 | | |
| * | |
William Morris | |
| 3,500 | | |
| * | |
Haitao Wang | |
| 3,500 | | |
| * | |
All directors and executive officers as a
group (six individuals) 5% or Greater Shareholders: | |
| 5,545,080 | | |
| 21.2 | |
Jowell Holdings Ltd. (1) | |
| 5,341,380 | | |
| 20.4 | |
| (1) | Including 120,000 shares owned by Zhiweu Xu directly and 5,341,380
shares owned by Jowell Holdings Ltd. Mr.
Zhiwei Xu, Chairman of our Board and Chief Executive Officer of the Company, is the sole shareholder of Jowell Holdings Ltd. a British
Virgin Islands company. The registered address of Jowell Holdings Ltd. is Vistra Corporate Services Centre, Wickhams Cay II, Road Town,
Tortola, VG1110, British Virgin Islands. Mr. Zhiwei Xu also owns all 750,000 of the Company’s outstanding preferred shares, and
each holder of one preferred share has the right to 2 votes at a meeting of the shareholders of the Company. |
| (2) | including 20,000 Restricted
Stock Units that will vest in the next 60 days. |
ITEM 7. |
MAJOR SHAREHOLDERS AND
RELATED PARTY TRANSACTIONS |
7.A. Major Shareholders
See
Item 6.E., “Share Ownership” for a description of our major shareholders.
7.B. Related Party Transactions
Variable
Interest Entity Arrangements
See
“Item 4. Information on the Company—C. Organizational Structure.”
Employment
Agreements, Director Agreements and Indemnification Agreements
See
“Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Employment
Agreements, Director Agreements and Indemnification Agreements.”
Share Incentives
See “Item 6.
Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers —Share Incentive Plans.”
Other
Transactions with Related Parties
The
relationship and the nature of related party transactions are summarized as follow:
Name of Related Party |
|
Relationship to the Company |
|
Nature of Transactions |
Longrich Group and its subsidiaries |
|
Controlled by Mr. Zhiwei Xu, the Chief Executive Officer (“CEO”), Chairman and a major shareholder of the Company |
|
Purchase and operating leases |
Longliqi International (NIG) Limited |
|
Controlled by Mr. Zhiwei Xu, the CEO, Chairman and a major shareholder of the Company |
|
Sales |
Longrich Goalbridge Company Limited |
|
Controlled by Mr. Zhiwei Xu, the CEO, Chairman and a major shareholder of the Company |
|
Sales |
Longrich America Int’l, Inc. |
|
Controlled by Mr. Zhiwei Xu, the CEO, Chairman and a major shareholder of the Company |
|
Sales |
Longrich Bioscience (M) Berhad |
|
Controlled by Mr. Zhiwei Xu, the CEO, Chairman and a major shareholder of the Company |
|
Sales |
Due
to related parties:
The
balance in due to related parties account amounted to $134,381 and $1,240,008 as of December 31, 2021 and 2020, respectively. These dues
to related parties, subsidiaries of Longrich Group, are typically short-term in nature, interest-free and due upon demand.
Related
party lease:
As of December 31, 2021, the Company had eight
leases from its related party, subsidiaries of Longrich Group, controlled by the Chairman and CEO of the Company, who also is a major
shareholder of the Company. The Company is obligated to pay a quarterly based rent under these lease agreements. See Note 14 in our consolidated financial statement for further discussion.
Related
party purchases:
The
Company periodically purchases merchandise from Longrich Group and its subsidiaries during the ordinary course of business. The purchases
made from Longrich Group were $73,876,430, $82,551,615 and $50,190,032 for the years ended December 31, 2021, 2020 and 2019, respectively.
Related
party sales:
The
Company made sales to related parties controlled by the Chairman, CEO, a major shareholder of the Company, in the amount of $1,521,566,
$1,522,546 and $nil for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the Company
had accounts receivable of $480,111 and $682,315 related to these sales.
Long-term investment in a related party
On July 27, 2021, Shanghai Juhao, a variable interest
entity of Jowell Global entered into a Capital Increase Agreement (the “Agreement”) with Suzhou Industrial Park Hongrun Rural
Small Amount Loan Co., Ltd. (“Hongrun”) and its shareholders identified on the signature pages thereto. Pursuant to the Agreement,
Shanghai Juhao contributed RMB 30 million (approximately $4.6 million) to Hongrun (the “Investment”) for 18.96% equity interest
of Hongrun. Mr. Zhiwei Xu, the Chairman of the Board of Directors and Chief Executive Officer of the Company is also the Chairman of the
Board of Directors of Hongrun. Jiangsu Longrich Group Co., Ltd., the largest shareholder of Hongrun is also a related party of the Company.
See Note 9 in our consolidated financial statement for further discussion.
7.C. Interests of Experts and Counsel
Not
applicable.
ITEM 8. |
FINANCIAL INFORMATION |
Consolidated
Statements and Other Financial Information
The
financial statements required by this item may be found at the end of this Annual Report on 20-F, beginning on page F-1.
Legal
Proceedings
We
are currently not involved in any material legal or administrative proceedings. From time to time, we may be subject to various legal
or administrative claims and proceedings arising in the ordinary course of business. Such legal or administrative claims and proceedings,
even if without merit, could result in the expenditure of financial and management resources and potentially result in civil liability
for damages.
Dividends
We
have not declared or paid cash dividends since the Company was incorporated in August 2019 in Cayman Island and we have no plan to declare
or pay any dividends in the near future on our ordinary shares. We currently intend to retain most, if not all, of our available funds
and any future earnings to operate and expand our business.
We
are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements,
including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends
to us. See “Item 4.B. Business Overview—Regulations —Regulations on Dividend Distribution.”
Our
board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of directors decides
to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. Cash dividends
on our ordinary shares, if any, will be paid in U.S. dollars.
No
Significant Changes
Except
as disclosed elsewhere in this annual report, no other significant changes to our financial condition have occurred since the date
of the annual financial statements contained herein.
ITEM 9. |
THE OFFER AND LISTING |
9.A. Offer and Listing Details
Our ordinary shares are listed for trading on
the NASDAQ Capital Market under the symbol “JWEL” The shares began trading on March 17, 2021 on the NASDAQ Capital Market.
9.B. Plan of Distribution
Not
Applicable.
9.C. Markets
Our ordinary shares have been listed on the Nasdaq
Capital Market since March 17, 2021 under the symbol “JWEL”.
9.D. Selling Shareholders
Not
Applicable.
9.E. Dilution
Not
Applicable.
9.F. Expenses of the Issuer
Not
Applicable.
ITEM 10. |
ADDITIONAL INFORMATION |
10.A. Share Capital
Not
Applicable.
10.B. Memorandum and Articles of Association
We
are a Cayman Islands exempted company limited by shares and our affairs are governed by our current memorandum and articles of association
and the Companies Act (As Revised) of the Cayman Islands, which we refer to as the “Companies Act” below, and the common
law of the Cayman Islands.
Our authorized share capital consists of: (i)
450,000,000 Ordinary Shares, par value $0.0001 per share and (ii) 50,000,000 Preferred Shares, par value $0.0001 per share. As of April
22, 2022, 26,163,465 Ordinary Shares and 750,000 Preferred Shares are issued and outstanding.
We incorporate by reference into this annual report
our second amended and restated memorandum and articles of association, which was filed as Exhibits 3.2 and 3.3 to our registration
statement on Form F-1 (File Number 333-250889) initially filed with the Securities and Exchange Commission on November 23, 2020,
as amended and declared effective on March 16, 2021. Our shareholders adopted our second amended and restated memorandum and articles
of association by way of a special resolution on July 1, 2020.
Our
registered office in the Cayman Islands is located at P. O. Box 31119, Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand
Cayman, KY1 - 1205 Cayman Islands.
According
to clause 3 of our second amended and restated memorandum of association, the objects for which the Company is established are
unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Act or any
other Law of the Cayman Islands.
Board
of Directors
See
“Item 6. Directors, Senior Management and Employees.”
Ordinary
Shares
Dividends. Subject
to any rights and restrictions of any other class or series of shares, our Board may, from time to time, declare dividends on the shares
issued and authorize payment of the dividends out of our lawfully available funds. No dividends shall be declared by the board out of
our company except the following:
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profits; or |
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“share premium account,”
which represents the excess of the price paid to our company on issue of its shares over the par or “nominal” value of
those shares, which is similar to the U.S. concept of additional paid in capital. |
However,
no dividend shall bear interest against the Company.
Voting
Rights. Each Ordinary Share shall be entitled to one vote on all matters subject to vote at general and special meetings of our company
and each Preferred Share shall be entitled to two (2) votes on all matters subject to vote at general and special meetings of our company.
Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting
or any one or more shareholders who together hold not less than 10% of the nominal value of the total issued voting shares of our company
present in person or by proxy. An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of
a simple majority of the votes attaching to the Ordinary Shares cast at a meeting, while a special resolution requires the affirmative
vote of no less than two-thirds of the votes cast attaching to the outstanding Ordinary Shares at a meeting. A special resolution will
be required for important matters such as making changes to our second amended and restated memorandum and articles of association.
There
are no limitations on non-residents or foreign shareholders in the memorandum and articles to hold or exercise voting rights on the Ordinary
Shares imposed by foreign law or by the charter or other constituent document of our company. However, no person will be entitled to
vote at any general meeting or at any separate meeting of the holders of the Ordinary Shares unless the person is registered as of the
record date for such meeting and unless all calls or other sums presently payable by the person in respect of Ordinary Shares in the
Company have been paid.
Winding
Up; Liquidation. Upon the winding up of our company, after the full amount that holders of any issued shares ranking senior to the
Ordinary Shares as to distribution on liquidation or winding up are entitled to receive has been paid or set aside for payment, the holders
of our Ordinary Shares are entitled to receive any remaining assets of the Company available for distribution as determined by the liquidator.
The assets received by the holders of our Ordinary Shares in a liquidation may consist in whole or in part of property, which is not
required to be of the same kind for all shareholders.
Calls
on Ordinary Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for
any amounts unpaid on their Ordinary Shares in a notice served to such shareholders at least 14 days prior to the specified time and
place of payment. Any Ordinary Shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption
of Ordinary Shares. We may issue shares that are, or at its option or at the option of the holders are, subject to redemption on
such terms and in such manner as it may, before the issue of the shares, determine. Under the Companies Act, shares of a Cayman Islands
exempted company may be redeemed or repurchased out of profits of the company, out of the proceeds of a fresh issue of shares made for
that purpose or out of capital, provided the memorandum and articles authorize this and it has the ability to pay its debts as they come
due in the ordinary course of business.
No
Preemptive Rights. Holders of Ordinary Shares will have no preemptive or preferential right to purchase any securities of our
company.
Variation
of Rights Attaching to Shares. All or any of the special rights attached to any class of shares may, subject to the provisions of
the Companies Act, be materially adversely varied with the written consent of the holders of all of the issued shares of that class or
with the sanction of an ordinary resolution passed at a general meeting of the holders of the shares of that class. The rights conferred
upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares
of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of
shares.
Anti-Takeover
Provisions. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a change of control
of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to
issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred
shares without any further vote or action by our shareholders.
Transfer
of Ordinary Shares. Subject to the restrictions contained in our current articles of association, any of our shareholders may transfer
all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board
of directors.
Our
board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up
or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
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the
instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other
evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; |
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the
instrument of transfer is in respect of only one class of shares; |
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the
instrument of transfer is properly stamped, if required; |
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in
the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four;
and |
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a
fee of such maximum sum as the Nasdaq Capital Market may determine to be payable or such lesser sum as our directors may from time
to time require is paid to us in respect thereof. |
If
our directors refuse to register a transfer, they shall, within three months after the date on which the instrument of transfer was lodged,
send to each of the transferor and the transferee notice of such refusal.
The
registration of transfers may, on ten calendar days’ notice being given by advertisement in such one or more newspapers, by electronic
means or by any other means in accordance with the Nasdaq Rules, be suspended and the register closed at such times and for such periods
as our board of directors may, in their absolute discretion, from time to time determine, provided, however, that the registration of
transfers shall not be suspended nor the register closed for more than 30 calendar days in any calendar year.
Inspection
of Books and Records
Holders
of our shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our
corporate records (other than the memorandum and articles of association, the register of mortgages and charges, and copies of any
special resolutions passed by our shareholders). However, we will provide our shareholders with annual audited financial
statements.
General
Meeting of Shareholders. Shareholders’ meetings may be convened by a majority of our board of directors or our chairman. Advance
notice of at least seven (7) calendar days is required for the convening of our annual general shareholders’ meeting and any
other general meeting of our shareholders. A quorum required for and throughout a meeting of shareholders consists of at least one shareholder
entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation) by its duly authorized representative
representing not less than one-third of all voting power of our share capital in issue.
Exempted
Company. We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between ordinary
resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside
of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the
same as for an ordinary company except that an exempted company:
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does not have to file an
annual return of its shareholders with the Registrar of Companies; |
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is not required to open
its register of members for inspection; |
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does not have to hold an
annual general meeting; |
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may issue shares with no
par value; |
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may obtain an undertaking
against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance); |
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may register by way of
continuation in another jurisdiction and be deregistered in the Cayman Islands; |
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may register as a limited
duration company; and |
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may register as a segregated
portfolio company. |
“Limited
liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the
company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or
an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Preferred
Shares
Conversion.
Each Preferred Share is convertible into one (1) ordinary share at any time at the option of the holder thereof. In no event shall
Ordinary Shares be convertible into Preferred Shares.
Voting
Rights. Each share of Preferred Shares shall have the voting rights equal to two (2) Ordinary Shares.
Dividends.
Except for voting rights and conversion rights as set out hereof, the Ordinary Shares and the Preferred Shares shall rank pari
passu with one another and shall have the same rights, preferences, privileges and restrictions.
Assignment
and Transfer. The holders of Preferred Shares shall have the right to transfer each share of the Preferred Shares to any third party
at any time in such holder’s sole and absolute discretion, subject to compliance with applicable securities laws. Upon any sale,
transfer, assignment or disposition of any Preferred Share by a shareholder to any person who is not an affiliate of such shareholder,
or upon a change of control of any Preferred Share to any person who is not an affiliate of the registered shareholder of such share,
such Preferred Share shall be automatically and immediately converted into one (1) ordinary share.
10.C. Material Contracts
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in this annual
report.
10.D. Exchange Controls
Cayman
Islands
Currently
there is no exchange control regulations in the Cayman Islands applicable to us and shareholders.
See
“Item 4. Information on the Company—B. Business Overview—Regulation—PRC Laws and Regulations Relating to Foreign
Exchange” for exchange controls in China.
10.E. Taxation
The
following summary of the material Cayman Islands, PRC and U.S. tax consequences of an investment in our ordinary shares is based upon
laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive
effect. This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible
tax considerations. This summary also does not deal with all possible tax consequences relating to an investment in our ordinary shares,
such as the tax consequences under state, local, or under the tax laws of jurisdictions other than the Cayman Islands, PRC and the United
States. Investors should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition
of our ordinary shares.
Cayman
Islands Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is
no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government
of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within
the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments
made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments
of dividends and capital in respect of our Ordinary Shares will not be subject to taxation in the Cayman Islands and no withholding will
be required on the payment of a dividend or capital to any holder of our Ordinary Shares, nor will gains derived from the disposal of
our Ordinary Shares be subject to Cayman Islands income or corporation tax.
No
stamp duty is payable in respect of the issue of the shares or on an instrument of transfer in respect of a share.
People’s
Republic of China Taxation
Under
the EIT Law, an enterprise established outside the PRC with a “de facto management body” within the PRC is considered a PRC
resident enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its
worldwide income as well as tax reporting obligations. Under the Implementation Rules, a “de facto management body” is defined
as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources,
finances and properties of an enterprise. In addition, SAT Circular 82 issued in April 2009 specifies that certain offshore-incorporated
enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if all of the following
conditions are met: (a) senior management personnel and core management departments in charge of the daily operations of the enterprises
have their presence mainly in the PRC; (b) their financial and human resources decisions are subject to determination or approval
by persons or bodies in the PRC; (c) major assets, accounting books and company seals of the enterprises, and minutes and files
of their board’s and shareholders’ meetings are located or kept in the PRC; and (d) half or more of the enterprises’
directors or senior management personnel with voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued
SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin
45 provides for procedures and administration details of determination on PRC resident enterprise status and administration on post-determination
matters. If the PRC tax authorities determine that the Company is a PRC resident enterprise for PRC enterprise income tax purposes, a
number of unfavorable PRC tax consequences could follow. For example, Shanghai Juhao may be subject to enterprise income tax at a rate
of 25% with respect to its worldwide taxable income. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC
enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or Ordinary
Shares and potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and with
respect to gains derived by our non-PRC individual shareholders from transferring our shares or Ordinary Shares.
It
is unclear whether, if we are considered a PRC resident enterprise, holders of our shares or Ordinary Shares would be able to claim the
benefit of income tax treaties or agreements entered into between China and other countries or areas. See “Risk Factors—Risks
Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification
could result in unfavorable tax consequences to us and our non-PRC shareholders”.
The
SAT issued SAT Circular 59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. Both SAT Circular
59 and SAT Circular 698 became effective retroactively as of January 1, 2008, and Circular 7, in replacement of some of the existing
rules in Circular 698, became effective in February 2015. On October 17, 2017, the SAT promulgated Bulletin 37, and Circular 698 was
replaced effective December 1, 2017. Under Circular 7, where a non-resident enterprise conducts an “indirect transfer”
by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the
equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC entity
which directly owned such taxable assets, may report such indirect transfer to the relevant tax authority. Using a “substance over
form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. We and non-resident enterprises in such transactions
may become at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 7 and Bulletin 37, and may be
required to expend valuable resources to comply with Circular 59, Circular 7 and Bulletin 37 or to establish that we and our non-resident
enterprises should not be taxed under these circulars. In addition, in accordance with the Individual Income Tax Law promulgated by the
Standing Committee of NPC, later amended on August 31, 2018, and effective January 1, 2019, where an individual carries out other arrangements
without reasonable business purpose and obtains improper tax gains, the tax authorities shall have the right to make tax adjustments
based on a reasonable method, and levy additional tax and collect interest if there is a need to levy additional tax after making tax
adjustments. As a result, our beneficial owners, who are PRC residents, may be deemed to have carried out other arrangements without
reasonable business purpose and obtained improper tax gains for such indirect transfer, and thus be levied tax. See “Risk Factors—Risks
Related to Doing Business in China—We face uncertainty regarding the PRC tax reporting obligations and consequences for certain
indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax
authorities may have a negative impact on potential acquisitions we may pursue in the future.”
Pursuant
to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and
Tax Evasion on Income, or the Tax Arrangement, where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise
directly holds at least 25% of a PRC enterprise, the withholding tax rate in respect of the payment of dividends by such PRC enterprise
to such Hong Kong resident enterprise is reduced to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority.
Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax
Agreements, or Circular 81, a resident enterprise of the counter-party to such Tax Arrangement should meet the following conditions,
among others, in order to enjoy the reduced withholding tax under the Tax Arrangement: (i) it must directly own the required percentage
of equity interests and voting rights in such PRC resident enterprise; and (ii) it should directly own such percentage in the PRC
resident enterprise anytime in the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident
Enterprises to Enjoy Treatments under Tax Treaties (for Trial Implementation), or the Administrative Measures, which became effective
in October 2009, requires that the non-resident enterprises must obtain the approval from the relevant tax authority in order to
enjoy the reduced withholding tax rate under the tax treaties. There are also other conditions for enjoying such reduced withholding
tax rate according to other relevant tax rules and regulations. Accordingly, Shanghai Juhao may be able to enjoy the 5% withholding
tax rate for the dividends it receives from the WFOE, if it satisfies the conditions prescribed under Circular 81 and other relevant
tax rules and regulations, and obtains the approvals as required under the Administrative Measures. However, according to Circular
81, if the relevant tax authorities consider the transactions or arrangements are for the primary purpose of enjoying a favorable tax
treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
United
States Federal Income Tax Considerations
The
following is a discussion of United States federal income tax considerations relating to the acquisition, ownership, and disposition
of our ordinary shares by a U.S. Holder, as defined below, that acquires our ordinary shares and holds our ordinary shares as “capital
assets” (generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”).
This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations or change,
possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to
any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take
a contrary position. This discussion does not address all aspects of United States federal income taxation that may be important to particular
investors in light of their individual circumstances, including investors subject to special tax rules (such as, for example, certain
financial institutions, insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in
securities that elect mark-to-market treatment, partnerships and their partners, tax-exempt organizations (including private foundations)),
investors who are not U.S. Holders, investors that own (directly, indirectly, or constructively) 10% or more of our voting stock, investors
that hold their ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction), or investors
that have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those
summarized below. In addition, this discussion does not address any tax laws other than the United States federal income tax laws, including
any state, local, alternative minimum tax or non-United States tax considerations, or the Medicare tax. Each potential investor is urged
to consult its tax advisor regarding the United States federal, state, local and non-United States income and other tax considerations
of an investment in our ordinary shares.
General
For
purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United States federal
income tax purposes, (i) an individual who is a citizen or treated as a tax resident of the United States, (ii) a corporation (or other
entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United
States or any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary
supervision of a United States court and which has one or more United States persons who have the authority to control all substantial
decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If
a partnership (or other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ordinary
shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of the partnership.
Partnerships and partners of a partnership holding our ordinary shares are urged to consult their tax advisors regarding an investment
in our ordinary shares.
The
discussion set forth below is addressed only to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to consult
their own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state,
local, foreign and other tax consequences to them of the purchase, ownership and disposition of our ordinary shares.
Taxation
of Dividends and Other Distributions on our Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to
the ordinary shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend
income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not
be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable
to qualified dividend income, provided that (1) the ordinary shares are readily tradable on an established securities market in the United
States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange
of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which
the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Because there is no income tax
treaty between the United States and the Cayman Islands, clause (1) above can be satisfied only if the ordinary shares are readily tradable
on an established securities market in the United States. Under U.S. Internal Revenue Service authority, ordinary shares are considered
for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on
certain exchanges, which presently include the Nasdaq. You are urged to consult your tax advisors regarding the availability of the lower
rate for dividends paid with respect to our ordinary shares, including the effects of any change in law after the date of this report.
To
the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), it will be treated first as a tax-free return of your tax basis in your ordinary shares, and to the extent the
amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings
and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a
dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described
above.
Taxation
of Dispositions of Ordinary Shares
Subject
to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other
taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis
(in U.S. dollars) in the ordinary shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including
an individual U.S. Holder, who has held the ordinary shares for more than one year, you may be eligible for reduced tax rates on any
such capital gains. The deductibility of capital losses is subject to limitations.
Passive
Foreign Investment Company (“PFIC”)
A
non-U.S. corporation is considered a PFIC for any taxable year if either:
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at least 75% of its gross
income for such taxable year is passive income; or |
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at least 50% of the value
of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce
or are held for the production of passive income (the “asset test”). |
Passive
income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of
a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by
value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash we hold
will generally be considered to be held for the production of passive income and (2) the value of our assets must be determined based
on the market value of our ordinary shares from time to time, which could cause the value of our non-passive assets to be less than 50%
of the value of all of our assets (including the cash raised in any offering) on any particular quarterly testing date for purposes of
the asset test.
We must make a separate determination each year
as to whether we are a PFIC. Depending on the amount of cash we hold, together with any other assets held for the production of passive
income, it is possible that, for our current taxable year or for any subsequent taxable year, at least 50% of our assets may be assets
held for the production of passive income. We will make this determination following the end of any particular tax year. Although the
law in this regard is unclear, we treat our consolidated variable interest entity, as being owned by us for United States federal income
tax purposes, not only because we exercise effective control over the operation of such entity but also because we are entitled to substantially
all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. In
particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our
ordinary shares and because cash is generally considered to be an asset held for the production of passive income, our PFIC status will
depend in large part on the market price of our ordinary shares and the amount of cash we hold. Accordingly, fluctuations in the market
price of the ordinary shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in
several respects. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above,
the determination of the value of our assets will depend upon material facts (including the market price of our ordinary shares from time
to time that may not be within our control). If we are a PFIC for any year during which you hold ordinary shares, the shares will continue
to be treated as stock in a PFIC for all succeeding years during which you hold ordinary shares. However, if we cease to be a PFIC and
you did not previously make a timely “mark-to-market” election as described below, you may avoid some of the adverse effects
of the PFIC regime by making a “purging election” (as described below) with respect to the ordinary shares.
If
we are a PFIC for your taxable year(s) during which you hold ordinary shares, you will be subject to special tax rules with respect to
any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge)
of the ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable
year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years
or your holding period for the ordinary shares will be treated as an excess distribution. Under these special tax rules:
|
● |
the excess distribution
or gain will be allocated ratably over your holding period for the ordinary shares; |
|
● |
the amount allocated to
your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable year in which we were
a PFIC, will be treated as ordinary income, and |
|
● |
the amount allocated to
each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by
any net operating losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as
capital, even if you hold the ordinary shares as capital assets.
A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect
out of the tax treatment discussed above. If you make a mark-to-market election for first taxable year which you hold (or are deemed
to hold) ordinary shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the
excess, if any, of the fair market value of the ordinary shares as of the close of such taxable year over your adjusted basis in such
ordinary shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess,
if any, of the adjusted basis of the ordinary shares over their fair market value as of the close of the taxable year. However, such
ordinary loss is allowable only to the extent of any net mark-to-market gains on the ordinary shares included in your income for prior
taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition
of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale
or disposition of the ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously
included for such ordinary shares. Your basis in the ordinary shares will be adjusted to reflect any such income or loss amounts. If
you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to
distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “—
Taxation of Dividends and Other Distributions on our ordinary shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market
(as defined in applicable U.S. Treasury regulations), including Nasdaq. If the ordinary shares are regularly traded on Nasdaq and if
you are a holder of ordinary shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of
the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally
include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the
taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information
regarding its earnings and profits as required under applicable U.S. Treasury regulations.
We
do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you
hold ordinary shares in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621
in each such year and provide certain annual information regarding such ordinary shares, including regarding distributions received on
the ordinary shares and any gain realized on the disposition of the ordinary shares.
If
you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period
you hold our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect to you even if we
cease to be a PFIC in a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging
election” creates a deemed sale of such ordinary shares at their fair market value on the last day of the last year in which we
are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating
the gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis (equal to the
fair market value of the ordinary shares on the last day of the last year in which we are treated as a PFIC) and holding period (which
new holding period will begin the day after such last day) in your ordinary shares for tax purposes.
You
are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our ordinary shares and the
elections discussed above.
Information
Reporting and Backup Withholding
Dividend
payments with respect to our ordinary shares and proceeds from the sale, exchange or redemption of our ordinary shares may be subject
to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply,
however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal
Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt
status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax
advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability,
and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund
with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup
withholding), and such brokers or intermediaries may be required by law to withhold such taxes.
Under
the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our ordinary
shares, subject to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial institutions),
by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for
each year in which they hold ordinary shares and all specified foreign financial assets held exceed a threshold amount (such as $100,000
as of the end of the year for married taxpayers filing joint returns). Failure to report the information could result in substantial
penalties. You should consult your own tax advisor regarding your obligation to file Form 8938.
10.F.
Dividends and Paying Agents
Not
Applicable.
10.G.
Statement by Experts
Not
Applicable.
10.H.
Documents on Display
We
are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers.
Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information
filed with the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information regarding
the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that
contains reports and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. You may also visit us on the world wide web at http://www.1juhao.com. However, information
contained on our website does not constitute a part of this annual report.
10.I.
Subsidiary Information
Not
Applicable.
ITEM 11. |
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK |
Liquidity
risk
We
are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet
our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures.
When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.
Inflation
risk
Inflationary
factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have
an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if
the revenues from our products do not increase with such increased costs.
Interest
rate risk
Our
exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand, interest-earning
instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase,
however, may raise the cost of any debt we incur in the future.
Foreign
currency translation and transaction
Our
operating transactions and assets and liabilities are mainly denominated in RMB. RMB is not freely convertible into foreign currencies
for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other things,
changes in China’s political and economic conditions and China’s foreign exchange policies. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.
ITEM 12. |
DESCRIPTION OF SECURITIES
OTHER THAN EQUITY SECURITIES |
Not
applicable.
Not
applicable.
Not
applicable.
The accompanying notes are an integral part of these consolidated financial statements.
Jowell Global Ltd. (“Jowell Global”
or the “Company”) is a limited liability company established under the laws of the Cayman Islands on August 16, 2019 as a
holding company. The Company, through its consolidated Variable Interest Entity (“VIE”), sells and distributes health and
nutritional supplements, cosmetic products and certain household products sourced from manufacturers and distributors on its e-commerce
platform and mobile applications, , and offers an online marketplace that also enables third-party sellers to sell their products to
the Company’s online consumers.
A reorganization of the Company’s legal
structure (“Reorganization”) was completed on November 1, 2019. The Reorganization involved the incorporation of Jowell Global,
a Cayman Islands holding company, the incorporation of Jowell Technology Limited (“Jowell Tech”), a Hong Kong holding company;
the incorporation of Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a wholly foreign-owned entity (“WFOE”)
of Jowell Tech under the laws of the People’s Republic of China (“China” or the “PRC”).
On October 31, 2019 and November 1, 2019, Shanghai
Jowell entered into a series of VIE Agreements with Shanghai Juhao Information Technology Co., Ltd. (“Shanghai Juhao”) and
its shareholders, as amended on October 10, 2020. These agreements include: 1) an Exclusive Business Cooperation and Management Agreement;
2) an Equity Interest Pledge Agreement, 3) an Exclusive Option Agreement; 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant
to these agreements, Shanghai Jowell has the exclusive rights to provide consulting services to Shanghai Juhao related to the business
operation and management of Shanghai Juhao. For such services, Shanghai Juhao agrees to pay service fees equal to all of its net profit
after tax payments to Shanghai Jowell. At the same time Shanghai Jowell has obligation to absorb all of the Shanghai Juhao’s losses.
Such contractual arrangements are designed so that the operations of Shanghai Juhao are solely for the benefit of Shanghai Jowell and
ultimately, the Company. The agreements remain in effect until and unless all parties agree to its termination, except the Exclusive
Option Agreement that the effective term of 10 years and can be renewed for an additional 10 years. Until such termination, Shanghai
Juhao may not enter into another agreement for the provision of management consulting services without the prior consent of Shanghai
Jowell. In essence, Shanghai Jowell has gained control over Shanghai Juhao. Therefore, Shanghai Juhao is considered a Variable Interest
Entity under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the characteristics of a controlling
financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai Juhao. Accordingly, Shanghai Juhao
has been consolidated (See Note 2 – Consolidation of Variable Interest Entity).
Upon the reorganization, the Company has subsidiaries
in countries and jurisdictions including PRC and Hong Kong . Details of the subsidiaries of the Company are set out below:
Shanghai Juhao has seven
wholly owned Juhao Best Choice Stores, located in the cities of Suzhou, Changshu and Wuhu, and twenty-eight wholly owned subsidiaries
engaging online promotion of Shanghai Juhao’s products and services located in the cities of Changshu, Nantong, Shanghai, Guangzhou
and Hangzhou.
In preparing the consolidated financial statements
in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts
of revenues and expenses during the reporting years. Significant items subject to such estimates and assumptions include, but not limited
to, the useful lives of property and equipment, allowance for doubtful accounts and advance to suppliers, valuation of inventories, impairment
of long-lived assets, and assumptions related to the consolidation of entity in which the Company holds variable interests. Actual results
could differ from those estimates.
The Company through its e-commerce platform mainly
www.1juhao.com and mobile applications, engages primarily in online sale of cosmetic products, health and nutritional supplements and
household products sourced from manufacturers and distributors in China, and also offers an online marketplace that enables third-party
sellers to sell their products to the Company’s consumers. Customers place their orders for products or services online primarily
through the Company’s websites and mobile applications. Payment for the purchased products or services is generally made either
before delivery or upon delivery.
The Company primarily sells cosmetic products,
health and nutritional supplements and household products through online direct sales. The Company recognizes product revenues from the
online direct sales on a gross basis as the Company is a principal because it controls the promised good or service before transferring
it to a customer. This control is determined by the following indicators 1) The Company is the primary obligor in the sales transaction
and responsible for fulfilling the promise to provide the product and service. 2) The Company bears the inventory risk. The Company will
first indemnify customers for product damages and then request reimbursements from suppliers if the suppliers are determined to be responsible
for the damages. 3) The Company has discretion in establishing the prices and control over the entire transaction. For the years ended
December 31, 2021, 2020 and 2019, approximately $nil, $21.3 million and $50.19 million cost of products were purchased, packed and delivered
by the Company at the warehouse of a subsidiary of Jiangsu Longrich Group Co., Ltd (“Longrich Group”), a supplier controlled
by the CEO of the Company, which generated approximately $nil, $23.4 million and $54.39 million revenues, respectively.
Fulfillment expenses consist primarily of expenses
charged by third-party couriers for dispatching and delivering the Company’s products and rental expenses of leased warehouses.
Shipping cost included in fulfillment costs amounted to $2,404,268, $2,201,457 and $2,107,761 for the years ended December 31, 2021,
2020 and 2019, respectively.
For the year ended
December 31, 2021, two major suppliers, a related party and a third party, accounted for approximately 45% and 24% of the total
purchases, respectively. For the year ended December 31, 2020, one major supplier, a related party, accounted for approximately 87% of the total
purchases. For the year ended December 31, 2019, the same related party supplier, accounted for approximately 90% of the total
purchases. See Note 11 to the consolidated financial statements for additional information on related parities transactions.
Beginning in late 2019, there was an outbreak
of COVID-19 (coronavirus) which has spread quickly to many parts in China, the U.S. and globally. In March 2020, the World Health Organization
declared the COVID-19 a pandemic. With an aim to contain the COVID-19 outbreak, the Chinese government has imposed various strict measures
across the country including, but not limited to, travel restrictions, mandatory quarantine requirements, and postponed resumption of
business operations after the Chinese New Year holiday in 2020. Starting from March 2020, businesses in China began to reopen, and the
interruptions to businesses were gradually removed. However, due to the recent outbreak of Omicron variant in
many cities in China, including Xi’an, Hong Kong, Shanghai, Guangzhou and Suzhou, local governments have imposed new restrictions
and quarantine requirements with travel restrictions and temporary closure of office buildings and
facilities, and the employees at our Shanghai office have been working from home since March 30, 2022.
As an online retailer and retail platform and
because the COVID-19 is generally considered under control in China, the Company’s operations in 2021 were not significantly negatively
impacted by the pandemic. However, it is not possible to determine the impact of the COVID-19 pandemic on the Company’s business
operations and financial results for 2022, which is highly dependent on numerous factors, including the duration and spread of the pandemic
and any resurgence of COVID-19 and new variants such as Omicron variant, efficacy and distribution of COVID-19 vaccines, and the actions
taken by government authorities and other entities in China and elsewhere to contain COVID-19 and its new variants.
On March 19, 2021, the Company closed its initial
public offering, raising net proceeds of approximately $25.7 million. The Company used part of the proceeds to expand its business and
execute its growth strategy by increasing marketing and promotion, optimizing the platform, enriching product selections and increasing
cooperation with leading brands at home and abroad, which has brought more traffic to the online platform and attracted more users and
distributors. As a result, the Company’s revenue increased by approximately $74.0 million in 2021 from 2020, cost of sales increased
by approximately $72.9 million in 2021 from 2020, and approximately $8.4 million more were spent on marketing in 2021 when compared to
2020. The growth in business also resulted in an increase of $4.9 million in inventory and an increase of $2.5 million in prepayment for
products purchased by the end of 2021, as well as an increase of $4.5 million in outstanding balance of accounts receivable, which was
mainly due to significant increase in sales to local distributors and wholesalers which were provided with certain credit terms based
on management’s assessment on their creditworthiness. All these were the main reasons for the net loss and cash outflow of the Company
in 2021.
Presently, the Company’s principal sources
of liquidity are from its operations, proceeds from its initial public offering and private placement, and the bank loan. As of December
31, 2021, the Company had cash and restricted cash of approximately $21.2 million and working capital of $31.3 million. $18.2 million
of the cash were held by the VIE with banks and financial institutions inside China as the Company conducted its operations primarily
through its consolidated VIE in China. With the uncertainty of the current market and the impact of the COVID-19 pandemic, the management
believes it is necessary to enhance the collection of the outstanding balance of accounts receivable and other receivables, and to be
cautious on operational decisions and project selections. As of March 31, 2022, approximately $3.9 million, or 70%, of its accounts receivable
balance as of December 31, 2021 were collected, and approximately $2.7 million or 49% of its advances to supplier balance as of December
31, 2021 were utilized.
As of December 31, 2021, the Company also had
short-term bank loan of approximately $2.7 million borrowed from a PRC bank, which has been subsequently renewed to March 2023. Management
expects that it would be able to renew its existing bank loan upon maturity based on past experience.
Based on its current operating plan, management
believes that the above-mentioned measures, including cash and restricted cash on hand of approximately $21.2 million and bank borrowing,
will collectively provide sufficient liquidity for the Company to meet its future liquidity and capital requirements for at least next
twelve months from the date the Company’s consolidated financial statements are issued.
Approximately 70% of the accounts receivable balance
as of December 31, 2021 have been subsequently collected by March 31, 2022. The remaining balance is expected to be collected by the end
of May 2022.
Approximately 49% of the advance to suppliers
balance as of December 31, 2021 have been subsequently utilized by March 31, 2022. The remaining balance is expected to be collected or
utilized by the end of June 2022.
During the fiscal year
2021, the Company entered into two contracts with a third party for the development of enterprise resource planning (“ERP”)
system and a new-retail cloud platform, with total budget of approximately $1.5 million. As of December 31, 2021, the Company has made
total payment of approximately $1.1 million in connection with these two projects, which are recorded as other non-current asset as of
December 31, 2021. Subsequently, the ERP system has been completed and transferred to intangible assets in March 2022, and the new-retail
cloud platform is expected to be completed by the end of 2022.
On July 27, 2021, Shanghai Juhao, a variable
interest entity of Jowell Global entered into a Capital Increase Agreement (the “Agreement”) with Suzhou Industrial Park
Hongrun Rural Small Amount Loan Co., Ltd. (“Hongrun”) and its shareholders identified on the signature pages thereto (the
“Existing Shareholders”). Pursuant to the Agreement, Shanghai Juhao contributed RMB 30 million (approximately $4.6 million)
to Hongrun (the “Investment”) for 18.96% equity interest of Hongrun. After the investment, Hongrun had 9 shareholders, including
Jiangsu Longrich Group Co., Ltd., the largest shareholder with 29.17% equity interest of Hongrun, which is also a related party of the
Company (see Note 13 related party transactions). Other 7 shareholders are unrelated parties accounting for 51.87% equity interest in
Hongrun. Mr. Zhiwei Xu, the Chairman of the Board of Directors and Chief Executive Officer of the Company is also the Chairman of the
Board of Directors of Hongrun. According to the Article of Association of Hongrun, the Board of Directors of Hongrun has 5 members, among
whom Mr. Zhiwei Xu and another Director are from Longrich Group, accounting for 40% voting rights of the Board. Accordingly, Longrich
Group and the Company in aggregate cannot exercise control but has significant influence over Hongrun. Accordingly, Shanghai Juhao has
been accounting for the investment under equity method. Hongrun and Existing Shareholders agreed the Investment only be used for making
loans to future owners of Juhao Best Choice Stores for their business development and expansion. Juhao Best Choice Stores are the community
group-buying franchise stores launched by Shanghai Juhao in April 2021. For the year ended December 31, 2021, the Company generated $143,849
investment income from Hongrun based on Hongrun’s financial performance and operation results and did not recognize any impairment
losses for the long-term investment.
On March 19, 2021, Shanghai Juhao entered into
a loan agreement with Shanghai Bank to borrow RMB 17 million for working capital needs. Interest of the loan is 4.6% per annum. The loan
is guaranteed by Jowell Tech, who signed a maximum pledge agreement with Shanghai Bank and agreed to pledge its deposit of $2.999 million
as collaterals to secure RMB 17 million loans so that the Shanghai Juhao may borrow from Shanghai Bank during the period of March 19,
2021 to March 18, 2022. As of December 31, 2021, the outstanding balance was RMB 17,000,000 (equivalent of $2,672,366 as of December 31,
2021). In March 2022, Shanghai Juhao renewed this loan with Shanghai Bank with the same interest rate and a new maturity date of March
21, 2023. The pledge agreement was also renewed by Jowell Tech with Shanghai Bank on the same date.
In connection with the March 19, 2021 offering,
the Company agreed to grant to the Underwriters Warrants (“UW Warrants”) covering a number of Ordinary Shares equal to 10%
of the aggregate number of the Ordinary Shares sold in the offering including any shares sold upon exercise of the over-allotment option,
totaling 427,143 warrants. The warrants carry a term of 5 years and the exercise price is $9.10. The UW Warrants were not exercisable
for a period of 180 days after the effective date of the offering. On November 25, 2021, the warrants holders provided the Company with
the notice of exercise and elected the cashless exercise of the UW Warrants, which resulted in an aggregate of 137,111 Ordinary Shares
issued based on the 5 days average market price of $13.402 per share. As of December 31, 2021, no warrants were outstanding.
The Company has 50,000,000 authorized Preferred
Shares and a total of 750,000 of its Preferred shares issued and outstanding, with a par value of US$0.0001. Each Preferred Share has
voting rights equal to two Ordinary Shares of the Company and each Preferred Share is convertible into one Ordinary Share at any time.
Except for voting rights and conversion rights, the Ordinary Shares and the Preferred Shares shall rank pari passu with one another and
shall have the same rights, preferences, privileges and restrictions.
On April 21, 2021, the Company granted 100,000
ordinary shares to a third-party consultant in exchange for services in connection with the Company’s internal control and management,
budget management, accounting, procurement, assets and contract management, mergers and acquisitions strategy and due diligence, etc.
with service period from April 21, 2021 to December 31, 2021. The fair value of $770,000 was based on the Company’s closing stock
price $7.70 on April 21, 2021, which cost was amortized over the service period.
On September 21, 2021, the Company filed Form
S-8 with SEC to register 4,000,000 ordinary shares under the Company’s 2021 Omnibus Equity Plan which was approved by the Board
of the Company on August 2, 2021 and by the shareholders of the Company at annual shareholders meeting on September 10, 2021. On November
26, 2021, the Company authorized the grant of Restricted Stock Units (“RSU”) of 80,000 ordinary shares to the Company’s
Chief Financial Officer under the Company’s 2021 Omnibus Equity Plan for service period from November 16, 2021 to November 15, 2022,
of which 20,000 ordinary shares was vested immediately with the fair value of $201,200 based on the closing stock price $10.06 at November
26, 2021. The remaining RSU shall vest in accordance with twenty-five percent (25%) of the RSU on each of March 31, 2022, June 30, 2022
and September 30, 2022.
The Company is required to make appropriations
to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income
determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory
surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve
is equal to 50% of the entity’s registered capital, which is RMB 14 million (approximately $2 million) as of December 31, 2021.
Appropriations to the surplus reserve are made at the discretion of the Board of Directors. As of December 31, 2021 and 2020, the balance
of statutory reserve was both $394,541.
On July 27, 2021, Shanghai Juhao, a variable
interest entity of Jowell Global entered into a Capital Increase Agreement (the “Agreement”) with Suzhou Industrial Park
Hongrun Rural Small Amount Loan Co., Ltd. (“Hongrun”) and its shareholders identified on the signature pages thereto. Pursuant
to the Agreement, Shanghai Juhao contributed RMB 30 million (approximately $4.6 million) to Hongrun (the “Investment”) for
18.96% equity interest of Hongrun. Mr. Zhiwei Xu, the Chairman of the Board of Directors and Chief Executive Officer of the Company is
also the Chairman of the Board of Directors of Hongrun. Jiangsu Longrich Group Co., Ltd., the largest shareholder of Hongrun is also
a related party of the Company. See Note 9 in for more details.
In August, 2021, the Company signed a three-year
operating lease agreement with a subsidiary of Longrich Group to rent an office space with 3956 square meters for a Jowell Best Choice
Store in Changsu City, Jiangsu Province. The lease term is from September 1, 2021 to August 31, 2024. The rental payments related to this
lease were $53,144 for the year ended December 31, 2021.
In August, 2021, the Company entered into a one-year
operating lease agreement with a subsidiary of Longrich Group to rent an office space with 350 square meters in Chengdu, Sichuan. The
lease term is from September 1, 2021 to August 31, 2022. The rental payment related to this lease were $6,200 for the year ended
December 31, 2021.
The Company also entered into following four lease
agreements with its related parties controlled by the Chairman, CEO and a major shareholder of the Company, to lease warehouse and office
spaces. The Company intend to continue these leases for the next three years.
On December 31, 2020, January 1, 2020 and January
1, 2019, the Company entered into a one-year lease agreement with a subsidiary of Longrich Group to rent an office space of 700 square
meters at Yangpu District, Shanghai, respectively. The rental payments related to these leases were $115,681, $95,913 and $91,188 for
the year ended December 31, 2021, 2020 and 2019, respectively. The lease was renewed on January 1, 2022 for another one year term.
On January 1, 2020 and January 1, 2019, the Company
entered into the second one-year operating lease agreement with a subsidiary of Longrich Group to rent a warehouse space with 500 square
meters at Jiangsu Diye Industrial District. On December 31, 2020, the Company renewed this lease agreement for fiscal year 2021 and the
leased space is increased to 6,440 square meters. The rental payments related to these leases were $324,296, $20,299 and $14,280 for the
year ended December 31, 2021, 2020 and 2019, respectively. The lease was renewed on January 1, 2022 for another one year term.
On December 31, 2020, January 1, 2020 and January
1, 2019, the Company entered into the third one-year operating lease agreement with a subsidiary of Longrich Group to rent another office
space with 1,097 square meters at Longrich Industrial District, respectively. The rental payments related to this lease were $90,242,
$83,505 and $83,361 for the year ended December 31, 2021, 2020 and 2019, respectively. The lease was renewed on January 1, 2022 for another
one year term.
On January 1, 2020, the Company entered into
the fourth one-year operating lease agreement with a subsidiary of Longrich Group to rent another office space with 404 square meters
in Changshu City, Jiangsu Province. On December 31, 2020, the Company renewed this lease agreement for fiscal year 2021 and the leased
space is increased to 5,976 square meters. The rental payments related to this lease were $492,939 and $32,261 for the year ended December
31, 2021 and 2020, respectively. The lease was renewed on January 1, 2022 for another one year term.
On May 28, 2021, the Company signed a two-year
operating lease agreement with a third party to lease 273.59 square meters for office space in Tianjin City. The lease term is from August
1, 2021 to July 31, 2023. The rental payments related to this lease were $14,189 for the year ended December 31, 2021.
On June 20, 2021, the Company signed a three-year
operating lease agreement with a third party to lease 169 square meters for a Jowell Best Choice Store in Suzhou City, Jiangsu Province.
The lease term is from July 20, 2021 to July 19, 2024. The rental payments related to this lease were $10,772 for the year ended December
31, 2021.
In June, 2021, the Company signed a two-year operating
lease agreement with a third party to lease 264.89 square meters for office space in Wuhan City, Hubei Province. The lease term is from
June 20, 2021 to June 19, 2023. The rental payments related to this lease were $13,541 for the year ended December 31, 2021.
On November 20, 2021, the Company signed a two-year
operating lease agreement with a third party to lease 230 square meters for office space in Guangzhou City, Guangdong Province. The lease
term is from December 1, 2021 to November 30, 2023. The rental payments related to this lease were $3,654 for the year ended December
31, 2021.
Under the Enterprise Income Tax (“EIT”)
Law of PRC, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified 25% enterprise
income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on case-by-case basis. Each of Shanghai
Jowell and Shanghai Juhao is subject to income tax at unified rate of 25%.
At December 31, 2021, the Company has provided
full valuation allowance on deferred tax assets for net operating loss that the Company estimated unrealizable in the foreseeable future
due to expected future operating loss in certain entities. As of December 31, 2021 and 2020, the valuation allowance was $890,517 and
$nil, respectively. The Company’s management reviews this valuation allowance periodically and makes adjustments as necessary.
All of the Company’s long-lived assets are located in PRC. Majority
of the Company’s merchandises are sold in PRC.
On March 31, 2022, the Company issued 20,000 ordinary shares to the
Company’s Chief Financial Officer for the RSU vested as discussed in Note 12, and on April 11, 2022, the Company granted 500,500
shares as stock awards to its employees, officers and directors under the Company’s 2021 Omnibus Equity Plan, which were vested
immediately. The fair value of these ordinary shares was $1,080,035 based on the closing stock price $2.20 on March 31, 2022 and $2.07
on April 11, 2022.
The condensed financial information of the parent company has been
prepared using the same accounting policies as set out in the Company’s consolidated financial statement except that the parent
company used the equity method to account for investments in its subsidiaries, VIE and VIE’s subsidiaries. The parent company and
its subsidiaries, and VIE were included in the consolidated financial statements where inter-company balances and transactions were eliminated
upon consolidation. For purpose of the parent company’s stand-alone financial statements, its investments in subsidiaries and VIE
were reported using the equity method of accounting. The parent company’s share of income from its subsidiaries and VIE were reported
as share of income of subsidiaries, VIE and VIE subsidiaries in the accompanying parent company financial statements.