RISK
FACTORS
An
investment in our common stock involves a high degree of risk. The risks described below include all material risks to our company
or to investors in this offering that are known to our company. You should carefully consider such risks before participating
in this offering. If any of the following risks actually occur, our business, financial condition and results of operations could
be materially harmed. As a result, the trading price of our common stock could decline, and you might lose all or part of your
investment. When determining whether to buy our common stock, you should also refer to the other information in this prospectus,
including our financial statements and the related notes included elsewhere in this prospectus.
Risks
Relating to Our Business and Industry
Our
limited operating history may not be indicative of our future growth or financial results and we may not be able to sustain our
historical growth rates.
Our
subsidiary in China, Zhenghao, commenced its operations in 2018. As of the date of this prospectus, we have launched seven stores
in Guangdong Province, Jilin Province and Chongqing City, including two stores owned by ourselves and five Brand Stores to which
we granted rights to use our brand. We are currently promoting our products and enhancing our brand recognition by working with
and placing our coffee machines free of charge in various stores, including grocery stores, bakeries, super markets, shopping
malls and other places with significant customer volume and high demand of coffee. As of the date of this prospectus, we have
placed our coffee machines into over 80 stores in Guangdong Province, over 60 stores in Jilin Province and over 150 stores in
Chongqing City. However, our limited operating history may not be indicative of our future growth or financial results. There
is no assurance that we will be able to grow in future periods. Our growth rates may decline for any number of possible reasons
and some of them are beyond our control, including decreasing customer spending, increasing competition, declining growth of China’s
coffee industry or China’s food and beverage sector in general, emergence of alternative business models, or changes in
government policies or general economic conditions. We will continue to expand our network of members and authorized partners
and product offerings to bring greater convenience to our customers and to increase our customer base and number of transactions.
However, the execution of our expansion plan is subject to uncertainty and the total number of items sold and number of transacting
customers may not grow at the rate we expect for the reasons stated above. If our growth rates decline, investors’ perceptions
of our business and prospects may be adversely affected and the market price of our common stock could decline. In addition, since
our business model is innovative in China’s coffee and healthy drink industry, it increased the difficulty in evaluating
our business and future prospects based on our historical operational or financial result.
We
have incurred significant net losses since our inception and we may continue to experience significant net losses in the future.
We
have incurred significant net losses since our inception in January 2017. For the period from January 26, 2017 (inception date)
to December 31, 2017, the year ended December 31, 2018 and the nine months ended September 30, 2019, we incurred net
loss of $8,055, $399,428, and $338,852, respectively, primarily attributed to the expenses in relation to the startup and fast
expansion of our business.
We
intend to further increase our brand awareness, expand our customer base and store network, and expect to continue to invest heavily
in offering discounts and deals and other aspects of our business, especially sales and marketing expenses, in the foreseeable
future as we continue to expand our store network and our product offerings. In addition, our net revenues will be impacted by
various factors, including the performances of our stores, level of discounts we offer for different products, competitive landscape,
customer preference and macroeconomic and regulatory environment. Therefore, our revenues may not grow at the rate we expect and
it may not increase sufficiently to offset the increase in our expenses. We may continue to incur losses in the future and we
cannot assure you that we will eventually achieve our intended profitability.
We
require a significant amount of capital to fund our operations and respond to business opportunities. If we cannot obtain sufficient
capital on acceptable terms, our business, financial condition and prospects may be materially and adversely affected.
Building
a reputable brand and accumulating a large and continuously growing customer base is costly and time-consuming. For example, we
require a significant amount of capital and resources to continue to expand our store network in a timely manner. Significant
and continuous investments in sales and marketing are also required for further establishing brand awareness among the mass population
in China to attract new customers and retain existing ones.
We
have historically funded our cash requirements principally with capital contribution from our shareholders. If these resources
are insufficient to satisfy our cash requirements, we may seek to raise funds through additional equity offering or debt financing
or obtain additional bank facilities. Our ability to obtain additional capital in the future, however, is subject to a number
of uncertainties, including those relating to our future business development, financial condition and results of operations,
general market conditions for financing activities by companies in our industry, and macro-economic and other conditions in China
and globally. If we cannot obtain sufficient capital on acceptable terms to meet our capital needs, we may not be able to execute
our growth strategies, and our business, financial condition and prospects may be materially and adversely affected.
If
we fail to acquire new customers or retain existing customers in a cost-effective manner, our business, financial condition and
results of operations may be materially and adversely affected.
Our
ability to cost-effectively attract new customers and retain existing customers is crucial to driving net revenues growth and
achieving profitability. We have invested significantly in branding, sales and marketing to acquire and retain customers since
our inception. For example, we offer various discount offers and deals in the form of vouchers and coupons. We also expect to
continue to invest significantly to acquire new customers and retain existing ones. There can be no assurance that new customers
will stay with us, or the net revenues from new customers we acquire will ultimately exceed the cost of acquiring those customers.
In addition, if we reduce or discontinue our current discount offers and deals, if our existing customers no longer find our products
appealing, or if our competitors offer more attractive products, prices, discounts or better customer services, our existing customers
may lose interest in us, decrease their orders or even stop ordering from us. If we are unable to retain our existing customers
or to acquire new customers in a cost-effective manner, our revenues may decrease and our results of operations will be adversely
affected.
We
may be unsuccessful in operating our stores.
The
operating results of our stores (including our Brand Stores and Cooperation Stores) have been and will continue to be subject
to a number of factors, including but not limited to:
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our
ability to maintain and enhance the quality of our products and services;
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our
ability to retain existing customers and attract new customers;
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our
ability to continuously increase the number of items sold to each customer and number of items sold in each store;
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our
ability to successfully implement our pricing strategies;
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our
ability to timely respond to changes in market opportunities and customer preferences;
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our
ability to maintain good relationships with third-party suppliers, service providers and strategic partners;
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our
ability to hire, train and retain talented employees;
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our
ability to manage costs of our operations, such as cost of materials, store rental and other operating costs, and sales and
marketing expenses;
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our
ability to ensure full compliance with relevant laws and regulations, and maintain adequate and effective control, supervision
and risk management over our stores; and
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our
ability to monitor and control the overall operation of our stores.
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Many
factors that are out of our control, including macroeconomic and regulatory environment, could also adversely affect our store
operations. In addition, as we continue to expand our store network, opening new stores near our existing stores may adversely
affect the sales of our existing stores. Any of these factors listed above or described elsewhere in this Risk Factors section
may render us unsuccessful in profitably operating our stores and could adversely impact our business, financial condition and/or
results of operations. We may even have to shut down certain stores if their business, financial conditions and operation results
are far below our expectation.
We
rely on a limited number of third-party suppliers and service providers to provide products and services to us or to our customers,
and the loss of any of these suppliers or service providers would negatively impact our business.
We
have a limited number of suppliers for our raw materials and beverage items, delivery service to our customer and warehouse and
fulfillment service. In 2018 and 2019, we purchased our coffee beans solely from one supplier and our health drink beverages ingredients
mainly from three suppliers.
Due
to concentration of suppliers, any interruption of the operations of our suppliers, any failure of our suppliers to accommodate
our growing business scale, any termination or suspension of our supply arrangements, any change in cooperation terms, or the
deterioration of cooperative relationships with these suppliers may materially and adversely affect our results of operations.
In addition, our current agreements with our suppliers generally do not prohibit them from working with our competitors. Our competitors
may be more effective in providing incentives to our suppliers to prioritize on their orders in case of short supply. We cannot
assure you that we would be able to find replacement suppliers on commercially reasonable terms or a timely basis.
Failure
to maintain the quality and safety of our products could have a material and adverse effect on our reputation, financial condition
and results of operations.
The
quality and safety of our products are critical to our success. We pay close attention to quality control, monitoring each step
in the process from procurement to production and from warehouse to delivery. Yet, maintaining consistent product quality depends
significantly on the effectiveness of our quality control system, which in turn depends on a number of factors, including but
not limited to the design of our quality control system, employee training to ensure that our employees adhere to and implement
our quality control policies and procedures and the effectiveness of monitoring any potential violation of our quality control
policies and procedures. There can be no assurance that our quality control system will always prove to be effective.
In
addition, the quality of the products or services provided by our suppliers or service providers is subject to factors beyond
our control, including the effectiveness and the efficiency of their quality control system, among others. There can be no assurance
that our suppliers or service providers may always be able to adopt appropriate quality control systems and meet our stringent
quality control requirements in respect of the products or services they provide. Any failure of our suppliers or service providers
to provide satisfactory products or services could harm our reputation and adversely impact our operations. See “Risk Factors—Illegal
actions or misconduct, or any failure by third-party suppliers or service providers to provide satisfactory products or services
could materially and adversely affect our business, reputation, financial condition and results of operations. In addition, we
may be unable to receive sufficient compensation from suppliers and service providers for the losses caused by them.”
If
customers become ill from food or beverage-borne illnesses, tampering, adulteration, contamination, mislabeling or other food
or beverage-safety issues, we could be forced to temporarily close some stores and/or be involved in related disputes or legal
proceedings. In addition, instances of food or beverage-safety issues, even those not involving us or our suppliers, could, by
resulting in negative publicity about us, China’s coffee industry or China’s food and beverage market in general,
adversely affect our reputation, financial condition and results of operations. A decrease in customer confidence in the safety
and quality of our products or any food safety issues could materially harm our business and results of operations. See “—Adverse
incidents or reports of food-safety issues, whether true or not, may harm our business.”
Any
significant disruption in our technology infrastructure or our failure to maintain the satisfactory performance, security and
integrity of our technology infrastructure would materially and adversely affect our business, reputation, financial condition
and results of operations.
The
proper functioning of our technology infrastructure is essential to our business. We rely on our technology to improve customer
engagement and our operational efficiency, among others. The risks we face in relation to the disruption of our technology infrastructure
include:
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we
may encounter problems when upgrading our technology infrastructure including our systems and software. The development, upgrades
and implementation of our technology infrastructure are complex processes. Issues not identified during pre-launch testing
of new services may only become evident when such services are made available to our entire customer base. Therefore, our
technology infrastructure may not function properly if we fail to detect or solve technical errors in a timely manner; and
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our
systems are potentially vulnerable to damage or interruption as a result of earthquakes, floods, fires, extreme temperatures,
power loss, telecommunications failures, technical error, computer viruses, hacking and similar events.
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We
face intense competition in China’s coffee industry and food and beverage sector in general. If we fail to compete effectively,
we may lose market share and customers, and our business, financial condition and results of operations may be materially and
adversely affected.
China’s
coffee industry is intensely competitive. We mainly compete with a number of coffee shop operators for customers. Our competitors
may have more financial, technical, marketing and other resources than we do and may be more experienced and able to devote greater
resources to the development, promotion and support of their business. Some competitors are well-established in China and any
defensive measures they take in response to our expansion could hinder our growth and adversely affect our sales and results of
operations. In addition, China’s coffee industry is subject to the entry of new and well-funded competitors.
Furthermore,
as we continue to increase our product offerings, we also expect to compete against other businesses such as convenience stores
as well as food and beverages operators with convenient locations. Increased competition may reduce our market share and profitability
and require us to increase our sales and marketing efforts and capital commitment in the future, which could negatively affect
our results of operations or force us to incur further losses. Although we have accumulated some and continuously growing our
customer base, there is no assurance that we will be able to continue to do so in the future against current or future competitors,
and such competitive pressures may have a material adverse effect on our business, financial condition and results of operations.
Our
unique coffee recipe depend on the continuous cooperation between the Company and Bright Sun. If we stop working with Bright Sun,
we will lose our rights to use the recipe and results of operations may be materially and adversely affected.
We
rely on our unique coffee recipe to make coffee capsule products that are favored by our customers. We entered into a coffee recipe
cooperation agreement (the “Recipe Agreement”) with Bright Sun, pursuant to which Bright Sun, the owner of such unique
coffee recipe, authorized us to exclusively use such recipe as long as we continue purchasing coffee beans from them and fully
perform other duties under the Recipe Agreement. The current Recipe Agreement is expiring on February 29, 2020 (“Expiration
Date”). Although the Recipe Agreement can be extended 60 days before the Expiration Date, there can be no assurance that
an extension will be made. Although we do not expect the Recipe Agreement is going to terminate in the near future, if we fail
to maintain the cooperation with Bright Sun for any reasons and lose the rights to use the coffee recipe, we will have to use
other recipes to make our coffee products, which may not be as popular as our current products. Accordingly, our results of operations
may be materially and adversely affected
Our
business is currently highly dependent on coffee and we may not be able to quickly identify new market opportunities, respond
to the industry trends and adapt to customer preferences.
The
growth of China’s coffee industry is affected by customer taste, preferences, perceptions and spending patterns. Since we
have generated, and expect to continue to generate a considerable amount of our revenues from the sale of coffee, a shift in customer
preferences away from coffee, the changes of spending pattern adversely affecting consumption of coffee, or the decrease or slow-growth
of coffee consumption in China would harm our business, more than if our revenues were generated from more diversified products.
We
have devoted significant resources to launch and promote new products from time to time to serve broader customer demand, adapt
to changes in market trends and shifts in customer taste and preferences, including the introduction of new coffee flavors and
non-coffee products. However, we may not be successful in developing innovative new products and our new products may not be favored
by customers or commercially successful. To the extent that we are not able to effectively gauge the direction of our key markets
and successfully identify, develop and promote new or improved products in the changing market, our financial results and our
competitive position will suffer.
We
may increasingly become a target for public scrutiny, including complaints to regulatory agencies, negative media coverage, and
malicious allegations, all of which could severely damage our reputation and materially and adversely affect our business and
prospects.
Publicity
about our business creates the possibility of heightened attention from the public, regulators and the media. Heightened regulatory
and public concerns over customer protection and customer safety issues may subject us to additional legal and social responsibilities
and increased scrutiny and negative publicity over these issues, due to our increasing transactions and continued business expansion.
Any negative report regarding our business, financial condition and results of operations could damage our brand image and severely
affect the sales of our products and possibly lead to product liability claims, litigations or damages. In addition, improper
behaviors or statements of our employees may result in substantial harm to our brand, reputation and operations. There is no assurance
that we would not become a target for regulatory or public scrutiny in the future or that scrutiny and public exposure would not
severely damage our reputation as well as our business and prospects.
We
have incurred significant costs on a variety of sales and marketing efforts and some sales and marketing campaigns and methods
may not be sustainable or may turn out to be ineffective.
We
have invested significantly in sales and marketing activities to promote our brand and our products and to deepen our relationships
with customers.
Our
sales and marketing activities may not be well received by our existing customers, and may not attract new customers as anticipated.
The evolving marketing landscape may require us to experiment with new marketing methods to keep pace with industry trends and
customer preferences. Failure to refine our existing marketing approaches or to introduce new marketing approaches in a cost-effective
manner could reduce our market share and negatively impact our results of operations. There is no assurance that we will be able
to recover the costs of our sales and marketing activities or that these activities will be effective in attracting new customers
and retaining existing customers.
We
may be unsuccessful in expanding our store network.
We
may not be able to expand our store network as we planned. The number and timing of the stores actually opened during any given
period are subject to a number of risks and uncertainties, including but not limited to our ability to:
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identify
suitable locations and secure leases on commercially reasonable terms;
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obtain
adequate funding for development and opening costs;
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obtain
the required licenses, permits and approvals;
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efficiently
manage our time and cost in relation to the design, decoration and pre-opening processes for each of our stores; and
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hire,
train and retain skilled employees.
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Any
factors listed above, either individually or in aggregate, might delay or fail our plan to increase the number of stores in desirable
locations at manageable cost levels. In addition, we may not be able to successfully operate our existing stores and may choose
to shut down certain stores from time to time.
Any
lack of requisite approvals, licenses or permits applicable to our business may have a material and adverse impact on our business,
financial condition and results of operations.
In
accordance with the relevant laws and regulations in jurisdictions in which we operate, we are required to maintain various approvals,
licenses and permits to operate our business, including but not limited to business license, food operation license, environmental
impact assessment filing and fire safety inspection. These approvals, licenses and permits are obtained upon satisfactory compliance
with, among other things, the applicable laws and regulations.
If
we fail to obtain the necessary licenses, permits and approvals, we may be subject to fines, confiscation of the gains derived
from the related stores or the suspension of operations of the related stores. We may also experience adverse publicity arising
from such non-compliance with government regulations that negatively impact our brand. We may experience difficulties or failures
in obtaining the necessary approvals, licenses and permits for new stores. If we fail to obtain the material licenses, our store
opening and expansion plan may be delayed. In addition, there can be no assurance that we will be able to obtain, renew and/or
convert all of the approvals, licenses and permits required for our existing business operations upon their expiration in a timely
manner or at all, which could adversely affect our business operations.
We
have recorded negative cash flows from operating activities historically and may have a current liabilities position in the future.
We
have experienced significant cash outflow from operating activities since our inception. We had net cash used in operating activities
of $332,772 and $7,517 for the years ended December 31, 2018 and December 31, 2017, respectively. The cost of continuing
operations could further reduce our cash position, and an increase in our net cash outflow from operating activities could adversely
affect our operations by reducing the amount of cash available to meet the cash needs for operating our business and to fund our
investments in our business expansion.
Our
future liquidity and ability to make additional capital investments necessary for our operations and business expansion will depend
primarily on our ability to maintain sufficient cash generated from operating activities and to obtain adequate external financing.
There can be no assurance that we will be able to renew existing bank facilities or obtain other sources of financing.
Failure
to comply with the terms of our indebtedness could result in acceleration of indebtedness, which could have an adverse effect
on our cash flow and liquidity.
We
may from time to time enter into credit facilities and debt financing arrangements containing financial and other covenants that
could, among other things, restrict our business and operations. If we breach any of these covenants, including by failing to
maintain certain financial ratios, our lenders may be entitled to accelerate our debt obligations. Any default under our credit
facility could require that we repay these loans prior to maturity as well as limit our ability to obtain additional financing,
which in turn may have a material adverse effect on our cash flow and liquidity.
From
time to time we may evaluate and potentially consummate strategic investments or acquisitions, which may turn out to be not successful
and adversely affect our operation and financial results.
To
complement our business, we may form strategic alliances or make strategic investments and acquisitions from time to time. We
may experience difficulties in integrating our operations with the newly invested or acquired businesses, implementing our strategies
or achieving expected levels of net revenues, profitability, productivity or other benefits. Therefore, we cannot assure you that
our investments or acquisitions will benefit our business strategy, generate sufficient net revenues to offset the associated
investment or acquisition costs, or otherwise result in the intended benefits.
We
have undertaken strategic partnerships which may not be successful. If our collaboration with any of our strategic partners where
our authorized stores are operating is terminated or curtailed, or if we are no longer able to benefit from the business collaborations
with our strategic partners, our business may be adversely affected.
Our
business has benefited from our collaborations with our strategic partners, including WeChat, in the areas such as mobile ordering
and payment and joint marketing. We cannot assure you that such alliances or partnerships will contribute to our business, and
we might not be able to maintain our cooperative relationships with our strategic partners and their respective affiliates in
the future. If the services provided by these strategic partners become limited, compromised, restricted, curtailed or less effective
or become more expensive or unavailable to us for any reason, our business may be materially and adversely affected. To the extent
we cannot maintain our cooperative relationships with any of these strategic partners, it may be very difficult for us to identify
other alternative partners, which may divert significant management attention from existing business operations and adversely
impact our daily operation and customer experience.
A
significant interruption in the operations of our third-party suppliers and service providers could potentially disrupt our operations.
We
have limited control over the operations of our third-party suppliers, service providers and other business partners and any significant
interruption in their operations may have an adverse impact on our operations. For example, a significant interruption in the
operations of our roasted coffee bean supplier’s roasting facilities could cause a shortage of coffee at our stores, a significant
interruption impacting our leased warehouses, whether as a result of a natural disaster, labor difficulties, fire or other causes,
could cause the shortage of our inventory. If we could not solve the impact of the interruptions of operations of our third-party
suppliers or service providers, our business operations and financial results may be materially and adversely affected.
Illegal
actions or misconduct, or any failure by third-party suppliers or service providers to provide satisfactory products or services
could materially and adversely affect our business, reputation, financial condition and results of operations. In addition, we
may be unable to receive sufficient compensation from suppliers and service providers for the losses caused by them.
Our
reputation and operation may be harmed by illegal or unsatisfactory actions taken by suppliers and service providers that are
outside of our control. For example, the failure of our raw material suppliers to ensure product quality or to comply with food
safety or other laws and regulations could interrupt our operations and result in claims against us, and any delay in delivery
of our products, damage to our products during the course of delivery and inappropriate actions taken by delivery riders of our
delivery service providers might cause customer complaints.
In
the event that we become subject to claims caused by actions taken by our suppliers or service providers, we may attempt to seek
compensation from the relevant suppliers or service providers. However, such compensation may be limited. If no claim can be asserted
against a supplier or service provider, or amounts that we claim cannot be fully recovered from the supplier or service provider,
we may be required to bear such losses and compensation at our own costs. This could have a material and adverse effect on our
business, financial condition and results of operations.
We
face the risk of fluctuations in the cost, availability and quality of our raw materials, which could adversely affect our results
of operations.
The
cost, availability and quality of our principal raw material, coffee beans, coffee condiments, such as dairy products and syrup
are important to our operations. If the cost of raw materials increases due to large market price fluctuation or due to any other
reason, our business and results of operations could be adversely affected. In addition, as coffee beans and most of our coffee
condiments have relatively short shelf life, frequent and timely supply of these products are essential to our operations. Lack
of availability of these products, whether due to shortages in supply, delays or interruptions in processing, failure of timely
delivery or otherwise, could interrupt our operations and adversely affect our financial results.
Uncertainties
relating to the growth of China’s coffee industry could adversely affect our revenues and business prospects.
Our
business is affected by the development of China’s coffee industry. The demand for our coffee items and our future results
of operations will depend on numerous factors affecting the development of the China’s coffee industry, such as governmental
regulations and policies over this industry, investments in this industry and drinking culture and hobby of Chinese consumers,
and some of them are completely beyond our control.
A
decline in the popularity of coffee in general, especially freshly brewed coffee, or any failure by us to adapt our strategies
in response to trends in China’s coffee industry, may adversely affect our results of operations and business prospects.
Adverse
public or medical opinion about the health effects of our products may harm our business.
Some
of our products contain caffeine, dairy products, sugar and other active compounds, the health effects of which are not fully
understood. The excessive consumption of these compounds may result in adverse health effects and have caused increasing public
awareness. For example, a number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased
heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health
effects. Unfavorable reports on the health effects of caffeine or other compounds of our products could significantly reduce the
sales of our products. Also, we could become subject to litigation relating to the existence of such compounds in our products;
any such litigation could be costly and could divert management attention.
Adverse
incidents or reports of food-safety issues, whether true or not, may harm our business.
Instances
or reports of food-safety issues, such as food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling,
either during growing, manufacturing, packaging, storing or preparation, whether true or not, have in the past severely injured
the reputations of companies in China’s food and beverage market and could affect us as well. Product safety or quality
issues, actual or perceived, or allegations of product contamination, even when false or unfounded, could tarnish the image of
our brand and may cause customers to choose other products. Such issues could negatively affect our reputation, results of operations
and financial performance.
Our
success depends on the continuing efforts of our key management and experienced and capable personnel as well as our ability to
recruit new talents. If we fail to hire, train, retain or motivate our staff, our business may suffer.
Our
future success is significantly dependent upon the continued service of our key management as well as experienced and capable
personnel generally. If we lose the services of any member of key management, we may not be able to locate suitable or qualified
replacements, and may incur additional expenses to recruit and train new staff, which could severely disrupt our business and
growth. If any of our key management joins a competitor or forms a competing business, we may lose customers, know-how and
key professionals and staff members.
Our
rapid growth also requires us to hire, train, and retain a wide range of talents who can adapt to a dynamic, competitive and challenging
business environment and are capable of helping us conduct effective marketing, innovate new products, and develop technological
capabilities. We will need to continue to attract, train and retain talents at all levels, such as skillful baristas, as we expand
our business and operations. We may need to offer attractive compensation and other benefits package, including share-based compensation,
to attract and retain them. We also need to provide our employees with sufficient training to help them to realize their career
development and grow with us. Any failure to attract, train, retain or motivate key management and experienced and capable personnel
could severely disrupt our business and growth.
Overall
tightening of the labor market, increases in labor costs or any possible labor unrest may adversely affect our business and results
of operations.
Our
business requires a substantial number of personnel. Any failure to retain stable and dedicated labor by us may lead to disruption
to our business operations. Although we have not experienced any labor shortage to date, we have observed an overall tightening
and increasingly competitive labor market. We have experienced, and expect to continue to experience, increases in labor costs
due to increases in salary, social benefits and employee headcount. We compete with other companies in our industry and other
labor-intensive industries for labor, and we may not be able to offer competitive remuneration and benefits compared to them.
If we are unable to manage and control our labor costs, our business, financial condition and results of operations may be materially
and adversely affected.
If
we fail to adopt new technologies to evolving customer needs or emerging industry standards, our business may be materially and
adversely affected.
To
remain competitive, we must continue to stay abreast of the constantly evolving industry trends and to enhance and improve our
technology accordingly. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies
useful in our business. There can be no assurance that we will be able to use new technologies effectively or adapt our future
mobile apps to meet customer requirements. If we are unable to adapt in a cost-effective and timely manner in response to changing
market conditions or customer preferences, whether for technical, legal, financial or other reasons, our business may be materially
and adversely affected.
Security
breaches and attacks against our technology systems, and any potentially resulting breach or failure to otherwise protect confidential
and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely
affect our financial condition and results of operations.
Although
we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect
or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software,
break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize
the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity
measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification
of customer information, or a denial of service or other interruption to our business operations. As techniques used to obtain
unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party
service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.
We
have in the past and are likely again in the future to be subject to these types of attacks, although to date no such attack has
resulted in any material damages or remediation costs. If we are unable to avert these attacks and security breaches, we could
be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial lost
sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly
evolving types of cyber-attacks. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including
costs to deploy additional personnel and network protection technologies, train employees and engage third-party experts and consultants.
Unexpected
termination of leases, failure to renew the lease of our existing premises or to renew such leases at acceptable terms could materially
and adversely affect our business.
We
lease the premises for all of our stores. Generally, lessors may terminate our lease agreements unilaterally upon advance notice.
In addition, the PRC government has the statutory power to acquire any land in the PRC. As a result, we may be subject to compulsory
acquisition, closure or demolition of any of the properties on which our stores are situated. Although we may receive liquidated
damages or compensation if our leases are terminated unexpectedly, we may be forced to suspend operations of the relevant store
and divert management attention, time and costs to find a new site and relocate our store, which will negatively affect our business
and results of operations.
We
generally enter into leases of approximately one to five years with an option to renew for our stores. Rent for our leases is
typically fixed amounts and subject to annual or biennially incremental increases as stipulated in the lease agreements. We cannot
assure you that we would be able to renew the relevant lease agreements without substantial additional cost or increase in the
rental cost payable by us. If a lease agreement is renewed at a rent substantially higher than the current rate, or currently
existing favorable terms granted by the lessor are not extended, our business and results of operations may be materially and
adversely affected. If we are unable to renew the leases for our store sites, we will have to close or relocate the store, which
could subject us to decoration and other costs and risks, and loss of existing customers, and could have a material and adverse
effect on our business and results of operations. In addition, the relocated store may not perform as well as the existing store.
We
may experience significant liability claims or complaints from customers, or adverse publicity involving our products, our services
or our stores.
We
face an inherent risk of liability claims or complaints from our customers. We take our customers’ complaints seriously
and endeavor to reduce such complaints by implementing various remedial measures. Nevertheless, we cannot assure you that we can
successfully prevent or address all customer complaints.
Any
complaints or claims against us, even if meritless and unsuccessful, may divert management attention and other resources from
our business and adversely affect our business and operations. Customers may lose confidence in us and our brand, which may adversely
affect our business and results of operations. Furthermore, negative publicity including but not limited to negative online reviews
on social media and crowd-sourced review platforms, industry findings or media reports related to food quality, safety, public
health concerns, illness, injury or government, whether or not accurate, and whether or not concerning our products, can adversely
affect our business, results of operations and reputation.
We,
our directors, management and employees may be subject to litigation and regulatory investigations and proceedings, such as claiming
in relation to food safety, commercial, labor, employment, antitrust or securities matters, and may not always be successful in
defending ourselves against such claims or proceedings.
We
face potential liability, expenses for legal claims and harm due to our business nature. For example, customers could assert legal
claims against us in connection with personal injuries related to food poisoning or tampering. The PRC government, media outlets
and public advocacy groups have been increasingly focused on customer protection in recent years. Selling of defective products
may expose us to liabilities associated with customer protection laws. Sellers are responsible for compensation on customer’s
loss even if the contamination of food is not caused by the sellers. Thus, we may also be held liable if our suppliers or other
business partners fail to comply with applicable food-safety related rules and regulations. Though we can ask the responsible
parties for indemnity after that, our reputation could still be adversely affected. In addition, our directors, management and
employees may from time to time be subject to litigation and regulatory investigations and proceedings or otherwise face potential
liability and expense in relation to commercial, labor, employment, antitrust, securities or other matters, which could adversely
affect our reputation and results of operations.
Post
the Reverse Merger, we may face additional exposure to claims and lawsuits. These claims could divert management time and attention
away from our business and result in significant costs to investigate and defend, regardless of the merits of the claims. In some
instances, we may elect or be forced to pay substantial damages if we are unsuccessful in our efforts to defend against these
claims, which could harm 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.
We
cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate intellectual
property rights held by third parties. We have not but in the future may be, subject to legal proceedings and claims relating
to the intellectual property rights of others. There could also be existing intellectual property of which we are not aware that
our products may inadvertently infringe. We cannot assure you that holders of intellectual property purportedly relating to some
aspect of our technology platform or business, if any such holders exist, would not seek to enforce such intellectual property
against us in China, the United States or any other jurisdictions. If we are 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. In addition, we may incur significant
expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against
these infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result
in significant monetary liabilities and may materially disrupt our business and operations by restricting or prohibiting our use
of the intellectual property in question, and our business, financial position 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, software copyrights, copyright of works, domain names, know-how, proprietary technologies, and similar
intellectual property as critical to our success. We may become an attractive target to intellectual property attacks in the future
with the increasing recognition of our brand. Any of our intellectual property rights could be challenged, invalidated, circumvented
or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition,
there can be no assurance that (i) our pending applications for intellectual property rights will be approved, (ii) all
of our intellectual property rights will be adequately protected, or (iii) our intellectual property rights will not be challenged
by third parties or found by a judicial authority to be invalid or unenforceable.
We
are subject to regulations, and future regulations may impose additional requirements and obligations on our business or otherwise
materially and adversely affect our business, reputation, financial condition and results of operations.
The
industries in which we operate are highly regulated. As China’s coffee industry as well as China’s food and beverage
market in general is evolving rapidly and the PRC government is very concerned about customer protection, new laws and regulations
may be adapted to address new issues that arise from time to time and to impose additional restrictions on our current business.
As
we continue to grow in scale and significance, we expect to face increased scrutiny, which will, at a minimum, result in our having
to increase our investment in compliance and related capabilities and systems. The increasing sophistication and development of
our customer base will also increase the need for higher standards of customer protection, privacy protection and dispute management.
Any increased involvement in inquiries or investigations could result in significantly higher legal and other costs and diversion
of management and other resources, as well as negative publicity, which could materially and adversely affect our business, reputation,
financial condition and results of operations.
If
we fail to implement and maintain an effective system of internal controls to remediate our material weaknesses over financial
reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and
investor confidence and the market price of the common stock may be materially and adversely affected.
Prior
to the Reverse Merger, Well Benefit and its subsidiaries have been private companies with limited accounting and financial reporting
personnel and other resources with which it addresses its internal control over financial reporting. In connection with the audit
of our consolidated financial statements as of and for the year ended December 31, 2018, we and our independent registered
public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the
standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, a “material weakness” is a
deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The
material weaknesses identified are our company’s lack of sufficient accounting and financial reporting personnel with requisite
knowledge and experience in application of U.S. GAAP and the Securities and Exchange Commission, or the SEC, rules, and lack
of financial reporting policies and procedures that are commensurate with U.S. GAAP and the SEC reporting requirements. We
are in the process of implementing a number of measures to address the material weaknesses and deficiencies that have been identified.
However, we cannot assure you that these measures may fully address the material weaknesses and deficiencies in our internal control
over financial reporting or that we may conclude that they have been fully remediated.
If
we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and
adversely affected.
Our
inventories are mostly coffee beans and coffee condiments with short shelf life, which require us to manage our inventory effectively.
We depend on our demand forecasts for various kinds of raw materials and pre-made products to make purchase decisions and to manage
our inventory. Such demand, however, can change significantly between the time inventory is ordered and the date by which we hope
to sell it. Demand may be affected by seasonality, new product launches, pricing and discounts, product defects, changes in customer
spending patterns, changes in customer tastes and other factors, and our customers may not order products in the quantities that
we expect. In addition, when we begin selling a new product, it may be difficult to establish supplier relationships, determine
appropriate product selection, and accurately forecast demand. The acquisition of certain types of inventory may require significant
lead time and prepayment and they may not be returnable.
Furthermore,
as we plan to continue expanding our product offerings, we expect to include a wider variety of products and raw materials in
our inventory, which will make it more challenging for us to manage our inventory and logistics effectively. We cannot guarantee
that our inventory levels will be able to meet the demands of customers, which may adversely affect our sales. We also cannot
guarantee that all of our inventories can be consumed within its shelf life. If we fail to manage our inventory effectively, we
may be subject to a heightened risk of inventory obsolescence, a decline in inventory value, and significant inventory write-downs
or write-offs. Any of the above may materially and adversely affect our results of operations and financial condition. On the
other hand, if we underestimate demand for our products, or if our suppliers fail to supply quality raw materials and pre-made
products in a timely manner, we may experience inventory shortages, which might result in diminished brand loyalty and lost revenues,
any of which could harm our business and reputation.
The
growth and profitability of our business depend on the level of customer demand and discretionary spending in China. A severe
or prolonged downturn in China’s economy could materially and adversely affect our business, financial condition and results
of operations.
China’s
coffee industry as well as China’s food and beverage market in general is affected by macro-economic factors, including
changes in international, national, regional and local economic conditions, employment levels, customer demand and discretionary
spending. All of our stores are located in China and accordingly, our results of operations are affected by the macro-economic
conditions in China. Any deterioration of the PRC economy, decrease in disposable customer income and fear of a recession may
lead to a reduction of customer demand and average spending per customer at our stores, which could materially and adversely affect
our business, financial condition and results of operations. Moreover, the occurrence of a financial crisis, sovereign debt crisis,
banking crisis or other disruptions in the global financial markets may have a material and adverse impact on our operating results.
We
face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our business,
financial condition and results of operations.
We
are vulnerable to natural disasters, health epidemics, and other calamities. Any of such occurrences could cause severe disruption
to the daily operations of us, and may even require a temporary closure of facilities and logistics delivery networks, which may
disrupt our business operations and adversely affect our results of operations. In addition, our results of operations could be
adversely affected to the extent that any of these catastrophic events harm the Chinese economy in general.
We
have no business liability or disruption insurance, which could expose us to significant costs and business disruption.
The
insurance industry in China is still at an early stage of development, and insurance companies in China currently offer limited
business-related insurance products. We have no business liability or disruption insurance to cover our operations. Any uninsured
risks may result in substantial costs and the diversion of resources, which could adversely affect our results of operations and
financial condition.
Our
business is subject to seasonal fluctuations and unexpected interruptions.
We
experience seasonality in our business. We generally experience fewer purchase orders during holiday seasons, such as the Chinese
New Year holidays. Our financial condition and results of operations for future quarters may continue to fluctuate and our historical
quarterly results may not be comparable to future quarters. As a result, the trading price of the common stock may fluctuate from
time to time due to seasonality.
Risks
Relating 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 operations.
Substantially
all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and
prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese
economy differs from the economies of most developed countries in many respects, including the level 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 past decades, growth has been uneven, both geographically and among
various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government
or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments
could adversely affect our business and operating results, lead to a reduction in demand for our products and adversely affect
our competitive position. 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 adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which
may adversely affect our business and operating results.
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 since then has significantly enhanced the protections 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.
Furthermore,
the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis
or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules
until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting
in substantial costs and diversion of resources and management attention.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against
us or our management named in this prospectus based on foreign laws.
We
conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all
our senior executive officers reside within China for a significant portion of the time and most are PRC nationals. As a result,
it may be difficult for our shareholders to effect service of process upon us or those persons inside China. In addition, China
does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States
of America and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any
of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.
We
may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements
we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse
effect on our ability to conduct our business.
We
are a Nevada holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiaries
for our cash requirements, including for services of any debt we may incur.
Our
PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit
our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries are 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 our PRC subsidiaries as a Foreign Invested Enterprise, or FIE, 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 its
discretion. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in
the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation
on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders 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.
In
addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be
applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according
to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC
resident enterprises are incorporated.
We
may be subject to liability for placing advertisements with content that is deemed inappropriate or misleading under PRC laws.
PRC
laws and regulations prohibit advertising companies from producing, distributing or publishing any advertisement with content
that violates PRC laws and regulations, impairs the national dignity of the PRC, involves designs of the PRC national flag, national
emblem or national anthem or the music of the national anthem, is considered reactionary, obscene, superstitious or absurd, is
fraudulent, or disparages similar products. We may be subject to claims by customers misled by information on our website or other
portals where we put our advertisements on. We may not be able to recover our losses from advertisers by enforcing the indemnification
provisions in the contracts, which may result us in diverting management’s time and other resources from our business and
operations to defend against these infringement claims. As a result, our business, financial condition and results of operations
could be materially and adversely affected.
Our
employment practices may be adversely impacted under the labor contract law of the PRC.
The
PRC National People’s Congress promulgated the Labor Contract Law which became effective on January 1, 2008 and was
amended on December 28, 2012, and the State Council promulgated implementing rules for the labor contract law on September 18,
2008. The labor contract law and the implementing rules impose requirements concerning, among others, the execution of written
contracts between employers and employees, the time limits for probationary periods, and the length of employment contracts. The
interpretation and implementation of these regulations are still evolving, our employment practices may violate the labor contract
law and related regulations and we could be subject to penalties, fines or legal fees as a result. If we are subject to severe
penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition
and results of operations may be adversely affected.
We
may be subject to additional contributions of social insurance and housing fund and late payments and fines imposed by relevant
governmental authorities.
In
accordance with the PRC Social Insurance Law and the Regulations on the Administration of Housing Fund and other relevant laws
and regulations, China establishes a social insurance system and other employee benefits including basic pension insurance, basic
medical insurance, work-related injury insurance, unemployment insurance, maternity insurance, housing fund, and a handicapped
employment security fund, or collectively the Employee Benefits. An employer shall pay the Employee Benefits for its employees
in accordance with the rates provided under relevant regulations and shall withhold the social insurance and other Employee Benefits
that should be assumed by the employees. For example, an employer that has not made social insurance contributions at a rate and
based on an amount prescribed by the law, or at all, may be ordered to rectify the non-compliance and pay the required contributions
within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be. If the employer
still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to
a fine ranging from one to three times of the amount overdue.
Under
the Social Insurance Law and the Regulations on the Administration of Housing Fund, PRC subsidiaries shall register with local
social insurance agencies and register with applicable housing fund management centers and establish a special housing fund account
in an entrusted bank. Both PRC subsidiaries and their employees are required to contribute to the Employee Benefits.
As
of the date of this prospectus, some of our PRC subsidiaries are in the process of completing the social insurance registration
and the housing fund registration, and we have not made adequate contributions to Employee Benefits for some of our employees.
We have recorded accruals for the estimated underpaid amounts of Employee Benefits in our financial statements. As of the date
of this prospectus, we have not received any notice from the relevant government authorities or any claim or request from these
employees in this regard. However, we cannot assure you that the relevant government authorities will not require us to pay the
outstanding amount and impose late fees or fines on us. If we fail to make the outstanding Employee Benefit contributions within
the prescribed time frame, we may be subject to a fine of up to three times the amount of the overdue payment. If we are otherwise
subject to investigations related to non-compliance with labor laws and are imposed severe penalties or incur significant legal
fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may
be adversely affected.
Non-compliance
with labor-related laws and regulations of the PRC may have an adverse impact on our financial condition and results of operation.
We
have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying
various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment
insurance and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor
Contract Law, or the Labor Contract Law, that became effective in January 2008 and its implementing rules that became effective
in September 2008 and was amended in July 2013, employers are subject to stricter requirements in terms of signing labor contracts,
minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts.
In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor
Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner,
which could adversely affect our business and results of operations.. We believe our current practice complies with the Labor
Contract Law and its amendments. However, the relevant governmental authorities may take a different view and impose fines on
us.
As
the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our
employment practice does not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes
or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide
additional compensation to our employees and our business, financial condition and results of operations could be materially and
adversely affected.
The
custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities,
or misappropriate or misuse these assets.
Under
PRC law, legal documents for corporate transactions, including agreements and contracts 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 relevant PRC
industry and commerce authorities.
In
order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops
and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application
through our office automation system and the application will be verified and approved by authorized employees in accordance with
our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally
have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees,
the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could
abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries.
If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever
reason, we could experience disruption to our normal business operations, and we may have to take corporate or legal action, which
could involve significant time and resources to resolve and divert management from our operations.
Fluctuations
in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes
in political and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict
how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar
may change again. All of our revenues and substantially all of our costs are denominated in Renminbi. We are a holding company
and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi
may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into
U.S. dollars, and the value of, and any dividends payable on, the common stock in U.S. dollars. To the extent that we need to
convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose
of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount.
Governmental
control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our
holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we
may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions,
interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior
approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without
prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our
company. However, approval from or registration with appropriate government authorities is required where Renminbi 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. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to
pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure
payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign
currencies for current account transactions in the future. 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,
including holders of the Common stock.
Certain
PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among
other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules,
adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could
make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other
things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control
of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions
on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008, are triggered. Moreover,
the Anti-Monopoly Law promulgated by the Standing Committee of the NPC which became effective in 2008 requires that transactions
which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they
can be completed. In addition, PRC national security review rules which became effective in September 2011 require acquisitions
by foreign investors of PRC companies engaged in military-related or certain other industries that are crucial to national security
be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that
are complementary to our business and operations.
Complying
with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes,
including obtaining approval or clearance from the MOFCOM, 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 the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries,
limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely
affect us.
In
July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice
on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment
Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular
37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its
local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our
shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
Under
SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments
in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches.
In addition, any PRC resident who is a direct or indirect shareholder of an SPV is required to update its filed registration with
the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China
is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder
of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV
in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation
to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13,
2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment,
or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration
of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37,
will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations
under the supervision of SAFE.
Some
of our shareholders that we are aware of are subject to SAFE regulations, and we expect all of these shareholders will have completed
all necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. We cannot assure you,
however, that all of these individuals may continue to make required filings or updates in a timely manner, or at all. We can
provide no assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct
or indirect interest in our company. Any failure or inability by such individuals to comply with SAFE regulations may subject
us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiaries’
ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions
or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and
adversely affected.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly
evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent
review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated
borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire
a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain
the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This
may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
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 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 subsidiaries of such overseas-listed company, and complete certain
other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise
or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who
are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options
will be subject to these regulations when our company becomes an overseas-listed company upon completion of the Reverse Merger.
Failure to complete the SAFE registrations may subject them to fines and legal sanctions, there may be additional restrictions
on the ability of them to exercise their stock options or remit proceeds gained from the sale of their stock into the PRC. We
also face regulatory uncertainties that could restrict our ability to adopt incentive plans for our directors, executive officers
and employees under PRC law.
If
we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable
tax consequences to us and our non-PRC shareholders and the common stock holders.
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “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 and overall management over the business, productions, personnel,
accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT
Circular 82, which provides certain specific criteria for determining whether the “de facto management body”
of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular applies only to offshore
enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the
criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body”
text should be applied in determining the tax resident status of all offshore enterprises. According to SAT 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 our company is 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 our company is a PRC resident enterprise for enterprise
income tax purposes, we would be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we
would be required to withhold a 10% tax from dividends we pay to our shareholders that are non-resident enterprises. In addition,
non-resident enterprise shareholders (including the common stock holders) may be subject to PRC tax on gains realized on the sale
or other disposition of the common stock, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed
a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including the common stock holders) and any
gain realized on the transfer of the common stock or ordinary shares by such shareholders may be subject to PRC tax at a rate
of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty,
but 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 common stock.
We
face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On
February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of
Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving
the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin
7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities
market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay
for the transfer) of taxable assets, as such persons need to determine whether their transactions are subject to these rules and
whether any withholding obligation applies.
On
October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding
of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT
Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
Where
a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company,
which is an “Indirect Transfer”, the non-resident enterprise as either transferor or transferee, or the PRC entity
that directly owns the 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. As a result, gains derived
from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who pays 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. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold
the taxes and the transferor fails to pay the taxes.
We
face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets
are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may
be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding
obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares
in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing
under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin
7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars,
or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial
condition and results of operations.
Regulation
and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject
us to liability for information displayed on our online shopping mall.
The
PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet.
Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the
internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary,
obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses
to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held
liable for such censored information displayed on or linked to the websites. If our online shopping mall is found to be in violation
of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.
Risks
Relating to Ownership of Our Common Stock
The
market price of our common stock may be volatile or may decline regardless of our operating performance.
The
market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control,
including:
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or anticipated fluctuations in our revenue and other operating results;
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financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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actions
of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates or the expectations of investors;
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announcements
by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships,
joint ventures, or capital commitments;
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price
and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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lawsuits
threatened or filed against us; and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action
litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us
to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
Short
sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a
third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to
profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement
shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short
seller’s interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of,
opinions or characterizations regarding the relevant issuer, its business prospects and similar matters calculated to or which
may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short.
Issuers whose securities have historically had limited trading volumes and/or have been susceptible to relatively high volatility
levels can be particularly vulnerable to such short seller attacks.
The
publication of any such commentary regarding us by a short seller may bring about a temporary, or possibly long term, decline
in the market price of our common stock. No assurances can be made that we will not become a target of such commentary and declines
in the market price of our common stock will not occur in the future, in connection with such commentary by short sellers or otherwise
We
do not intend to pay dividends for the foreseeable future.
We
currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to
declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common
stock if the market price of our common stock increases.
Shares
eligible for future sale may adversely affect the market price of our common stock, as the future sale of certain amount of outstanding
common stock in the public marketplace could reduce the price of our common stock.
The
market price of our shares could decline as a result of sales of our shares in the public market, or the perception that these
sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our
common stock.
If
we continue to fail to maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent fraud.
The
SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management
report on such company’s internal controls over financial reporting in its annual report, which contains management’s
assessment of the effectiveness of internal controls over financial reporting.
As
of June 30, 2019, we did not maintain effective controls over financial statement disclosure due to certain material weaknesses
disclosed in our annual report on Form 10-K filed with the SEC on October 15. Our reporting obligations as a public company place
a significant strain on our management and operational and financial resources and systems. Effective internal controls, particularly
those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent
fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting may result in the
loss of investor confidence in the reliability of our financial statements, which in turn may harm our business and negatively
impact the trading price of our stock. Furthermore, we anticipate that we will continue to incur considerable costs and use significant
management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
There
is a limited market for our common stock, which may make it difficult for holders of our common stock to sell their stock.
As
of the date of this prospectus, our common stock was quoted on the OTC Pink under the symbol “GLBD”. There is a limited
trading market for our common stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop
for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may
be able to sell our common stock. Further, many brokerage firms will not process transactions involving low price stocks, especially
those that come within the definition of a “penny stock.” If we cease to be quoted, holders of our common stock may
find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our common stock, and the market
value of our common stock would likely decline.
We
are subject to the penny stock rules which will make shares of our common stock more difficult to sell.
We
are subject now and in the future to the SEC’s “penny stock” rules if our shares of common stock sell below
$5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require
broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks
and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements
showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction
and must be given to the customer in writing before or with the customer’s confirmation.
In
addition, the penny stock rules require that prior to a transaction, the broker dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The
penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common
stock. As long as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock
may find it more difficult to sell their securities.
If
a more active trading market for our common stock develops, the market price of our common stock is likely to be highly volatile
and subject to wide fluctuations, and holders of our common stock may be unable to sell their shares at or above the price at
which they were acquired.
The
market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number
of factors that are beyond our control, including:
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quarterly
variations in our revenues and operating expenses;
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developments
in the financial markets and worldwide economies;
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announcements
of innovations or new products or services by us or our competitors;
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announcements
by the PRC government relating to regulations that govern our industry;
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significant
sales of our common stock or other securities in the open market;
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variations
in interest rates;
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changes
in the market valuations of other comparable companies; and
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in accounting principles.
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addition, the market for Chinese companies that went public in the U.S. through reverse mergers, such as ours, is currently extremely
volatile primarily due to recent allegations and, in some instances, findings of fraud among some of these companies. If a stockholder
were to file a class action suit against us following a period of volatility in the price of our securities, we would incur substantial
legal fees and our management’s attention and resources would be diverted from operating our business to responding to such
litigation, which may harm our business and reputation.
The
rights of the holders of our common stock may be impaired by the potential issuance of preferred stock.
As
of the date of this prospectus, there are 9,989,886,988 shares of preferred stock authorized. Our Board of Directors has the right
to create a new series of preferred stock. As a result, the Board of Directors may, without stockholder approval, issue preferred
stock with voting, dividend, conversion, liquidation or other rights that may adversely affect the voting power and equity interest
of the holders of our common stock. Although we have no present intention to issue any additional shares of preferred stock or
to create any new series of preferred stock, we may issue such shares in the future.
Shares
of our common stock that have not been registered under federal securities laws are subject to resale restrictions imposed by
Rule 144, including those set forth in Rule 144(i) which apply to a former “shell company.”
Our
stock has limited trading volume. Many of our securities will be subject to restrictions on transfer under the Securities Act
and may not be transferred in the absence of registration or the availability of a resale exemption. In particular, in the absence
of registration, such securities cannot be resold to the public until certain requirements under Rule 144 promulgated under the
Securities Act have been satisfied, including certain holding period requirements and other requirements applicable to companies
that have previously been a shell company. An investor may be unable to sell such securities at the time or at the price or upon
such other terms and conditions as the investor desires, and the terms of such sale may be less favorable than might be obtainable
because of a limited market, which may never develop.
Until
October 2019, we were deemed a “shell company” under applicable SEC rules and regulations because we had no or nominal
operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any
amount of cash and cash equivalents and nominal other assets. Pursuant to Rule 144 promulgated under the Securities Act, sales
of the securities of a former shell company, such as us, under that rule are not permitted (i) until at least 12 months have elapsed
from the date on which our Current Report on Form 8-K reflecting our status as a non-shell company, was filed with the SEC; and
(ii) unless at the time of a proposed sale, we are subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act and have filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable,
during the preceding 12 months (or for such shorter period that we were required to file such reports and materials), other than
Form 8-K reports. We are currently subject to the reporting rules under the Exchange Act expect to remain subject to the reporting
requirements under the Exchange Act. However, even then, many of our stockholders may be forced to hold their shares of our common
stock for at least that 12-month period before they are eligible to sell those shares, and even after that 12-month period, sales
may not be made under Rule 144 unless we are in compliance with other requirements of Rule 144 including paragraph (i) that applies
specifically to a former shell company. Further, it will be more difficult for us to raise funds to support our operations through
the sale of debt or equity securities unless we agree to register such securities under the Securities Act, which could cause
us to expend significant time and cash resources. Additionally, our previous status as a shell company could also limit our use
of our securities to pay for any acquisitions we may seek to pursue in the future (although none are currently planned). The lack
of liquidity of our securities as a result of the inability to sell under Rule 144 for a longer period of time than a non-former
shell company could cause the market price of our securities to decline or make it difficult to establish a trading market in
our shares.
BUSINESS
Overview
We are a holding company
that, through our wholly-owned subsidiaries, Well Benefit, a British Virgin Islands company, Agility International Holding LTD
(“Agility”), a Hong Kong company, Shangshang (Guangzhou) Industrial Investment Limited Company (“Shangshang”),
a PRC company and Dongguan Zhenghao Industrial Investment Company Limited (“Zhenghao”), a PRC company, provide healthy
coffee and beverage products with high quality, high affordability and high convenience to our customers. In 2018, we established
our health beverage band – “Ka Su Le”, and as of the date of this prospectus, we have launched seven stores in
Guangdong Province, Jilin Province and Chongqing City, including two stores owned by ourselves and five Brand Stores to which we
granted rights to use our brand. We are currently promoting our products and enhancing our brand recognition by working with and
placing our coffee machines free of charge in various stores, including grocery stores, bakeries, super markets, shopping malls
and other places with significant customer volume and high demand of coffee. As of the date of this prospectus, we have placed
our coffee machines into over 80 stores in Guangdong Province, over 60 stores in Jilin Province and over 150 stores in Chongqing
City..
We are headquartered
in Guangdong-Hong Kong-Macao Great Bay Area, one of the key strategic areas in China. In 2003, Mainland China, Hong Kong and Macao
entered into a Closer Economic Partnership Arrangement with the goal to enhance the inter-connectivity in these three areas. We
believe those supportive plans have given and will continue to give rise to rich sources, including tax benefits and fast custom
clearance, allowing us to grow and develop our business in these areas of China.
China’s coffee
market is highly underpenetrated. Inconsistent qualities, high prices and inconvenience have hampered the growth of the coffee
market in China. Coffee and healthcare industries are developing very fast in China. We believe that by providing high-quality
and healthy coffee and other beverages at an affordable price we will benefit our customers and drive the mass market coffee consumption
in China.
Corporate History and Structure
We were incorporated
in the State of Texas on July 13, 2010 and we had been engaged principally in the distribution of a monthly journal prior to our
change in control consummated on June 2, 2018.
On May 21, 2018, Leung
Kwok Hei, Chi Siu On, Leung Siu Hung and Chan Hiu (collectively, the “Purchasers”) and various shareholders (the “Sellers”)
of the Company entered into a share purchase agreement, pursuant which the Sellers transferred to the Purchasers an aggregate of
4,492,000 shares of common stock (the “Common Stock”) of the Company (such transaction, the “Share Purchase”).
The Share Purchase was closed on June 1, 2018.
At the closing of the
Share Purchase, there was a change in our board and executive officers. Ms. Jia Tian, the sole director, President, Treasurer and
Secretary of the Company appointed Leung Kwok Hei to serve as a director and Chief Executive Officer and Chan Hiu as a director
and Chief Financial Officer of the Company, with such appointment effective on June 1, 2018. Ms. Jia Tian resigned from all her
positions with the Company effective on June 1, 2018.
On October 30, 2019,
we acquired all the issued and outstanding shares of Well Benefit pursuant to the Share Exchange Agreement in exchange for 252,874,025
of our restricted shares of common stock. As a result of the share exchange, Well Benefit became our wholly-owned subsidiary.
The following diagram
illustrates our current corporate structure:
Industry Overview
China’s rising
urbanization and disposable income have been and are expected to continue to be the main growth engines of its coffee industry,
and more and more people in China have begun to consume more coffee in their daily lives. However, compared to the developed countries,
including other East Asian countries and regions, China’s coffee market is still highly underdeveloped. The average coffee
consumption has been relatively low and mostly dominated by non-freshly brewed coffee. Despite the increased demand from Chinese
consumers, inconsistent qualities, high prices and inconvenience are the key pain points that hamper the growth of China’s
coffee consumption. With these pain points being gradually addressed, we expect coffee consumption to accelerate in China.
China’s coffee
market has been undergoing significant growth in recent years. According to the Frost & Sullivan Report, the number of cups
of coffee consumed in China has grown from 4.4 billion cups in 2013 (3.2 cups per capita) to 8.7 billion cups in 2018 (6.2 cups
per capita), and is expected to further increase to 15.5 billion cups in 2023 (10.8 cups per capita). In terms of retail sales,
the market has grown from RMB15.6 billion in 2013 to RMB56.9 billion in 2018, and is expected to reach RMB180.6 billion in 2023,
representing a CAGR of 26.0% from 2018 to 2023.
China’s coffee
market size(1)
(1) in terms of retail sales
The capsule beverage
market in China, including the capsule coffee market, is far from being saturated and offers tremendous business opportunity due
in part to the growth potential of coffee machine sales and the evolving tastes of Chinese customers towards more regular and sophisticated
coffee consumption. According to the Statista Report, China ranked number ten with 19.8 billion US dollars, where the top three
countries, which is the United States, Brazil and Japan, that has 125.1 billion, 84.1 billion and 80.6 billion US dollars. According
to the United Nations Population Division, in 2015 China had 14 billion people where the population of the United States is 0.3
billion. We would love to see people enjoying coffee in this tremendous market.
Although a giant brand
of instant coffee is dominating the market in China, based on the report of the Euromonitor International, Hot Drinks, 2016 Research
Edition, the market size of instant coffee in China has shown declination. According to International Coffee Organization (ICO),
although the instant coffee market in China is still taking the lead, the rate of coffee bean import to China was constantly rising
at an annual rate of 15% from 2004-2014. An article written by Jesse W. Mattingly from University of Kentucky concludes that coffee
market in China is new, however Chinese are getting more knowledgeable in coffee. Producers and retailers should focus on quality
in order to bring the traditional culture of coffee to a developing market.
Our Products and Services
We provide a variety
of coffee products and healthy beverages. We use capsules to keep the freshness and tastiness and to standardize the quality of
our products. Healthiness, convenience, high quality and affordability are the core values of our product. Our goal is to allow
our customers to make coffee or other healthy beverages at home through several simple brewing steps.
Wholesale
Business
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Coffee and Healthy Drinks Capsules
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Coffee and healthy
drinks capsules are our major products. We offer a wide variety of high-quality coffee and beverage items, mainly capsules of coffee
and non-coffee drinks, that have strong demand and can be produced in bulk with standardized process and consistent quality. Although
coffee products have a big market in China, China remains predominantly a tea-consuming nation and the coffee market is significantly
unsaturated. With a deep understanding of the Chinese drinking culture that has a history of thousands of years, we give particular
attention to selecting the premium raw materials to ensure the high quality of our products.
From the initial research
and development of products, selecting and purchasing raw materials, testing products and delivering the final products to our
customers, our management team strictly monitor each of these procedures. For our coffee products, we are in cooperation with Bright
Sun Coffee Co Ltd. (Bright Sun), our sole coffee beans supplier in Hong Kong with 90 years’ experience in the coffee industry.
For our health drink products, we endeavor to procure genuine and healthy raw materials in capsules, such as non-GMO (non-genetically
modified organism) soy milk, Italian cocoa, golden flower dark tea, momordica grosvenori and dendrobium among others. All of our
suppliers have relevant certificates from the governments, such as business license and food selling permissions, to show their
respective manufacturing capability. Afterwards, the materials will be put into a capsule as a final product which will be tested
again by Société Générale de Surveillance (SGS), a world’s leading company of inspection, verification,
testing and certification to ensure that the quality of the final product meets our standards.
We sell our capsules
through our Brand Stores. To join us as a Brand Store, we will charge a one-time brand authorization fee. After becoming our Brand
Store, we will grant it the rights to use our brand, Ka Su Le, and provided it with all of the materials (including different kinds
of capsules) and equipment that are necessary to make our coffee and other healthy beverages (collectively, the “Initiation
Package”). In addition, we provide our Brand Stores with staff training and help them with the designing and decoration of
their stores, setting up the equipment and other matters such as developing and shipping products. After paying the brand authorization
fee, our Brand Stores will receive certain amount of coffee and healthy drinks capsules, included in their Initiation Package,
enabling them to start their business. After that, if the Brand Stores need more supplies of capsules, they will need to purchase
them from our retail stores or online store. Each of our Brand Stores is independent from us. Other than providing the Initiation
Package and supplying our capsule products, we do not share interests with or take responsibility for the loss of our Brand Stores.
In addition, to better
promote our products and enhance our brand recognition, we are expanding our network by working with and placing our coffee machines
free of charge in our Cooperation Stores, including grocery stores, bakeries, super markets, shopping malls and other places with
significant customer volume and high demand of coffee. The Cooperation Stores can use our coffee machines free of charge with proper
care and a commitment of selling a certain amount of brewed coffee and healthy drinks each month. Similar to our Brand Stores,
the Cooperation Stores can purchase our capsules products from our retail stores or online store if they need additional supplies.
We believe this business model has a great potential of enhancing our brand recognition and increasing the sales of our capsules
products.
Our customers can also
purchase our capsules products from our online store through WeChat, one of the most popular messaging, social media and mobile
payment apps in China. We are currently in the process of designing a Wechat Mini Program and we plan to launch it at the first
quarter of 2020. This is program is designed to function to serve the purpose of E-mall and customer services. We also plan to
develop our own app, hoping to provide with our customers with more options and convenience of online shopping. See below “Our
Mobile Apps”.
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b.
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Coffee Brewing Machines
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We provide two types
of coffee brewing machines with our customers – one for domestic use and the other is for commercial use. We procure our
brewing machines directly from Cino Technology (Shenzhen) Ltd. (“Cino”). Furthermore, we have agreed to use Cino’s
fully automatic capsule vending machine (under development) to expand our business distributions to areas with high demand for
coffee, such as office buildings, commercial areas and school campuses. Cino provides one to two years of warranties of its brewing
machines depending on the type of machine. It also provides training of installation and maintenance to our customer service division.
The commercial brewing
machine can be installed at our Brand Stores, restaurants and offices. This machine is designed to be user-friendly, enabling users
to learn how to operate the machine in a few hours, and then make a drink in our standardized recipe.
Our brewing machines
are included in the Initiation Package for our Brand Stores and we are also providing them to our Cooperation Stores free of charge.
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c.
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Health Supplements and Skin Care Products
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We also offer several
health supplements and skin care products made from Chinese traditional herbs on our online store. We offer our online customers
opportunities to join us as a “health product agent” if they purchase an aggregate of RMB358 (approximately $51) worth
of health products from our online store. Each of our health product agent will sign an agent agreement with us and then they will
receive their own unique ID codes. Our health product agents have special discounts when they purchase our health products. In
addition, each time they develop a new health product agent with their ID codes, they will receive awards points from us which
can be then used to purchase health products in our online store. This segment is currently at its initial stage and contributed
very limited sales revenue to us as of the date of this prospectus.
Retail Outlets
of Coffee Products
We have two coffee
retail stores in Dongguan City and Shenzhen City, through which we offer capsule products and brewed coffee and healthy drinks
to our customers. We are currently looking to relocate one of our retail stores to an area with a higher demand of brewed coffee
and healthy drinks. This segment is currently at its initial stage and contributed very limited sales revenue to us as of the date
of this prospectus.
Retail Outlets
of Coffee Brewing Machines
With a brewing machine
at home, our customers can easily make a cup of tasty coffee using our capsule coffee products. We are currently marketing and
selling our brewing machines through our sales persons. Customers can also purchase a brewing machine from our online store. As
of the date of this prospectus, we have very limited sales of the coffee brewing machines.
Our Strategies
The key elements of
our strategy to grow our business include:
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Enhance our ability to attract, incentivize and
retain talented professionals. We believe our success greatly depends on our ability to attract, incentivize and retain talented
professionals. With a view to maintaining and improving our competitive advantage in the market, we plan to implement a series
of initiatives to attract additional and retain mid- to high-level personnel, including formulating a market-oriented employee
compensation structure and implementing a standardized multi-level performance review mechanism.
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Expand our store network. We will continue to
expand our store network by opening our own coffee stores and developing Brand Stores to which we will grand rights to use our
brand and offer all of the materials (including different kind of capsules) and equipment that are necessary to make our coffee
and other beverages. In addition, we are able to provide our Brand Stores with staff training and help them with the designing
and decoration of their stores, setting up the equipment and other matters such as developing and shipping products. Our store
network strategically focuses on economically vibrant regions in China. We are also promoting our products and enhancing our brand
recognition by working with and placing our coffee machines free of charge in various stores, including grocery stores, bakeries,
super markets, shopping malls and other places with significant customer volume and high demand of coffee. We typically locate
our stores in areas with high demand for coffee, such as office buildings, commercial areas and university campuses.
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Our Mobile Apps
We are currently in
the process of designing a Wechat Mini Program and we plan to launch it at the first quarter of 2020. This program is designed
to function to serve the purpose of E-mall and customer services. In particular, this program will be designed to cover the entire
customer purchase process with user-friendly interfaces. Through this program, our customers can easily view various choice of
beverage capsules, health product and accessories, place orders, make payment, check the shipping status and receive notifications
of our promotions. We plan to create our own mobile apps with English, simplified Chinese and traditional Chinese versions in 2020.
Procurement
We source a variety
of high-quality raw materials, including coffee beans and coffee condiments, as well as beverage items, from selected suppliers.
We also purchase different machines, such as coffee machines and ice machines, packaging materials and other consumables in bulk
from our suppliers. Due to our significant scale, we are able to procure high-quality products from our suppliers at favorable
prices. We maintain good relationships with our suppliers.
We have a dedicated
procurement team responsible for the procurement of raw materials, machines and equipment, packaging materials and consumables
based on inventory availability, number of stores and marketing events. Our senior management has designed stringent quality control
standards and enforced comprehensive quality control measures covering supplier selection, quality inspection and testing.
Coffee Beans
As discussed above,
we source premium coffee beans from renowned plantations in Colombia, Ethiopia and Indonesia through our supplier, Bright Sun.
We set detailed specifications
for the raw coffee beans procured by our roasted coffee bean supplier, including size, taste and moisture based on their origin
and grades. Together with Bright Sun, we screen for defected beans in each batch of raw coffee beans through sampling to ensure
that they meet our specifications before admitting them to roasting.
We set the quality
control standards for the testing process of roasted coffee beans. We work with Bright Sun and a third party inspection agency
(SGS) in testing the roasted coffee beans. Bright Sun conducts the first round of physical and chemical properties testing on the
roasted coffee beans, and delivers the batches that passed the test to us. Upon receipt, we will conduct another round of similar
testing together with a third-party inspection agency, and return any batch with high defect rate.
With the support of
Bright Sun, we have developed our own and unique coffee recipe and we believe the taste of our products is favored by most coffee
consumers in China.
Health Products
Ingredients
We also procure many
health products ingredients, such as, non-GMO soy milk, Italian cocoa, golden flower dark tea, momordica grosvenori and dendrobium,
from reputable suppliers throughout China. We mix these ingredients following our special formula after repeated testing and created
our own recipe of drinks. Our health products have been popular among our customers, especially among those who are from western
countries.
Coffee Condiments
Coffee condiments,
mainly dairy products and syrup, are crucial to the overall quality of our coffee. We source our dairy products, mainly milk and
cream, from leading suppliers to ensure their freshness and syrup mainly from distributors of imported syrup. Similar to coffee
beans, we have in place stringent quality control measures regarding coffee condiments. For example, we work with our dairy suppliers
to have the dairy products tested by SGS.
Packaging
Materials and Other Consumables
In addition to coffee
and beverage items, we procure a broad range of paper and plastic products, such as cups, straws and cutlery, from a number of
suppliers. We inspect the categories, specifications and qualities of our packaging materials and other consumables supplies against
our standards set out in the respective supply agreements and quality guarantee agreement.
The manufacturer of
our capsule products followed he standard in the process of making the capsules. The final products will be tested again by SGS
to ensure that their quality meets our standards.
Our Store Network
As discussed above,
we typically locate our stores in areas with high demand for coffee, such as office buildings, bakeries, shopping malls and residential
areas. As of the date of this prospectus, we have seven stores located in Guangdong Province, Jilin Province and Chongqing City,
including two of our own retail stores and five Brand Stores. We also have worked with and placed our coffee machines into over
290 Cooperation Stores Guangdong, Jilin and Chongqing. We will continue to expand our store network to new regions and cities in
China. We will also increase the density of our store network in areas with high demand for coffee in our existing markets. The
expansion of our store network will enable us to serve more customers and get closer to our customers.
Our Customers
The customers of our
coffee and healthy drinks products comprise mainly of companies and beverage stores located in Guangdong Province, Jilin Province
and Chongqing City in China.
The following table
sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the years ended December
31, 2018 and 2017.
Customers
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2018
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2017
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Amount
|
|
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%
|
|
|
Amount
|
|
|
%
|
|
Dong Guan Humen Kasule Food and Drink Company
|
|
$
|
3,879
|
|
|
|
23.52
|
|
|
|
0
|
|
|
|
0
|
|
Dongguan Kasule Food and Drink Limited Company
|
|
$
|
5,099
|
|
|
|
30.92
|
|
|
|
0
|
|
|
|
0
|
|
Intellectual Property
We develop and protect
our intellectual property portfolio by registering our trademarks, copyrights and domain names. As of the date of this prospectus,
we have one registered trademark with the Trademark Office of the PRC State Administration for Industry & Commerce (the “Trademark
Office”) with an effective period from May 28, 2019 to May 27, 2029 and two domain names (www.agilityholding.com and www.capsulemall.cn)
with Ministry of Industry and Information Technology with effective periods from August 4, 2018 to August 4, 2020 and from September
17, 2018 to September 17, 2020, respectively. In addition, we have applied to register 12 trademarks with the Trademark Office,
which is still in the process of reviewing our applications.
In addition, we entered
into standard employee confidentiality agreement with our technology development employees, which provides that the employees own
confidentiality obligations in relation to our trade and technology secrets.
Seasonality
We experience seasonality
in our business, reflecting seasonal fluctuations in food productions and storages. For example, we generally experience lower
transaction volumes during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter
of each year.
Employees
As of September 30,
2019, we had 36 full-time employees and no part-time employees. The departments cover, sales and marketing, administration, customer
service, logistics, storage, rear service, procurement, accounting, design, public relationship, intellectual technology, research
and development and human resources. We are required under PRC law to make contributions to employee benefit plans for our PRC-based
full-time employees at specified percentages of the salaries, bonuses and certain allowances of such employees, up to a maximum
amount specified by the local governments in China and we also are required to make contributions to the work-related injury insurance
for the part-time employees. We maintain a good working relationship with our employees, and as of the date of this prospectus,
we have not experienced any material labor disputes in the past. None of our employees are represented by labor unions.
Competitive Strength
We
are dedicated to serving our customers. We believe that the following strengths contribute to our success and are the differentiating
factors that set us apart from our peers.
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Leading and fastest growing player focusing on capsule
coffee in China: we believe that we are a pioneer that develops a taste for coffee in a society with brisk reverence for tea
by offering our customers with convenient capsule coffee, enabling them to make tasty coffee easily.
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superior customer propositions: Our commitment
to quality is uncompromising. We source premium coffee beans from a prominent supplier and work with an experienced team to design
our coffee recipes. We also implement stringent quality control procedures and processes across our supply chain, from procurement
to inventory and logistics, as well as in our day-to-day store operations. We are able to offer affordable coffee capsule and
other high-quality products because we have achieved sustainable cost advantages.
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Competition
We integrated many
components to create our unique business model which enables us to quickly spread out our coffee and healthy drinks to the market.
For those that choose to join us as our Brand Stores, we offer them not only the authorization to use our brand, but also support
them with all materials, equipment and even staff training and store decoration guidance to start their business. At the same time,
our customers can transfer their roles and become part of our team through various channels, including becoming a health product
agent after purchasing certain amount of health products on our online store. In addition, we are creatively expanding our store
network by providing coffee machines free of charge to other established stores. Although we are not aware of many famous brands
in this field with similar business model, we still face intense competition in China’s coffee industry. Our current or potential
competitors are mainly coffee shop operators.
We believe that the
principal competitive factors in China coffee industry include the following:
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Product
quality and safety;
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Supply
chain management and operating efficiency;
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Quality
of customer services;
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Brand
recognition and reputation;
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Effectiveness
of sales and marketing; and
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Our competitors may
have longer operating history, greater brand recognition, more capital, better supplier relationships and larger customer base.
Compliance,
Licenses and Permits
For compliance requirements
related to our business, including applicable licenses and permits, see “Regulation.”
Environmental
Law Compliance
We believe that our
manufacturing facilities are currently operating under compliance with local, state, and federal environmental laws. We plan to
continue acquiring environmental-oriented equipment and incurring the expenditures we deem necessary for compliance with applicable
laws. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital
expenditures, earnings or competitive position.
Legal
Proceedings
From time to time,
we are subject to legal proceedings and claims arising in the ordinary course of our business. As of the date of this prospectus,
we were not involved in any litigation, arbitration or administrative proceedings pending or, to our knowledge, threatened against
us that could have a material and adverse effect on our business, financial condition or results of operations.
Insurance
We provide social security
insurance including medical insurance, maternity insurance, workplace injury insurance, unemployment insurance and pension benefits
for our employees. Consistent with customary industry practice in China, we do not maintain business interruption insurance, nor
do we maintain product liability insurance or key-man life insurance.
REGULATIONS
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China or our shareholders’
rights to receive dividends and other distributions from us.
Regulations
on Food Safety and Licensing Requirement for Customer Food Services
Food
Safety Law
In accordance with
the Food Safety Law of the PRC, or the Food Safety Law, as effective on June 1, 2009 and most recently amended on December 29,
2018, the State Council of the PRC (the “State Council”) implements a licensing system for the food production and
trading. A person who engages in food production, food selling or catering services shall obtain the license in accordance with
the Food Safety Law.
According to the Food
Safety Law, the State Council shall establish a food safety committee whose duties shall be defined by the State Council. The
food safety supervision and administration department under the State Council shall exercise supervision and administration over
food production and trading activities according to the duties defined by the Food Safety Law and the State Council. The
health administrative department under the State Council shall organize the implementation of risk monitoring and risk assessment
of food safety according to the duties defined by the Food Safety Law, and shall formulate and issue national food safety
standards together with the food safety supervision and administration department under the State Council. Other relevant departments
under the State Council shall carry out relevant food safety work according to the duties defined by the Food Safety Law.
The Food Safety
Law sets out, as penalties for violation, various legal liabilities in the form of warnings, orders to rectify, confiscations
of illegal gains, confiscations of utensils, equipment, raw materials and other articles used for illegal production and operation,
fines, recalls and destructions of food in violation of laws and regulations, orders to suspend production and/or operation, revocations
of production and/or operation license, and even criminal punishment.
The Implementation
Rules of the Food Safety Law, as effective on July 20, 2009 and amended on February 6, 2016, further specify the
detailed measures to be taken and conformed by food producers and business operators in order to ensure food safety as well as
the penalties that shall be imposed should these required measures not be implemented.
Food
Operation Licensing
On August 31,
2015, China Food and Drug Administration promulgated the Administrative Measures for Food Operation Licensing, which was
amended on November 17, 2017. According to the Administrative Measures for Food Operation Licensing, a food operation
license shall be obtained in accordance with the law to engage in food selling and catering services within China. The principle
of one license for one site shall apply to the licensing for food operation, that is, a food operator shall obtain a food operation
license to engage in food operation activities in one operation site. Food and drug administrative authorities shall implement
classified licensing for food operation according to food operators’ types of operation and the degree of risk of their operation
projects.
The issuance date of
a food operation license is the date when the decision on granting the license is made, and the license is valid for five years.
Food operators shall hang or place their food operation license originals in prominent places of their operation sites. Where the
licensing items which are indicated on a food operation license change, the food operator shall, within ten business days after
the changes take place, apply to the food and drug administrative authority which originally issued the license for alteration
of the operation license. Those who fail to obtain a food operation license and engage in food operation activities shall be punished
by the local food and drug administrative authorities at or above the county level according to Article 122 of the Food
Safety Law that the authorities shall confiscate their illegal income, the food or food additives illegally produced or dealt
in, and the tools, equipment, raw materials, and other items used for illegal production or operation; and impose a fine of not
less than RMB50,000 but not more than RMB100,000 on them if the goods value of the food or food additives illegally produced or
dealt in is less than RMB10,000 or a fine of not less than 10 times but not more than 20 times the goods value if the goods value
is RMB10,000 or more.
Online Catering Services
In accordance with
Measures for the Supervision and Administration of the Safety of Food Offered through Online Catering Services, as effective
on January 1, 2018, Online catering service providers shall have their own physical stores and have obtained the food operation
licenses according to the law, and shall carry out business activities pursuant to the business forms and business items specified
on their own food operation licenses, and they shall not do business beyond the business scope. The provider of a third-party online
catering service platform shall, within 30 business days upon approval by the competent communications department, undergo the
recordation formalities with the provincial food and drug supervision and administration department at the place where it is located.
A catering service provider with a self-built website shall, within 30 business days after undergoing the recordation formalities
with the competent communications department, undergo the recordation formalities with the food and drug administrative authority
at the county level at the place where it is located. The headquarter of a catering service chain company which provides online
trading service for its stores by its website shall be governed by reference to the requirements on providers of third-party online
catering service platforms.
Regulations
on Environmental Protection
Environmental
Protection Law
The Environmental
Protection Law of the PRC, or the Environmental Protection Law, was promulgated and effective on December 26, 1989, and
most recently amended on April 24, 2014. This Environmental Protection Law has been formulated for the purpose of protecting
and improving both the living environment and the ecological environment, preventing and controlling pollution, other public hazards
and safeguarding people’s health.
According to the provisions
of the Environmental Protection Law, in addition to other relevant laws and regulations of the PRC, the Ministry of Environmental
Protection and its local counterparts take charge of administering and supervising said environmental protection matters. Pursuant
to the Environmental Protection Law, the environmental impact statement on any construction project must assess the pollution
that the project is likely to produce and its impact on the environment, and stipulate preventive and curative measures; the statement
shall be submitted to the competent administrative department of environmental protection for approval. Installations for the prevention
and control of pollution in construction projects must be designed, built and commissioned together with the principal part of
the project.
Permission to commence
production at or utilize any construction project shall not be granted until its installations for the prevention and control of
pollution have been examined and confirmed to meet applicable standards by the appropriate administrative department of environmental
protection that examined and approved the environmental impact statement. Installations for the prevention and control of pollution
shall not be dismantled or left idle without authorization. Where it is absolutely necessary to dismantle any such installation
or leave it idle, prior approval shall be obtained from the competent local administrative department of environmental protection.
The Environmental
Protection Law makes it clear that the legal liabilities of any violation of said law include warning, fine, rectification
within a time limit, compulsory cease operation, compulsory reinstallation of dismantled installations of the prevention and control
of pollution or compulsory reinstallation of those left idle, compulsory shutout or closedown, or even criminal punishment.
Law
on Environment Impact Assessment
Pursuant to the Law
of the People’s Republic of China on Environment Impact Assessment, which was issued on October 28, 2002 and most
recently amended on December 29, 2018, the State implements a classification-based management on the environmental impact
assessment, or EIA, of construction projects according to the impact of the construction projects on the environment. Construction
units shall prepare Environmental Impact Report, or EIR, or Environmental Impact Statement, or EIS, or fill out the Environmental
Impact Registration Form, or EIRF, (hereinafter collectively referred to as the “EIA documents”) according to the following
rules:
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For projects with potentially serious environmental impacts, an EIR shall be prepared to provide a comprehensive assessment of their environmental impacts;
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For projects with potentially mild environmental impacts, an EIS shall be prepared to provide an analysis or specialized assessment of their environmental impacts; and
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For projects with very small environmental impacts so that an EIA is not required, an Environmental Impact Registration Form shall be filled in.
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According to Classified
Administration Catalogue of Environmental Impact Assessments for Construction Projects issued on September 2, 2008 and
amended on April 28, 2018, the food and beverage services are classified as to fill in an Environmental Impact Registration
Form. Where the construction entity fails to fill in the Environmental Impact Registration Form in accordance with the law, the
environmental protection administrative department at or above the county level shall order it to fill in, and impose a fine of
not more than RMB50,000 on it.
Regulations
on Fire Prevention
Fire
Protection Design Approval and Filing
The Fire Prevention
Law of the PRC, or the Fire Prevention Law, was adopted on April 29, 1998 and amended on October 28, 2008. According
to the Fire Prevention Law and other relevant laws and regulations of the PRC, the Ministry of Public Security and its local counterparts
at or above county level shall monitor and administer the fire prevention affairs. The fire prevention departments of such public
securities are responsible for implementation. The Fire Prevention Law provides that the fire prevention design or construction
of a construction project must conform to the national fire prevention technical standards (as the case may be). According to Provisions
on the Supervision and Administration of Fire Protection of Construction Projects, or the Fire Protection Supervision Provisions,
issued on April 30, 2009 and amended on July 17, 2012, for those construction projects with more than 500 square meters,
the construction entity shall apply to the fire prevention department of a public security authority for fire protection design
approval. For the construction projects other than the conditions foregoing, the construction entity shall, within seven days of
obtaining the construction permit of the project, submit the fire protection filing for fire protection design through the website
of the fire prevention department of the public security authority at the provincial level or at the service office of the fire
prevention department of the public security authority. For a construction project whose investment is less than RMB300,000 or
whose construction area is less than 300 square meters, the fire protection design approval or filing is not required.
Fire
Protection As-built Acceptance Check and Filing
Upon completion of
a construction project to which a fire prevention design has been applied, according to the requirements of the Fire Prevention
Law, such project must go through an as-built acceptance check on fire prevention by, or filed with, the relevant fire prevention
departments of public security authorities. For construction projects with more than 500 square meters, the construction entity
or entity using such venue shall, prior to use and operation of any business thereof, apply for a safety acceptance check on fire
prevention with the relevant fire prevention department of the public security authority at or above the county level where the
venue is located. For the construction projects other than the conditions foregoing, the construction entity or entity using such
venue shall submit the filing for as-built inspection of the project through the website of the fire prevention department of the
public security authority at the provincial level or at the service office of the fire prevention department of the public security
authority. For a construction project whose investment is less than RMB300,000 or whose construction area is less than 300 square
meters, the fire protection as-built acceptance check or filing is not required.
Fire
Safety Inspection
The Fire Prevention
Law requires the employer or user entity shall apply to the fire prevention department of the public security authority of the
local people’s government at or above the county level for a fire safety inspection before a public gathering place is put
into use or opens for business. Any constructions illegally putting into use or operating a public gathering place without undergoing
the fire safety inspection or without satisfying the fire safety requirements upon inspection shall be ordered to stop construction,
stop use or stop production or business operation and be fined not less than RMB30,000 but not more than RMB300,000. According
to our PRC legal counsel, after consulting with local fire prevention departments, the requirements of conducting the fire safety
inspection before use are different among cities. In Beijing, Guangzhou, Fuzhou, and Changsha coffee stores with construction area
of more than 300 square meters are required to conduct the fire safety inspection before use; in Shenzhen and Dongguan, coffee
stores with construction area of more than 50 square meters are required to conduct the fire safety inspection before use; in Shanghai,
Wuxi, Chongqing, Qingdao, Xi’an, Suzhou, Dalian and Nanjing, coffee stores are required to conduct the fire safety inspection
before use no matter the size of the construction area.
Regulations
Relating to Customer Rights Protection
The PRC Customer
Rights and Interests Protection Law, or Customer Protection Law, as amended on October 25, 2013 and effective on March 15,
2014, sets out the obligations of business operators and the rights and interests of the customers. Pursuant to this law, business
operators must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide customers
with authentic information about the commodities, and guarantee the quality, function, usage and term of validity of the commodities.
Failure to comply with the Customer Protection Law may subject business operators to civil liabilities such as refunding purchase
prices, exchange of commodities, repairing, ceasing damages, compensation, and restoring reputation, and even subject the business
operators or the responsible individuals to criminal penalties if business operators commit crimes by infringing the legitimate
rights and interests of customers.
Regulations
on Foreign Investment
Investment activities
in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment,
or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce, or the MOFCOM, and the National
Development and Reform Commission, or the NDRC. Industries listed in the Catalogue are divided into three categories: encouraged,
restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted”
category. According to the Catalogue, customer food and beverage services are classified as industries where foreign investments
are permitted.
Draft
Foreign Investment Law (2015)
In January 2015, MOFCOM
published a draft Foreign Investment Law (2015) for public comments. According to the draft Foreign Investment Law (2015),
Foreign investments in the restricted industries must apply for approval from the foreign investment administration authority,
whereas foreign investments in business sectors outside of the “negative list” will only be subject to filing procedures.
MOFCOM suggests both
registration and approval as potential options for the regulation of variable interest entity structures, depending on whether
they are “Chinese controlled” or “foreign controlled.” One of the core concepts of the draft Foreign
Investment Law (2015) is “de facto control,” which is broadly defined and emphasizes substance over form
in determining whether an entity is “Chinese controlled” or foreign controlled. “De facto control”
can be established if a person has the power to exert decisive influence on an entity, via contractual or trust arrangements, over
the subject entity’s operations, financial matters or other key aspects of business operations. The draft Foreign Investment
Law (2015) specifically provides that entities established in China but “controlled” by foreign investors, such
as via contracts or trusts, will be treated as foreign invested enterprises, or FIEs, whereas an investment in China in the foreign
investment-restricted industries by a foreign investor may nonetheless apply for treatment as a PRC domestic investment if the
foreign investor is determined to be “controlled” by PRC entities and/or citizens. According to the draft Foreign
Investment Law (2015), VIEs would also be deemed to be FIEs, if they are ultimately “controlled” by foreign investors,
and be subject to the restrictions on foreign investments.
Draft
Foreign Investment Law (2018)
In December 2018, the
Standing Committee of the National People’s Congress of PRC published the Draft Foreign Investment Law (2018) for
public comments. On March 15, 2019, the Foreign Investment Law was formally issued, which will become effective on
January 1, 2020. The Foreign Investment Law mainly focuses on the foreign investment promotion, foreign investment
protection and foreign investment management. Comparing with the draft Foreign Investment Law (2015), the Foreign Investment
Law does not mention concepts such as “De facto control” and “controlling PRC companies by contracts or trusts”,
nor did it specify the regulation requirements on controlling through contractual arrangements.
Regulation
on Information Security
The Standing Committee
of the National People’s Congress promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which became
effective on June 1, 2017, to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual or
organization using the network must comply with the constitution and the applicable laws, follow the public order and respect social
moralities, and must not endanger cyber security, or engage in activities by making use of the network that endanger the national
security, honor and interests; incite subversion of state power; overthrow the socialist system; incite secession, undermining
national unity, terrorism and extremism promotion, ethnic hatred and discrimination; spread violence and disseminate pornographic
information, fabricating and spreading false information that disturbs economic and social order; or infringe on the fame, privacy,
intellectual property and other legitimate rights and interests of others. The Cyber Security Law sets forth various security protection
obligations for network operators, which are defined as “owners and administrators of networks and network service providers,”
including, among others, complying with a series of requirements of tiered cyber protection systems; verifying users’ real
identity; localizing the personal information and important data gathered and produced by key information infrastructure operators
during operations within the PRC; and providing assistance and support to government authorities where necessary for protecting
national security and investigating crimes.
To comply with these
laws and regulations, we have adopted security policies and measures to protect our cyber system and customer information.
Regulations
on E-Commerce
The Standing Committee
of the National People’s Congress of PRC enacted the PRC E-Commerce Law on August 31, 2018, which became effective
on January 1, 2019. Under the PRC E-Commerce Law, e-commerce refers to operating activities of selling goods or providing
services through the internet or other information networks. The PRC E-Commerce Law generally applies to: (i) platform
operators, which refer to legal persons or unincorporated organizations that provide network places of business, transaction matching,
information release and other services to enable the transaction parties to carry out independent transaction activities; (ii) operators
on the platform, which refer to e-commerce operators that sell goods or provide services to customers through e-commerce platforms;
and (iii) other e-commerce operators that sell goods or provide services through self-established websites or other network
services. The PRC E-commerce Law also provides rules in relation to e-commerce contracts, dispute settlements, e-commerce
development as well as legal liabilities involved in e-commerce.
Regulations
on Foreign Exchange
Pursuant to the Foreign
Exchange Administration Regulations, as amended in August 2008, the RMB is freely convertible for current account items, including
the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital
account items, such as direct investments, loans, repatriation of investments and investments in securities outside the PRC, unless
SAFE’s prior approval is obtained and prior registration with SAFE is made. In May 2013 SAFE promulgated the Circular
of the SAFE on Printing and Distributing the Administrative Provision on Foreign Exchange in Domestic Direct Investment by Foreign
Investors and Relevant Supporting Documents which provides for and simplifies the operational steps and regulations on foreign
exchange matters related to direct investment by foreign investors, including foreign exchange registration, account opening and
use, receipt and payment of funds, and settlement and sales of foreign exchange.
Pursuant to the Circular
on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted
by Domestic Residents through Overseas Special Purpose Vehicles or the SAFE Circular 37, promulgated by SAFE and which
became effective on July 4, 2014, (a) a PRC resident shall register with the local SAFE branch before he or she contributes
assets or equity interests in an overseas special purpose vehicle, or Overseas SPV, that is directly established or controlled
by the PRC Resident for the purpose of conducting investment or financing; and (b) following the initial registration, the
PRC Resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including,
among other things, a change of the Overseas SPV’s PRC Resident shareholder(s), name of the Overseas SPV, term of operation,
or any increase or reduction of the Overseas SPV’s registered capital, share transfer or swap, and merger or division. Pursuant
to SAFE Circular 37, failure to comply with these registration procedures may result in penalties.
Pursuant to the Circular
of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange
Administration Policies, or the SAFE Notice 13, which was promulgated on February 13, 2015 and with effect from June 1,
2015, the foreign exchange registration under domestic direct investment and the foreign exchange registration under overseas direct
investment is directly reviewed and handled by banks in accordance with the SAFE Notice 13, and the SAFE and its branches
shall perform indirect regulation over the foreign exchange registration via banks.
Regulations
Relating to Dividend Distributions
The principal regulations
governing the distribution of dividends paid by wholly foreign-owned enterprises include the PRC Wholly Foreign-Owned Enterprise
Law issued in April 1986 and most recently amended in September 2016, and the PRC Implementation Regulations on the Wholly
Foreign-Owned Enterprise Law issued in December 1990 and most recently amended in February 2014. Under these regulations, wholly
foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, as determined in accordance
with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in China is required to set aside
at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total
reserve funds reaches 50% of its registered capital. These reserve funds, however, may not be distributed as cash dividends.
Regulations
Relating to Stock Incentive Plans
According to the Notice
of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas
Listed Company, or the Share Incentive Rules, which was issued by the SAFE in February 2012 and other regulations, directors,
supervisors, senior management and other employees participating in any share incentive plan of an overseas publicly-listed company
who are PRC citizens or non-PRC citizens residing in China for a continuous period of not less than one year, subject to certain
exceptions, are required to register with the SAFE. All such participants need to authorize a qualified PRC agent, such as a PRC
subsidiary of overseas publicly-listed company to register with the SAFE and handle foreign exchange matters such as opening accounts,
transferring and settlement of the relevant proceeds. The Share Incentive Rules further require an offshore agent to be designated
to handle matters in connection with the exercise of share options and sale of proceeds for the participants of share incentive
plans.
Failure to complete
the SAFE registrations for our employee incentive plans may subject them to fines and legal sanctions, and may also limit our ability
to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends
to us.
Regulations
Relating to Overseas Listings
In August 2006, six
PRC regulatory authorities, including the China Securities Regulatory Commission, or the CSRC, jointly adopted the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, amended in June 2009. The M&A
Rules, among other things, require that if an overseas company established or controlled by PRC companies or individuals, or PRC
Citizens, intends to acquire equity interests or assets of any other PRC domestic company affiliated with the PRC Citizens, such
acquisition must be submitted to the MOFCOM for approval. The M&A Rules also require that an Overseas SPV formed for overseas
listing purposes and controlled directly or indirectly by the PRC Citizens shall obtain the approval of the CSRC prior to overseas
listing and trading of such Overseas SPV’s securities on an overseas stock exchange.
The management, based on its understanding of the current PRC laws and regulations, believes our corporate
structure and arrangements are not subject to the M&A Rules. However, there are substantial uncertainties as to how the M&A
Rules will be interpreted or implemented in the context of an overseas offering, and the management’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.
Regulations on Labor
Labor
Contract Law
As of January 1,
2008 and as amended on December 28, 2012, labor contracts shall be concluded in writing if labor relationships are to be or
have been established between enterprises or institutions and the laborers under the Labor Contract Law of the PRC, or the
Labor Contract Law. Enterprises and institutions are forbidden to force the laborers to work beyond the time limit and the employers
shall pay laborers overtime working compensation in accordance with national regulations. In addition, the labor wages shall not
be lower than local standards on minimum wages and shall be paid to the laborers timely. According to the Labor Law of the PRC
effective as of January 1, 1995, and as amended on December 29, 2018, enterprises and institutions shall establish and
perfect its system of work place safety and sanitation, strictly abide by state rules and standards on work place safety and sanitation,
educate laborers of work place safety and sanitation. Work place safety and sanitation facilities shall comply with state-fixed
standards.
Regulations
on Social Insurance and Housing Fund
According to the Social
Insurance Law of the PRC effective as of July 1, 2011, and as amended on December 29, 2018, the Regulations on
Occupational Injury Insurance effective as of January 1, 2004 and as amended on December 20, 2010, the Interim
Measures concerning the Maternity Insurance for Enterprise Employees effective as of January 1, 1995, the Interim Regulations
concerning the Levy of Social Insurance effective as of January 22, 1999, the Interim Measures concerning the Administration
of the Registration of Social Insurance effective as of March 19, 1999 and the Regulations concerning the Administration
of Housing Fund effective as of April 3, 1999 and amended on March 24, 2002, enterprises and institutions in the
PRC shall provide their employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance,
occupational injury insurance and medical insurance, as well as housing fund and other welfare plans.
Regulations
on Labor Dispatch
The Interim Provisions
on Labor Dispatch was promulgated by the Ministry of Human Resources and Social Security and became effective on March 1,
2014. The Interim Provisions on Labor Dispatch sets forth that labor dispatch should only be applicable to temporary, auxiliary
or substitute positions, or the Three-Nature Requirements. Temporary positions shall mean positions subsisting for no more than
six months, auxiliary positions shall mean positions of non-major business that serve positions of major businesses, and substitute
positions shall mean positions that can be held by substitute employees for a certain period of time during which the employees
who originally hold such positions are unable to work as a result of full-time study, being on leave or other reasons.
Regulations
on Property Leasing
Under the Administrative
Measures on the Lease of Commodity Housing issued by Ministry of Housing and Urban-Rural Development on December 1, 2010,
the parties to a lease agreement shall go through the lease registration and filing process with the competent construction (real
estate) departments of the municipalities directly under the PRC Government, cities and counties where the housing is located within
30 days after the lease agreement is signed. For those who fail to comply with the above regulations, such competent departments
may impose a fine of between RMB1,000 and RMB10,000 per lease.
Regulations
on Intellectual Property Rights
Copyright
Pursuant to the Copyright
Law of the PRC, as amended in 2010, copyrights include personal rights such as the right of publication and that of attribution
as well as property rights such as the right of production and that of distribution. Reproducing, distributing, performing, projecting,
broadcasting or compiling a work or communicating the same to the public via an information network without permission from the
owner of the copyright therein, unless otherwise provided in the Copyright Law of the PRC, shall constitute infringements
of copyrights. The infringer shall, according to the circumstances of the case, undertake to cease the infringement, take remedial
action, and offer an apology, pay damages, etc.
Pursuant to the Computer
Software Copyright Protection Regulations promulgated on December 20, 2001 and amended on January 30, 2013, the software
copyright owner may go through the registration formalities with a software registration authority recognized by the State Council’s
copyright administrative department. The software copyright owner may authorize others to exercise that copyright, and is entitled
to receive remuneration.
Trademark
Pursuant to the Trademark
Law of the PRC, as amended in 2013, the right to exclusive use of a registered trademark shall be limited to trademarks which
have been approved for registration and to goods for which the use of such trademark has been approved. The period of validity
of a registered trademark shall be ten years, counted from the day the registration is approved. According to this law, using a
trademark that is identical to or similar to a registered trademark in connection with the same or similar goods without the authorization
of the owner of the registered trademark constitutes an infringement of the exclusive right to use a registered trademark. The
infringer shall, in accordance with the regulations, undertake to cease the infringement, take remedial action, and pay damages,
etc.
Domain
Name
Domain names are protected
under the Administrative Measures on the Internet Domain Names promulgated by the MIIT on August 24, 2017 and became
effective on November 1, 2017. The MIIT is the major regulatory authority responsible for the administration of the PRC Internet
domain names. The registration of domain names in PRC is on a “first-apply-first-registration” basis. A domain name
applicant will become the domain name holder upon completion of the application procedure.
Regulations
Relating to Tax in the PRC
Income
Tax
The PRC Enterprise
Income Tax Law was promulgated in March 2007 and was most recently amended in December 2018. The PRC Enterprise Income Tax
Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except
where tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law, an enterprise
established outside China with “de facto management bodies” within China is considered a “resident enterprise”
for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income.
Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body”
is defined as the body that exercises full and substantial control and overall management over the business, productions, personnel,
accounts and properties of an enterprise.
In April 2009, the
Ministry of Finance, or MOF, and SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise
Restructuring Business, or the Circular 59. In December 2009, SAT issued the Notice on Strengthening Administration of Enterprise
Income Tax for Share Transfers by Non-PRC Resident Enterprises, or the Circular 698. Both Circular 59 and Circular 698 became
effective retroactively as of January 2008. In March 2011, SAT issued the Notice on Several Issues Regarding the Income Tax
of Non-PRC Resident Enterprises, or the SAT Circular 24, effective in April 2011. By promulgating and implementing these circulars,
the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident
enterprise by a non-resident enterprise.
In February 2015, SAT
issued the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRC Resident Enterprises,
or the SAT Circular 7, to supersede existing provisions in relation to the indirect transfer as set forth in Circular 698, while
the other provisions of Circular 698 remain in force. SAT Circular 7 introduces a new tax regime that is significantly different
from that under Circular 698. SAT Circular 7 extends its tax jurisdiction to capture not only indirect transfers as set forth under
Circular 698 but also transactions involving transfer of immovable property in China and assets held under the establishment, and
placement in China, of a foreign company through the offshore transfer of a foreign intermediate holding company. SAT Circular
7 also addresses transfer of the equity interest in a foreign intermediate holding company broadly. In addition, SAT Circular 7
provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios
applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of
the indirect transfer as they have to determine whether the transaction should be subject to PRC tax and to file or withhold the
PRC tax accordingly. In October 2017, SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax
of Non-resident Enterprises, or the SAT Circular 37, amended in June 2018. The SAT Circular 37 superseded the Non-resident
Enterprises Measures and SAT Circular 698 as a whole and partially amended some provisions in SAT Circular 24 and SAT Circular
7. SAT Circular 37 purports to clarify certain issues in the implementation of the above regime, by providing, among others, the
definition of equity transfer income and tax basis, the foreign exchange rate to be used in the calculation of withholding amount,
and the date of occurrence of the withholding obligation. Specifically, SAT Circular 37 provides that where the transfer income
subject to withholding at source is derived by a non-PRC resident enterprise in instalments, the instalments may first be treated
as recovery of costs of previous investments. Upon recovery of all costs, the tax amount to be withheld must then be computed and
withheld.
Value-Added
Tax
Pursuant to the Provisional
Regulations on Value-added Tax of the PRC promulgated on December 13, 1993 and last amended on November 19, 2017
and its implementation rules, all entities or individuals in the PRC engaging in the sale of goods, the provision of processing
services, repairs and replacement services, and the importation of goods are required to pay value-added tax. Pursuant to the
Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax promulgated
on March 23, 2016 and as amended on July 11, 2017 and December 25, 2017 respectively, upon approval of the State
Council, the pilot program of the collection of value-added tax in lieu of business tax shall be promoted nationwide in a comprehensive
manner as of May 1, 2016, and all taxpayers of business tax engaged in the building industry, the real estate industry, the
financial industry and the life service industry shall be included in the scope of the pilot program with regard to payment of
value-added tax instead of business tax. Pursuant to the Circular of the Ministry of Finance and the State Administration of
Taxation on Adjusting Value-added Tax Rates promulgated on April 4, 2018 and come to effect on May 1, 2018, by Ministry
of Finance and State Administration of Taxation, where a taxpayer engages in a taxable sales activity for the value-added tax
purpose or imports goods, the previous applicable 17-percent and 11-percent tax rates are adjusted to be 16 percent and 10 percent
respectively.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Board of Directors and Executive Officers
Our current members of the Board of Directors
and executive officers are listed below.
Name
|
|
Position Held
with our Company
|
|
Age
|
|
|
Date First Elected or
Appointed
|
Lam Heung Yeung Horace
|
|
Director & CEO
|
|
|
54
|
|
|
October 30, 2019
|
Chan Hiu
|
|
Director & CFO
|
|
|
47
|
|
|
June 1, 2018
|
Yeung Pik Wah
|
|
Director & COO
|
|
|
50
|
|
|
October 30, 2019
|
Chiang Venant
|
|
VP for Corporate Finance & Development
|
|
|
42
|
|
|
October 30, 2019
|
Lam Heung Yeung Horace, director and
CEO
Mr. Lam, age 54, has
been serving as Convenor of Board of Directors of Agility International Holding Ltd. since 2016 and Managing Director of Logos
Surveyors and Construction Co. since 2012. Mr. Lam received his bachelor degree of Science in Building Serveying with honor from
Heriot-Watt University in 1993.
Chan Hiu, director
and CFO
Mr. Chan, age 46, has
been serving as Financial Controller of Zheng Gong Trading Ltd Co in Dongguan, China since 2016. Mr. Chan was a financial advisor
of Shenzhen Long Fu Capital based in Shenzhen, China from 2009 to 2016, and he consulted with clients for financial needs and helped
them develop marginal investment plans. Prior to that, He was an owner and financial controller of Motoring Concept Distribution
in Orlando, Florida from 2001 and 2008. Mr. Chan received his Bachelor of Business Accounting degree from University of Central
Florida in Orlando, Florida in 2000.
Yeung Pik Wah,
director and COO
Ms. Yeung, age 50,
previously served as Regional Sr. Director at Pfizer Corporation Hong Kong Ltd., where she had been working since 2000 in various
positions, such as Finance Director and General Manager. She is also the founder of LoveYoyo Amusement Company Limited and has
been working there since 2010. Ms. Yeung also has been serving as the chairwoman at Elderly Care Nursing Home in Hong Kong since
2014. In addition, Ms. Yeung founded Zenecom Internation in 2017 and Zenecom and JMM enterprise, and JMM and Ximu Education Institute
in 2018. Ms. Yeung founded LaChou Puff & MilkTea Mini-Shop in 2009 and successfully opened three chain stores within six months.
Ms. Yeung received her bachelor degree of Arts in Business Economic from University of California at Los Angeles in 1997.
Chiang Venant, VP for Corporate Finance
& Development
Mr. Chiang, age 42,
is a seasoned financial professional with about twenty years of experience in the global financial market and was a senior management
for various renowned investment banks such as HSBC, Deutsche Bank, Bank of China International and Jefferies. He currently serves
as an executive member of Kami Intelligence Limited, Vice Chairman of the investment committee at the Smart City Consortium and
Vice President of the Hong Kong Spirit Charity Sports Association. Mr. Chiang Served as a portfolio manager at Cardinalasia Consulting
Limited from July 2016 to May 2017. He was the head of Hong Kong and China Property Research at Jefferies Hong Kong from May 2012
to June 2016. Mr. Chiang graduated Cum Laude from University of California at Los Angeles with a bachelor degree of Arts in Business
Economics in 2001.
Term of Office
Our directors are appointed
to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws.
Our officers are appointed by our board of directors and hold office until removed by the board of directors.
Family Relationships
There are no family
relationships between any of our directors or executive officers.
Certain Legal Proceedings
To our knowledge, no
director, nominee for director, or executive officer of the Company has been a party in any legal proceeding material to an evaluation
of his ability or integrity during the past ten years.
Code of Ethics
A code of business
conduct and ethics is a written standard designed to deter wrongdoing and to promote (a) honest and ethical conduct, (b) full,
fair, accurate, timely and understandable disclosure in regulatory filings and public statements, (c) compliance with applicable
laws, rules and regulations, (d) the prompt reporting violation of the code and (e) accountability for adherence to the code. We
are not currently subject to any law, rule or regulation requiring that we adopt a code of ethics; however, we intend to adopt
one in the near future.
Corporate Governance
The business and affairs
of the Company are managed under the direction of our board of directors. In addition to the contact information in this annual
report, each stockholder will be given specific information on how he/she can direct communications to the officers and directors
of the corporation at our annual stockholders meetings. All communications from stockholders are relayed to the members of the
board of directors.
Board Committees
We presently do not
have an audit committee, compensation committee or nominating committee or committee performing similar functions, as our management
believes that until this point it has been premature at the early stage of our management and business development to form an audit,
compensation or nominating committee. Until these committees are established, these decisions will continue to be made by our board
of directors.
Board Leadership Structure and Role in Risk Oversight
Our board of directors
is primarily responsible for overseeing our risk management processes. The board of directors receives and reviews periodic reports
from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks.
The board of directors focuses on the most significant risks facing our company and our company’s general risk management
strategy, and also ensures that risks undertaken by our company are consistent with the board of directors’ appetite for
risk. While the board of directors oversees our company’s risk management, management is responsible for day-to-day risk
management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing
our company and that our board of directors leadership structure supports this approach.