The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Hanjiao Group, Inc. (“HJPG” or the
“Company”), known previously as AS Capital, Inc. (“ASIN”), is a holding company that, through its subsidiaries
and variable interest entity (collectively, the “Company”) is engaged in the business of selling healthcare and other related
products to the middle-aged and elderly market segments in the People’s Republic of China (the “PRC” or “China”)
through its internet platform and offline service centers.
HJPG conducts business primarily through its variable
interest entity, Beijing Luji Technology Co., Ltd. (“Beijing Luji”) that was formed in Beijing, China on March 27, 2007. HJPG
does not have a direct equity ownership interest in Beijing Luji but relies on a series of contractual arrangements, or variable interest
entity (VIE) agreements (“VIE Agreements”), through Beijing Hongtao Management Consulting Co., Ltd.) (“Beijing Hongtao)
to control and receive substantially all of the economic risks and benefits of Beijing Luji’s business in the PRC in which foreign
investment is restricted or prohibited. The VIE Agreements are designed to mimic direct ownership of Beijing Luji and allow the financial
condition and results of operations of Beijing Luji to be consolidated with the financial statements of HJPG.
On July 15, 2021, Beijing Hongtao Management Consulting
Co., Ltd. changed its name to Beijing Hanze Management Consulting Co., Ltd. (“Beijing Hanze”). On July 16, 2021, Beijing Luji
Technology Co., Ltd. changed its name to Beijing Yingjun Technology Co., Ltd. (“Beijing Yingjun”). Beijing Yingjun and Beijing
Hanze executed a supplementary agreement on July 16, 2021, confirming that all the original terms and conditions related to the VIE Agreements
remain unchanged and they continue to be valid.
The Company’s current corporate structure
is as follows:
|
· |
HanJiao International Holding Limited (“HanJiao”) is a holding company incorporated in the British Virgin Islands on July 5, 2018. |
|
· |
Luji Technology International Holding Limited (“Luji Technology”), a holding company incorporated in the British Virgin Islands on July 5, 2018, is wholly owned by HanJiao. |
|
· |
Inooka Holding Ltd. (“Inooka”), a company established in Hong Kong on July 18, 2018, is wholly owned by Luji Technology. |
|
· |
Beijing Hongtao Management Consulting Co., Ltd. (“Beijing Hongtao”), a wholly foreign-owned enterprise (“WFOE”) was established in China on October 11, 2018 and it is a wholly fixowned subsidiary of Inooka. On July 15, 2021, Beijing Hongtao Management Consulting Co., Ltd. changed its name to Beijing Hanze Management Consulting Co., Ltd. (“Beijing Hanze”). Beijing Hanze provides consulting and technical services to Beijing Yingjun Technology Co., Ltd. that was incorporated in China on March 27, 2007. Beijing Yingiun established Guovi Investment Fund Management (Beijing) Co., Ltd. (“Beijing Guoyi”) with registered capital of RMB 50 million (approximately US$973,000) on February 19, 2016, which is inactive. |
On August 6, 2020, ASIN and HanJiao International
Holding Limited (“HanJiao”) consummated a Share Exchange Agreement (the “Share Exchange Transaction”). In connection
with the Share Exchange Transaction, ASIN issued 86,000,000 shares of its common stock to acquire all the equity shares of HanJiao. Upon
the completion of the Share Exchange Transaction, the shareholders of HanJiao owned approximately 88.5% of the common stock of ASIN. On
October 20, 2020, the Company changed its name from “AS Capital, Inc.” to “Hanjiao Group, Inc.”
Reorganization and Variable Interest
Entities
On May 15, 2019, Beijing Hanze, Beijing Yingjun and
their shareholders entered into a series of contractual arrangements (the “VIE Agreements”) to control and receive the economic
benefits of Beijing Yingjun’s business. The VIE Agreements are designed to provide Beijing Hanze with the power, rights and obligations
equivalent in all material respects to those it would possess as the sole equity holder of Beijing Yingjun, including absolute control
rights and the rights to the assets, property, revenue and income of Beijing Yingjun.
To complete the corporate reorganization, the
shareholders of Luji Technology transferred their respective ownership interest in Luji Technology in exchange for their respective ownership
interest in HanJiao on September 16, 2019 (the “Share Transfer”).
Based on the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (‘ASC’) Topic 805, the VIE Agreements executed between Beijing Hanze
and Beijing Yingjun and the Share Transfer constituted a reorganization of entities under common control since all these entities were
controlled by the same major shareholder before and after the reorganization. As such, the Company’s consolidated financial statements
have been prepared as if the reorganization had occurred retroactively and the existing corporate structure had been in existence throughout
all periods presented.
The accounts of Beijing Yingjun and its wholly
owned subsidiary are consolidated in the accompanying unaudited condensed consolidated financial statements pursuant to ASC 810-10, Consolidation.
The carrying amounts of the VIE’s consolidated
assets and liabilities are as follows:
Financial information of VIE | |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Current assets | |
$ | 1,065,895 | | |
$ | 1,330,763 | |
Property and equipment, net | |
| 1,473,503 | | |
| 1,717,887 | |
Other noncurrent assets | |
| 17,069,470 | | |
| 18,989,263 | |
Total assets | |
| 19,608,868 | | |
| 22,037,913 | |
Total liabilities | |
| (33,744,658 | ) | |
| (33,865,867 | ) |
Net liabilities | |
$ | (14,135,790 | ) | |
$ | (11,827,954 | ) |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Other payables and accrued liabilities | |
$ | 14,863,290 | | |
$ | 13,502,495 | |
Other payables – related parties | |
| 603,281 | | |
| 21,530 | |
Taxes payable | |
| 18,278,087 | | |
| 20,341,842 | |
Total liabilities | |
$ | 33,744,658 | | |
$ | 33,865,867 | |
The summarized operating results of the VIE are
as follows:
| |
| | |
| |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
(Unaudited) | |
Operating revenues | |
$ | 775,617 | | |
$ | 1,630,559 | |
Loss from operations | |
$ | (1,060,016 | ) | |
$ | (2,667,768 | ) |
Net loss | |
$ | (3,793,291 | ) | |
$ | (5,033,910 | ) |
| |
| | |
| |
| |
For the Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
(Unaudited) | |
Operating revenues | |
$ | 8,213 | | |
$ | 1,052,323 | |
Loss from operations | |
$ | (21,763 | ) | |
$ | (525,817 | ) |
Net loss | |
$ | (1,143,464 | ) | |
$ | (1,329,426 | ) |
NOTE 2 – LIQUIDITY AND GOING CONCERN
As indicated in the accompanying unaudited condensed
consolidated financial statements, the Company had a net loss of approximately $4.1
million for the nine months ended September 30, 2022; and negative working capital of approximately $33.3
million as of September 30, 2022. Management of the Company has considered whether there is substantial doubt about the Company’s
ability to continue as a going concern due to the significant recurring operating losses in 2021 and 2020 and the continuing operating
losses during the nine months ended September 30, 2022. The Company can sell the apartment in Beijing if they have cash issues. In
addition, the major shareholder of the Company pledged to give financial support to continue the Company’s operations. In
assessing the Company’s liquidity, management monitors and analyzes its cash on hand and its operating expenses, and existing regulatory
obligations and commercial commitments.
The accompanying unaudited condensed consolidated
financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. While the major shareholder of the Company has pledged to
give financial support for the Company’s operations in China, there can be no assurance that this support will be sufficient to
enable the Company to continue as a going concern.
The accompanying unaudited condensed consolidated
financial statements do not include any adjustments related to the recoverability and/or classification of the recorded asset amounts
and/or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Presentation
The accompanying unaudited condensed consolidated
financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The unaudited condensed consolidated financial statements include the accounts of the Company and
include the assets, liabilities, revenues and expenses of the subsidiaries and VIE. In the opinion of management, all adjustments (including
normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at
the dates and for the periods presented have been included. Interim results are not necessarily indicative of results to be expected for
the full year. The information included in this report should be read in conjunction with the information included in the Company’s
annual report for the year ended December 31, 2021.
Principles
of Consolidation
The accompanying unaudited condensed consolidated
financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and the VIE and its subsidiary. All
inter-company transactions and balances have been eliminated upon consolidation.
VIE Agreements with Beijing Hanze
The Company does not have a direct equity ownership
interest in Beijing Yingjun but relies on the VIE Agreements to control and receive the economic benefits of Beijing Yingjun’s business.
The Company relies on contractual arrangements with its variable interest entity to operate its online to office (O2O) business in the
PRC in which foreign investment is restricted or prohibited. The O2O platform integrates the Company’s e-commerce platform with
physical outlets (service centers) to connect consumers and merchants in a dynamic marketplace. Pursuant to the VIE Agreements, the Company,
through Beijing Hanze, is able to exercise effective control over, bears the risks of, enjoys substantially all of the economic benefits
of its VIE and its subsidiary and has an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent
permitted by PRC law. The Company’s management concluded that Beijing Yingjun and its subsidiary are variable interest entities
of the Company and Beijing Hanze is the primary beneficiary of Beijing Yingjun and its subsidiary. As such, the financial statements of
the VIE and its subsidiary are included in the consolidated financial statements of the Company. Each of the VIE Agreements is described
in detail below:
Exclusive Consulting and Services
Agreement
Pursuant
to the Exclusive Consulting and Service Agreement signed on May 15, 2019, between Beijing Hanze and Beijing VIE, as amended by that certain
Supplement to the Exclusive Consulting and Services Agreement, dated September
30, 2022, Beijing Hanze agrees to provide various services exclusively to Beijing VIE including development and research services for
business-related software, pre-job and on-the-job training services, technology development and transfer services, public relations services,
market research and consulting services, short and medium-term market development and planning services, various technical support services,
consulting services related to business compliance, organization and planning services related to marketing and membership activities.
For services rendered to Beijing VIE by Beijing Hanze under this agreement, Beijing Hanze is entitled to collect 100% of the net income
of Beijing VIE.
The Exclusive Consulting and Services Agreement
shall remain in effect for ten years from the date of signing unless it is terminated by Beijing Hanze in advance or upon the mutual agreement
of both parties. Unless otherwise required by law, Beijing VIE shall not have any right to terminate the agreement. Prior to the termination
of this agreement, the parties may extend the term of this agreement in accordance with the requirements of Beijing Hanze.
Business Operations Agreement
Pursuant to the Business Operations Agreement
signed on May 15, 2019, by and among the Beijing Yingjun shareholders, Beijing Yingjun and Beijing Hanze. Beijing Yingjun agreed not to
conduct any transactions that may materially affect its assets, business, personnel, obligations, rights or company operations, without
the prior written consent of Beijing Hanze. Beijing Hanze agrees to provide advice to Beijing Yingjun from time to time regarding the
appointment and dismissal of employees, daily management and financial management systems. Beijing Yingjun and Beijing Yingjun shareholders
also agree to appoint designees of Beijing Hanze to serve as its board of directors and on the senior management team of Beijing Yingjun.
In connection with this agreement, the Beijing Yingjun shareholders executed a power of attorney of the Business Operations Agreement
in which the Beijing Yingjun shareholders shall irrevocably authorize the designated personnel of Beijing Hanze to exercise their shareholders’
rights on their behalf, including voting rights at the shareholders' meeting in the name of the shareholders. The Beijing Yingjun shareholders
further agree that they will replace the person authorized in the above power of attorney at any time upon Beijing Hanze's request. The
Business Operations Agreement shall remain in effect for ten years from the date of signing unless earlier terminated by Beijing Hanze
by delivering 30 days prior written notice or upon the mutual agreement of all parties. Beijing Yingjun and the Beijing Yingjun shareholders
do not have the right to terminate the agreement unilaterally. Upon the termination of any agreement between Beijing Hanze and Beijing
Yingjun, Beijing Hanze shall be entitled to terminate all agreements between such parties.
Equity Disposal Agreement
Pursuant to the Equity Disposal Agreement signed
on May 15, 2019, by and among the Beijing Yingjun shareholders, Beijing Yingjun and Beijing Hanze, the Beijing Yingjun shareholders granted
to Beijing Hanze an exclusive option right to purchase all of their equity interests in Beijing Yingjun to secure the execution of the
Equity Pledge Agreement in which the details are set out below. Under the terms of this agreement, Beijing Hanze has an exclusive
right to purchase, to the extent permitted under PRC law, at any time, all or any part of the equity interests of the Beijing Yingjun
shareholders in Beijing Yingjun or an option to transfer the equity interests in Beijing Yingjun to any third party designated by Beijing
Hanze. The option price shall be the minimum permitted by the laws and regulations of the PRC. The Equity Disposal Agreement has
a term of ten years from the date of signing, and it may be renewed at Beijing Hanze’s discretion.
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement signed
on May 15, 2019, by and among the Beijing Yingjun shareholders and Beijing Hanze, the Beijing Yingjun shareholders pledged all of their
equity interests in Beijing Yingjun to Beijing Hanze to guarantee the performance of Beijing Yingjun’s obligations under the Exclusive
Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement. Under the terms of the agreement,
in the event that Beijing Yingjun or its shareholders breach their respective contractual obligations under the Exclusive Consulting and
Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement, or upon occurrence of any event of default as
set forth in the Equity Pledge Agreement, Beijing Hanze shall be entitled to exercise its rights under this agreement, subject to certain
cure periods. The Beijing Yingjun shareholders further agree not to dispose of the pledged equity interests or take any actions that would
prejudice Beijing Hanze’s interest.
The Equity Pledge Agreement shall be effective
until Beijing Yingjun and the Beijing Yingjun shareholders have performed all of their obligations under the Exclusive Consulting and
Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement and the written approval of Beijing Hanze has
been obtained.
Agency Agreement
Pursuant to the Agency Agreement signed on May
15, 2019, among the Beijing Yingjun shareholders and Beijing Hanze, the Beijing Yingjun shareholders granted Beijing Hanze an irrevocable
license for the longest period permitted under law the right to exercise the voting rights of the Beijing Yingjun shareholders in accordance
with the laws of the PRC and the Articles of Association of Beijing Yingjun. During the term of this Agreement, none of the Beijing Yingjun
shareholders shall be entitled to transfer their interest in Beijing Yingjun to any third party other than entities or individuals designated
by Beijing Hanze. This Agency Agreement shall be irrevocable and continuously valid from the date of execution of this Agency Agreement,
and it can be terminated at Beijing Hanze’s discretion.
During the nine months ended September 30, 2022
and the year ended December 31, 2021, HanJiao, Luji Technology and Inooka did not have any business activities.
Use of Estimates
The
preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting periods.
Significant accounting estimates reflected in
the Company’s consolidated financial statements include the allowance for advances to suppliers, prepayments and slow-moving inventory,
and the useful lives of property and equipment. Since the use of estimates is an integral component of the financial reporting process,
actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company follows Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC Section 820, “Fair Value Measurements
and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a
fair value hierarchy to classify the inputs used in measuring fair value as follows:
| Level 1 | applies to assets or liabilities for which there are quoted prices
in active markets for identical assets or liabilities. |
| | |
| Level 2 | applies to assets or liabilities for which there
are inputs, other than quoted prices in level 1, that are observable for the asset or liability such as quoted prices for similar
assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally
from, or corroborated by, observable market data. |
| | |
| Level 3 | applies to assets or liabilities for which there
are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability. |
The carrying value of financial instruments included in current assets
and liabilities approximate their fair values because of the short-term nature of these instruments.
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash on hand, cash on deposit and other highly liquid investments which are unrestricted as to withdrawal or use, and which
have original maturities of nine months or less when purchased. The Company maintains cash with various financial institutions in the
PRC. As of September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $4,792 and $838,850, respectively.
Risks and Uncertainties
The operations of the Company are located in the
PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic,
and legal environment in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject
to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include
risks associated with, among other factors, the political, economic and legal environment and foreign currency restrictions. The Company’s
results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in governmental
policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad,
and rates and methods of taxation, among other things. Although the Company has not experienced losses from these situations and believes
that it is in compliance with existing laws and regulations, changes in the future could affect the Company’s interest in these
entities.
The outbreak of COVID-19 that started in late
January 2020 in the PRC had negatively affected our business. In March 2020, the World Health Organization declared COVID-19 as a pandemic
and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in China and the U.S.
in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company’s
business operations and its workforce are concentrated in China, the Company’s business, results of operations, and financial condition
through September 30, 2022 have been adversely affected. There is an uncertainty around the breadth and duration of business disruptions
related to COVID-19 and its variants, as well as its impact on the Company’s business. To mitigate the overall financial impact
of COVID-19 on the Company’s business, management continues to explore opportunities to reduce its operating overhead and works
closely with its service centers to develop promotional activities that will hopefully generate additional sales in 2022.
Inventories
Inventories consist of finished goods and
they are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The Company
periodically evaluates its inventories and will record an allowance for inventories that are either slow-moving, may not be saleable
or whose cost exceeds its net realizable value. For nine months ended September 30, 2022 and 2021, (reversal of) provision for
slow-moving inventory amounted to approximately $(96,000)
and $130,000,
respectively. For three months ended September 30, 2022 and 2021, (reversal of) provision for slow-moving inventory amounted to
approximately $(84,000)
and $25,500,
respectively.
Advances to Suppliers
Advance to suppliers consists of payments to suppliers
for finished goods that have not been delivered to the Company. The Company periodically evaluates and reviews its advance to suppliers
to determine whether its carrying value has been impaired. As of September 30, 2022, advances to suppliers and non-current advances to
suppliers were $97,845 and $5.5 million, respectively. As of December 31, 2021, advances to suppliers and non-current advance to supplier
were $189,294 and $6.1 million, respectively, the amount mainly includes the prepayment of the 5 million kilogram of selenium enriched
rice for RMB 40 million (approximately $6 million) in 2020.
Long-term Investment
Long-term investment consists of the Company’s
equity investment for strategic and business development purposes. The Company applies the equity method of accounting for its equity investment,
according to FASB ASC 323 “Investment—Equity Method and Joint Ventures,” over which it has significant influence but
does not own a majority equity interest or otherwise control. Under the equity method, the Company’s share of the profits or losses
of the equity investees are recorded in its consolidated statements of comprehensive income (loss).
The Company reviews its investment at least annually
to determine whether a decline in fair value to below the carrying value is other-than-temporary. The primary factors the Company considers
in its determination are the duration and severity of the decline in fair value; the financial condition, operating performance and the
prospects of the equity investee; and other company specific information such as recent financing activities. If the decline in fair value
is deemed to be other-than-temporary, the carrying value of the investment will be written down to its fair value.
No events have occurred that indicated an impairment
in fair value for nine and three months ended September 30, 2022.
Property and Equipment, Net
Property and equipment are carried at cost and
are depreciated on the straight-line basis over the estimated useful lives of the underlying assets. The cost of repairs and maintenance
is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated
depreciation and amortization are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
The Company examines the possibility of decreases in the value of its property and equipment, when events or changes in circumstances
reflect the fact that their recorded value may not be recoverable.
Estimated useful lives are as follows, taking
into account the assets’ estimated residual value:
Schedule of property and equipment estimated useful lives |
|
|
Classification |
|
Estimated useful lives |
Property - apartment |
|
20 years |
Vehicles |
|
10 years |
Office equipment |
|
3 years |
Furniture and fixtures |
|
3 years |
Software |
|
3 years |
Long-lived Assets
Finite-lived assets and intangibles are reviewed
for impairment testing when circumstances require. For purposes of evaluating the recoverability of long-lived assets, when undiscounted
future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. The
long-lived assets of the Company that are subject to evaluation consist primarily of property and equipment, and long-term investment.
For the nine and three months ended September 30, 2022 and 2021, the Company did not recognize any impairment of its long-lived assets.
Leases
In January 2016, the FASB issued ASU 2016-02,
“Leases” (“ASU 2016-02”) requiring leases to be recognized on the balance sheet as a right-of-use asset and lease
liability for all long-term leases and requiring disclosure of key information about leasing arrangements in order to increase transparency
and comparability among organizations.
The Company adopted on July 1, 2020, ASU 2016-02,
“Leases” (Topic 842), and elected the practical expedients that do not require it to reassess: (1) whether any expired or
existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for
any expired or existing leases. The Company also adopted the practical expedient that allows lessees to treat the lease and non-lease
components of a lease as a single lease component.
The Company measures the lease liability based
on the present value of the lease payments discounted by the relevant borrowing rate and reduces the carrying value of the lease liability
for lease payments made. Leases with an initial expected term of 12 months or less are considered short-term and are not recorded on the
Company’s consolidated balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the expected
lease term.
Revenue Recognition
The Company follows FASB ASC 606, Revenue from
Contracts with Customers
The core principle underlying the revenue recognition
standard is that the Company will recognize revenue to represent the transfer of products or services to customers in an amount that reflects
the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance
obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of the product or
the benefit of the services transfers to the customer. Under the guidance of ASC 606, the Company is required to (a) identify the
contract with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate
the transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) the Company satisfies
its performance obligations.
Product Sales: Beijing Yingjun, the Company’s
VIE, is primarily engaged in the sale of healthcare and other products (such as nutrition or dietary supplements; water and air purifiers
and smart watches) to the middle aged and elderly market segments in the PRC. Beijing Yingjun sells these products under its own “Fozgo”
brand and related healthcare products for other vendors through its internet platform and offline service centers. Revenue from product
sales is recognized when control passes to the customer, which generally occurs at a point in time when products are delivered. Allowance
for sales returns, that reduces revenues, are estimated based on historical experience. Revenues are recorded net of value-added taxes,
business taxes, discounts and surcharges and allowance for returns.
Beijing Yingjun collects cash from customers before
or upon delivery of products mainly through banks and third-party online payment platforms (such as Alipay). Cash collected from customers
before product delivery is recognized as advance from customers.
Cost of Revenues
Cost of revenues consists primarily of the cost
of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain
designated products as well as allowances for and write-down of slow-moving inventories.
General and Administrative Expenses
General and administrative expenses consist mainly
of payroll and related costs for employees involved in general corporate functions, including accounting, finance, tax, legal and human
resources, professional fees and other general corporate expenses as well as costs associated with the use by these functions of facilities
and equipment, such as depreciation and rental expenses.
Selling Expenses
Selling expenses consist mainly of payroll and
benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, marketing and selling expenses
that are related to events and activities at the Company’s service centers designed to promote product sales as well as operating
expenses related to the service centers.
Finance Expenses (Income)
Finance expenses consist mainly of service fees
related to the use of third-party online payment platforms, bank fees and interest expenses related to borrowings, net of interest income
from bank and related bank products.
Other Income (Expenses)
Other income consists primarily of income from
the administration of Beijing Yingjun’s online marketplace. Other expenses consist mainly of estimated tax penalties.
Income Taxes
The Company follows FASB ASC Topic 740, “Income
Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each
period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect
taxable income. Deferred tax assets are also recognized for operating losses that are available to offset the future taxable income. A
valuation allowance is established when deemed necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows FASB ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes”, which requires income tax positions to meet a more-likely-than-not recognition threshold to be
recognized in the financial statements. Under ASC 740-10-25, tax positions that previously failed to meet the more-likely-than-not threshold
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions
that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which
that threshold is no longer met. The Company believes that it does not have any uncertain tax positions.
The application of tax laws and regulations is
subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a
result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability
may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse
previously recorded tax liabilities or the deferred tax asset valuation allowance.
Enterprise Income Tax
Under the Provisional Regulations of the PRC concerning
income tax on enterprises promulgated by the PRC (the “EIT Law”), the Company was qualified as a high and new technology enterprise
starting in 2021 and is entitled to a preferential tax rate of 15% for 3 years that expires in 2024. An entity can re-apply to be a high
and new technology enterprise when the prior certificate expires.
Value-Added Tax
The VAT rate for revenue generated from providing
products is 13%. VAT is reported as a reduction of revenue when incurred. Entities that are VAT general taxpayers are allowed to offset
qualified input VAT paid to suppliers against their output VAT liabilities. The net VAT balance between input VAT and output VAT is recorded
in taxes payable.
Foreign Currency Translation
The functional currency of the Company’s
operations in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements are translated into U.S. dollars (“USD”)
using the period end rates of exchange for assets and liabilities, equity is translated at historical exchange rates, and average rates
of exchange (for the period) are used for revenues and expenses and cash flows. As a result, amounts relating to assets and liabilities
reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets.
Translation adjustments resulting from the process of translating the local currency financial statements into USD are included in determining
comprehensive income (loss). Transactions denominated in foreign currencies are translated into the functional currency at the exchange
rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional
currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as
incurred.
All of the Company’s revenue transactions
are transacted in its functional currency. The Company does not enter into any material transactions in foreign currencies. Transaction
gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
The exchange rates as of September 30, 2022 and
December 31, 2021 and for the nine months ended September 30, 2022 and 2021 are as follows:
Schedule of exchange rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Foreign currency |
|
|
Balance Sheet |
|
|
|
Balance Sheet |
|
|
|
Profits/Loss |
|
|
|
Profits/Loss |
|
RMB:1USD |
|
|
7.0998 |
|
|
|
6.3757 |
|
|
|
6.6068 |
|
|
|
6.4714 |
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Foreign currency |
|
|
Profits/Loss |
|
|
|
Profits/Loss |
|
RMB:1USD |
|
|
6.8287 |
|
|
|
6.4707 |
|
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components,
net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses
that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income (loss). Other comprehensive
income (loss) consists entirely of foreign currency translation adjustments resulting from the Company’s translation of its financial
statements from its functional currency into USD.
Earnings (loss) Per Share
Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per share
is computed by dividing net income by the weighted-average number of ordinary shares plus dilutive potential ordinary shares outstanding
during the period. When the Company has a loss, the potential ordinary shares are not included since their inclusion would be anti-dilutive.
For the nine months ended September 30, 2022 and 2021, there were no potential ordinary shares, such as options, warrants or conversion
rights, that would have a dilutive effect on the Company’s earnings (loss) per share.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments -
Credit Losses (Topic 326). The amendments in this Update require a financial asset (or a group of financial assets) measured at
amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an
entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The
use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more
decision useful to users of the financial statements. This ASU was initially to be effective for annual and interim periods
beginning after December 15, 2019 for issuers and December 15, 2020 for non-issuers. In May 2019, the FASB issued ASU
2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This ASU added optional transition
relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to
increase comparability of similar financial assets. The ASUs should be applied through a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective
approach). On November 19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13 to be fiscal years
beginning after December 15, 2022 and interim periods therein. The Company believes the adoption of this new standard will not
have a material impact on Company’s unaudited condensed consolidated financial statements and related
disclosures.
In October 2020, the FASB issued ASU 2020-10,
“Codification Improvements”. The amendments in this Update represent changes to clarify the Codification or correct unintended
application of guidance that is not expected to have a significant effect on current accounting practices or create a significant administrative
cost to most entities. The amendments in this Update affect a wide variety of Topics in the Codification and apply to all reporting entities
within the scope of the affected accounting guidance. ASU 2020-10 is effective for annual periods beginning after July 1, 2021 for public
business entities. Early application is permitted. The amendments in this Update should be applied retrospectively. The Company believes
the adoption of this new standard will not have a material impact on Company’s unaudited condensed consolidated financial statements
and related disclosures.
The Company does not believe that other recently
issued accounting standards, if currently adopted, will have a material effect on the Company’s unaudited condensed consolidated
financial statements.
NOTE 4 – CASH AND CASH EQUIVALENTS
Schedule of cash and cash equivalents | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Cash and cash equivalents: | |
| | | |
| | |
Cash on hand | |
$ | 1,890 | | |
$ | 5,815 | |
Cash equivalents: | |
| | | |
| | |
Bank deposits | |
| 2,902 | | |
| 590,774 | |
Other cash equivalents | |
| – | | |
| 242,261 | |
Total cash equivalents | |
| 2,902 | | |
| 833,035 | |
Total cash and cash equivalents | |
$ | 4,792 | | |
$ | 838,850 | |
NOTE 5 – INVENTORIES, NET
Schedule of inventory | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Finished goods | |
$ | 1,183,963 | | |
$ | 1,568,791 | |
Less: allowance for slow-moving inventories | |
| (1,096,709 | ) | |
| (1,321,238 | ) |
Inventories, net | |
$ | 87,254 | | |
$ | 247,553 | |
The Company reviews its inventories periodically
to determine if any reserves are necessary for slow-moving inventory or if a write-down is necessary when the carrying value exceeds
net realizable value. For nine months ended September 30, 2022 and 2021, (recovery of) provision for slow-moving inventory amounted to
approximately $(96,000)
and $130,000, respectively. For three
months ended September 30, 2022 and 2021, (recovery of) provision for slow-moving inventory amounted to approximately $(30,000)
and $25,500, respectively.
NOTE 6 – ADVANCE TO SUPPLIERS
Schedule of advances |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Supplier |
|
For the purchase of |
|
2022 |
|
|
2021 |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Baoqing Meilai Modern Agricultural Service Co., Ltd. (1) |
|
Selenium enriched rice |
|
$ |
– |
|
|
$ |
19,072 |
|
Shandong Kangqi Muye Industry Co., Ltd. |
|
Specialty wooden phonograph |
|
|
9,071 |
|
|
|
71,365 |
|
Chongqing Zhouhai Intelligent Technology Co., Ltd. |
|
Smart watches |
|
|
87,270 |
|
|
|
97,183 |
|
One Four One Three (Tianjin) Network Technology Development Co., Ltd. |
|
Various products |
|
|
1,504 |
|
|
|
1,674 |
|
Others |
|
Nutritional supplements |
|
|
– |
|
|
|
– |
|
Less: allowance for doubtful accounts |
|
|
|
|
– |
|
|
|
– |
|
Advances to suppliers, net |
|
|
|
$ |
97,845 |
|
|
$ |
189,294 |
|
Non-current advance to supplier |
|
|
|
|
|
|
|
|
|
|
Baoqing Meilai Modern Agricultural Service Co., Ltd. (1) |
|
|
|
$ |
5,522,499 |
|
|
|
6,145,779 |
|
(1) |
In January 2020, the Company and Baoqing Meilai Modern Agriculture Service Co., Ltd. (“Baoqing Melai”) entered into an agreement for a period of one-year whereby the Company agreed to purchase 5 million kg of selenium enriched rice for RMB 40 million (approximately $6.1 million). The Company took delivery of (and sold) approximately 8,050 kilogram of selenium enriched rice (valued at RMB 32,200 or approximately $4,966) during the three month ended September 30, 2022. Due to the negative impact of COVID-19, the Company and Baoqing Meilai extended the purchase agreement to January 17, 2023. According to the extended agreement, if the rice is not fully sold or delivered after the expiration of the agreement, the term of the agreement will be automatically extended until the delivery of the rice is completed, and a supplementary agreement will be signed once a year. The Company reclassified the non-current amount of $5,522,499 and $6,145,779 to the non-current advance to supplier as of September 30, 2022 and December 31, 2021, respectively. |
NOTE 7 – PREPAYMENTS AND OTHER CURRENT
ASSETS, NET
Schedule of prepayments and other assets | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Business advance to employees | |
$ | – | | |
$ | 12,623 | |
Prepaid service fees | |
| 11,710 | | |
| 13,040 | |
Loans to employees | |
| 97,115 | | |
| 108,145 | |
Others | |
| 12,638 | | |
| 158 | |
Less: allowance for doubtful accounts | |
| (81,798 | ) | |
| (89,716 | ) |
Total Prepaid Expenses and Other Current Assets | |
$ | 39,665 | | |
$ | 44,250 | |
NOTE 8 – LONG-TERM INVESTMENT
On March 15, 2019, Beijing Yingjun executed
an Equity Acquisition Agreement with Rongcheng Health Group Co., Ltd. and acquired a 44%
equity interest in Rongcheng Tianrun Taxus Co., Ltd. (“Rongcheng Tianrun”) for RMB 79,830,000 (approximately $11.4
million). Rongcheng Tianrun is organized and registered in the PRC, and it is engaged primarily in the cultivation and marketing of
Taxus, a type of medicinal plant. The purchase of this investment was completed in September 2019. As a result, the Company
recognized a loss on this equity investment of $33,306
and $8,166
for the nine months ended September 30, 2022 and 2021, respectively, and $26,512
and $0 nil
for the three months ended September 30, 2022 and 2021, respectively.
NOTE 9 – PROPERTY AND EQUIPMENT, NET
At September 30, 2022 and December 31, 2021, property and equipment
is as follows:
Schedule of property and equipment | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Property (1) | |
$ | 1,561,972 | | |
$ | 1,739,368 | |
Office furniture | |
| 89,414 | | |
| 104,766 | |
Computer equipment | |
| 94,081 | | |
| 99,568 | |
Vehicles | |
| 214,144 | | |
| 238,465 | |
Software (2) | |
| 478,042 | | |
| 532,334 | |
| |
| 2,437,653 | | |
| 2,714,501 | |
Less: accumulated depreciation | |
| (486,108 | ) | |
| (464,280 | ) |
Less: accumulated amortization related to software | |
| (375,339 | ) | |
| (368,953 | ) |
Property and equipment, net | |
$ | 1,576,206 | | |
$ | 1,881,268 | |
___________________
| (1) | On April 25, 2020, the Company purchased an apartment in Beijing
valued at approximately $1.7 million (RMB 12,087,760). |
| (2) | Software mainly includes financial and management systems purchased
by the Company and WeChat mini program developed by the Company. |
For nine months ended September 30, 2022 and 2021,
depreciation expense amounted to $48,664 and $152,156, respectively. For nine months ended September 30, 2022 and 2021, amortization
expense amounted to $23,897 and $24,311, respectively.
For three months ended September 30, 2022 and
2021, depreciation expense amounted to $25,676 and $45,568, respectively. For three months ended September 30, 2022 and 2021, amortization
expense amounted to $7,627 and $8,466, respectively.
NOTE 10 – DEPOSITS AND OTHER ASSETS,
NON-CURRENT
Schedule of deposits and other assets | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Office rental deposit | |
$ | 46,791 | | |
$ | 41,927 | |
Other deposit | |
| 9,849 | | |
| – | |
Total | |
$ | 56,640 | | |
$ | 41,927 | |
NOTE 11 – RELATED PARTY BALANCES AND TRANSACTIONS
As of September 30, 2022 and December 31, 2021,
due to related parties is as follows:
Schedule of related party transactions | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Tian Xiangyang (1) | |
$ | 68,055 | | |
$ | – | |
Tian Xiangdong (2) | |
| 535,226 | | |
| 21,530 | |
Total | |
$ | 603,281 | | |
$ | 21,530 | |
(1) |
This represents a loan from Ms. Tian Xiangyang, the Company's founder and chairwoman, to the Company for working capital purposes. The loan is non-interest bearing and it is due on demand. |
(2) |
Mr. Tian Xiangdong is the brother of Ms. Tian Xiangyang. The loan was for working capital purposes and it is due on demand with no interest. |
NOTE 12 – TAXES PAYABLE
At September 30, 2022 and December 31, 2021, taxes payable is as follows:
Schedule of taxes payable | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
VAT payable | |
$ | 15,702,174 | | |
$ | 17,469,904 | |
Income taxes payable | |
| 589,718 | | |
| 656,693 | |
Other taxes payable | |
| 1,986,195 | | |
| 2,215,245 | |
Total | |
$ | 18,278,087 | | |
$ | 20,341,842 | |
Under PRC tax rules that are in effect, Beijing Yingjun, the Company’s VIE,
is subject to penalties for any unpaid VAT and income taxes. The Company has accrued and recorded the related estimated penalties.
Schedule of interest and penalties payable | |
| |
Less: imputed interest | |
| (4,633 | ) |
Present value of lease liabilities | |
$ | 152,164 | |
Total lease expenses for the nine months ended
September 30, 2022 and 2021 were approximately $165,467 and $251,367.
Total lease expenses for the three months
ended September 30, 2022 and 2021 were approximately $28,394 and $68,835.
NOTE 13 – OTHER PAYABLES AND OTHER CURRENT
LIABILITIES
At September 30, 2022 and December 31, 2021, other payables and other
current liabilities are as follows:
Schedule of other payables and other current liabilities | |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Payroll and benefits (1) | |
$ | 1,895,992 | | |
$ | 1,890,535 | |
Payable to suppliers | |
| – | | |
| 328,651 | |
Commissions payable | |
| 220,536 | | |
| 567,337 | |
Penalties (2) | |
| 11,577,951 | | |
| 10,444,819 | |
Other current liabilities | |
| 1,016,647 | | |
| 800,503 | |
Total | |
$ | 14,711,126 | | |
$ | 14,031,845 | |
____________________
| (1) | Payroll and benefits payable represents
fringe benefits and last month salaries payable to the Company’s employees. |
| (2) | Penalties represent estimated penalties
related to unpaid VAT and income taxes related to Beijing Luji, which is calculated at 0.05% per day from the day tax payment is due
under applicable PRC laws and regulations. For nine months ended September 30, 2022, the Company recorded an estimated penalty of $2,276,876
and $85,552 for unpaid VAT and income taxes, respectively. For three months ended September 30, 2022, the Company recorded an estimated
penalty of $730,287 and $27,433 for unpaid VAT and income taxes, respectively. For the nine months ended September 30, 2021, the Company
recorded an estimated penalty of approximately $2,316,000 and $99,000 for unpaid VAT and income taxes, respectively.
For three months ended September 30, 2021, the Company recorded an estimated penalty of approximately $768,000 and $29,000 for unpaid
VAT and income taxes, respectively. |
NOTE 14 –STATUTORY RESERVES
Pursuant to the laws in the PRC, entities must
make appropriations from after-tax profit to a non-distributable “statutory surplus reserve fund.” Subject to certain cumulative
limits, the statutory surplus reserve fund requires annual appropriations of 10% of after-tax profit (as determined under accounting principles
generally accepted in the PRC) until the aggregated appropriations reach 50% of the registered capital.
As of September 30, 2022 and December 31, 2021,
the balance of the statutory reserve was $1,687,125.
NOTE 15 – INCOME TAXES
The entities within the Company file separate
tax returns in the respective tax jurisdictions in which they operate as follows:
British Virgin Islands
HanJiao is a tax-exempt entity incorporated in the British Virgin Islands.
Hong Kong
Inooka was incorporated in Hong Kong and does
not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the consolidated financial
statements as Inooka Holding Ltd. has no profits or operations for the nine months ended September 30, 2022 and 2021.
United States
The Company was incorporated under the laws of
the State of Nevada in the United States. It had no taxable income for the U.S. income tax purposes for the nine months ended September
30, 2022 and 2021. Nevada does not have a state income tax. The applicable federal tax rate is 21.0%.
PRC
The entities incorporated in the PRC are governed
by the income tax law of the PRC and are subject to the PRC enterprise income tax (“EIT”). The EIT rate of the PRC is 25%,
which applies to both domestic and foreign invested enterprises. Under the Provisional Regulations of the PRC Concerning Income Tax on
Enterprises promulgated by the PRC (the “EIT Law”), Beijing Yingjun qualified as a high and new technology enterprise starting
in 2018, and enjoyed a preferential tax rate of 15% for 3 years that expired in 2020 and the Company reapplied to qualify for the same
preferential tax rate in 2021 and obtained the qualification in October, 2021. The Company was qualified as a high and new technology
enterprise starting in 2021 and enjoys a preferential tax rate of 15% for 3 years that will expires in 2024. Beijing Yingjun can re-apply
as a high and new technology enterprise when the prior certificate expires. Income tax is payable at a rate of 15% of PRC taxable income
for the nine months ended September 30, 2022 and 2021.
Schedule of net loss before provision for income taxes | |
| | |
| |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
(Unaudited) | |
Non-PRC operations | |
$ | ) | |
$ | ) |
PRC operations | |
| ) | |
| ) |
Net loss before provision for income taxes | |
$ | ) | |
$ | ) |
| |
| | |
| |
| |
For the Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
(Unaudited) | |
Non-PRC operations | |
$ | | |
$ | |
PRC operations | |
| ) | |
| ) |
Net loss before provision for income taxes | |
$ | ) | |
$ | ) |
Provision for income taxes comprised of the followings:
Schedule of provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, |
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
|
(Unaudited) |
|
|
|
(Unaudited) |
|
Current tax expense |
|
|
|
|
|
|
|
|
PRC |
|
$ |
– |
|
|
$ |
– |
|
Deferred tax expense |
|
|
|
|
|
|
|
|
PRC |
|
|
– |
|
|
|
– |
|
Total provision for income taxes |
|
$ |
– |
|
|
$ |
– |
|
Provision for income taxes comprised of the followings:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
|
|
|
2022 |
|
|
|
2021 |
|
|
|
|
(Unaudited) |
|
|
|
(Unaudited) |
|
Current tax expense |
|
|
|
|
|
|
|
|
PRC |
|
$ |
– |
|
|
$ |
– |
|
Deferred tax expense |
|
|
|
|
|
|
|
|
PRC |
|
|
– |
|
|
|
– |
|
Total provision for income taxes |
|
$ |
– |
|
|
$ |
– |
|
The Company’s deferred tax assets are comprised of the following:
| |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(Unaudited) | | |
| |
Net operating loss | |
| | | |
| | |
PRC | |
$ | 1,264,122 | | |
$ | 1,034,902 | |
Total deferred tax assets | |
| 1,264,122 | | |
| 1,034,902 | |
Valuation allowance | |
| (1,264,122 | ) | |
| (1,034,902 | ) |
Deferred tax assets, net - long-term | |
$ | – | | |
$ | – | |
| |
| | |
| |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
PRC statutory tax rate | |
| 25.0% | | |
| 25.0% | |
Permanent differences | |
| (22.3% | ) | |
| (19.0% | ) |
Temporary differences | |
| 0.4% | | |
| – | |
High tech benefit | |
| (3.1% | ) | |
| (6.0% | ) |
Effective tax rate | |
| – | | |
| – | |
Below is a breakdown of key components that make up the permanent differences:
| |
| | |
| |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Penalties related to unpaid VAT and income taxes | |
| (14.9% | ) | |
| (7.6% | ) |
Non-deductible expenses | |
| (0.1% | ) | |
| (1.0% | ) |
Change in valuation allowance | |
| (1.6% | ) | |
| (10.2% | ) |
Others | |
| (5.7% | ) | |
| (0.2% | ) |
Total | |
| (22.3% | ) | |
| (19.0% | ) |
The Company's deferred tax assets were generated
from the net operating loss carry forwards of the PRC entities of the Company. The Company considers the following factors, among other
matters, when determining whether some portion or all of the deferred tax assets will more likely than not be realized: the nature, frequency
and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward years, the Company’s experience
with tax attributes expiring unused and tax planning alternatives. The Company’s ability to realize the net deferred tax assets
depends on its ability to generate sufficient taxable income within the carry forward years provided for in the tax law.
The Company’s VIE in the PRC has net operating
loss carry forwards of approximately $7.47 million
and the deferred tax asset is approximately $1.2
million as of September 30, 2022, which expires on various dates through 2027. The Company cannot file consolidated tax returns
in the PRC, therefore, losses from its VIE and individual subsidiaries may not be used to offset other VIE or subsidiaries’ earnings
within the Company. A valuation allowance is considered on each individual subsidiary or VIE when it is considered more likely than not
that their deferred tax asset will not be realized in the foreseeable future. As of September 30, 2022 and December 31, 2021, the Company
recognized a 100% valuation allowance.
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Contingencies
From time to time, the Company may be subject
to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Amounts accrued, as well as the total
amount of possible losses with respect to such matters, individually and in the aggregate, are not deemed to be material to the unaudited
condensed consolidated financial statements.
Variable interest entity structure
In the opinion of management, (i) the corporate
structure of the Company is in compliance with existing PRC laws and regulations; (ii) the VIE Arrangements are valid and binding, and
do not currently result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of the WFOE
and the VIE are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot assure that
the PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion. If the current corporate structure of
the Company or the VIE Arrangements is found to be in violation of any existing or future PRC laws and regulations, the Company may be
required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In
the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the VIE Arrangements
is remote based on current facts and circumstances.
Lease Obligations
The Company leases certain office premises and
apartments for employees under operating lease agreements with various terms that are less than one year in duration. Future minimum
lease payments amount to $152,164
for the twelve months ending September 30, 2022.
NOTE 17 - CONCENTRATION OF RISK
Risk of doing business in China
The Company conducts its operations and generates
its revenue through its Beijing VIE in the PRC. Accordingly, economic, political, and legal developments in the PRC will significantly
affect the Company’s business, financial condition, results of operations and prospects. The PRC economy is in transition from a
planned economy to a market-oriented economy subject to plans adopted by the government that set national economic development goals.
Policies of the PRC government can have significant effects on economic conditions in the PRC. While the Company believes that the PRC
will continue to strengthen its economic and trading relationships with foreign countries and that business development in the PRC will
continue to follow market forces, there is no assurance that this will be the case. The Company’s interests may be adversely affected
by changes in policies by the PRC government, including:
|
· |
changes in laws, regulations, or their interpretation; |
|
· |
confiscatory taxation; |
|
· |
restrictions on currency conversion, imports or sources of supplies, or ability to continue as a for-profit enterprise; |
|
· |
expropriation or nationalization of private enterprises; and |
|
· |
the allocation of resources. |
Concentration of credit risk
The Company places its cash with a financial
institution with a high-credit rating. Cash and cash equivalents as of September 30, 2022 was $4,792.
A depositor has up to RMB 500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”) if the bank
fails. While management believes that the financial institution is of high credit quality, it continually monitors its credit worthiness.
The Company has no uninsured cash balances as of September 30, 2022.
Foreign currency risk
The RMB is not a freely convertible currency.
The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB
into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political
developments affecting supply and demand in the China Foreign Exchange Trading System market.
Concentration of supplier risk
The Company’s utilizes various suppliers.
There were two suppliers that accounted for is 86%
and 14%
of total purchases for the nine months ended September 30, 2022.
One supplier accounted for 97% of total purchases,
for the nine months ended September 30, 2021.
There were no accounts payable balances owed to
these suppliers as of September 30, 2022 and December 31, 2021.
There were no suppliers who accounted for more
than 10% of total purchases for the three months ended September 30, 2022 and 2021.
Major customers
There were no customers who accounted for more
than 10% of total revenue for the three and nine months ended September 30, 2022 and 2021.
NOTE 18 – SUBSEQUENT EVENTS
The Company has analyzed its operations
subsequent to September 30, 2022, through the date of filing of this report and has determined that the Company does not have any
material subsequent events to disclose in these consolidated financial statements.
NOTE 19 – FINANCIAL INFORMATION OF THE
PARENT COMPANY (UNAUDITED)
The Company performed a test on the restricted
net assets of its consolidated subsidiaries in accordance with the Securities and Exchange Commission Regulation S-X Rule 5-04 and concluded
that it was applicable for the Company to disclose the financial statements for the parent company.
The subsidiary did not pay any dividends to the
Company for the periods presented. For the purpose of presenting parent only financial information, the Company records its investment
in its subsidiaries under the equity method of accounting. Such investment is presented on the separate condensed balance sheets of the
Company as “Investment in subsidiaries” and the income (loss) of the subsidiaries is presented as “share of income (loss)
of subsidiaries”. Certain information and footnote disclosures generally included in financial statements prepared in accordance
with US GAAP are not required.
The Company did not have any significant capital
and other commitments, long-term obligations, or guarantees as of September 30, 2022 and December 31, 2021.
PARENT COMPANY BALANCE SHEETS
| |
| | |
| |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Assets | |
| | | |
| | |
Current assets | |
| | | |
| | |
Investment in subsidiaries | |
$ | (14,962,328 | ) | |
$ | (12,415,158 | ) |
Total Current Assets | |
| (14,962,328 | ) | |
| (12,415,158 | ) |
Total Assets | |
$ | (14,962,328 | ) | |
$ | (12,415,158 | ) |
| |
| | | |
| | |
Liabilities and Shareholders’ Deficit | |
| | | |
| | |
Total Liabilities | |
$ | – | | |
$ | – | |
Shareholders’ Deficit | |
| | | |
| | |
Common stock: US$0.0001 par value; authorized - 500,000,000 shares; issued and
outstanding 97,201,030 shares at September 30, 2022 and December 31, 2021 | |
| 9,720 | | |
| 9,720 | |
Additional paid-in capital | |
| 7,360,741 | | |
| 7,360,741 | |
Statutory reserves | |
| 1,687,125 | | |
| 1,687,125 | |
Deficit | |
| (24,538,910 | ) | |
| (20,484,626 | ) |
Accumulated other comprehensive loss | |
| 518,996 | | |
| (988,118 | ) |
Total Shareholders’ Deficit | |
| (14,962,328 | ) | |
| (12,415,158 | ) |
| |
| | | |
| | |
Total Liabilities and Shareholders’ Deficit | |
$ | (14,962,328 | ) | |
$ | (12,415,158 | ) |
PARENT COMPANY STATEMENTS OF OPERATIONS
| |
| | |
| |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Share of loss of subsidiaries | |
$ | (4,054,284 | ) | |
$ | (5,325,479 | ) |
Net loss | |
| (4,054,284 | ) | |
| (5,325,479 | ) |
Foreign currency translation adjustments | |
| 1,507,114 | | |
| (33,119 | ) |
Comprehensive loss | |
$ | (2,547,170 | ) | |
$ | (5,358,598 | ) |
PARENT COMPANY STATEMENTS OF COMPREHENSIVE
(LOSS)
| |
| | |
| |
| |
For the Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
Share of loss of subsidiaries | |
$ | (1,143,464 | ) | |
$ | (1,336,775 | ) |
Net loss | |
| (1,143,464 | ) | |
| (1,336,775 | ) |
Foreign currency translation adjustments | |
| 791,017 | | |
| (17,027 | ) |
Comprehensive loss | |
$ | (352,447 | ) | |
$ | (1,353,802 | ) |
PARENT COMPANY STATEMENTS OF CASH FLOWS
| |
| | |
| |
| |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
Cash flows from operating activities | |
| | | |
| | |
Net loss | |
$ | (760,703 | ) | |
$ | (5,325,479 | ) |
Adjustments to reconcile net loss income to cash used in operating activities: | |
| | | |
| | |
Share of loss of subsidiaries | |
| (760,703 | ) | |
| (5,325,479 | ) |
Net cash provided by used in operating activities | |
| – | | |
| – | |
| |
| | | |
| | |
Changes in cash and cash equivalents | |
| – | | |
| – | |
Cash and cash equivalents at beginning of year | |
| – | | |
| – | |
Cash and cash equivalents at end of year | |
$ | – | | |
$ | – | |