ITEM
2.01
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COMPLETION
OF ACQUISITION OR DISPOSITION OF ASSETS
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As
previously reported in a Current Report on Form 8-K filed, on April 1, 2019, we entered into a definitive Share Exchange Agreement
(the “Share Exchange Agreement”) with Bangtong International and the shareholders of Bangtong International, including
our Chairman and Chief Executive Officer, Xianyi Hao, Guanhua International Limited, Zhengyu International Limited Wanbo International
Limited and Zhuohong International Development Limited (the “Shareholders”). Pursuant to the Share Exchange Agreement,
the Shareholders agreed to transfer 72,720,000 ordinary shares of Bangtong International held by them, constituting all of the
issued and outstanding capital stock of Bangtong International, in exchange for 100,000,000 newly issued shares of our common
stock (the “Shares”) that will, in the aggregate, constitute approximately 89.6% of the issued and outstanding capital
stock of the Company on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by
the Share Exchange Agreement. On June 21, 2019, we completed the acquisition of Bangtong International pursuant to the Share Exchange
Agreement (the “Reverse Acquisition”). As a result of the Reverse Acquisition, Bangtong International became our wholly-owned
subsidiary and the former shareholders of Bangtong International became our major shareholders. The Reverse Acquisition was accounted
for as a recapitalization effected by a share exchange, wherein Bangtong International is considered the acquirer for accounting
and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value
and no goodwill has been recognized.
FORM
10 DISCLOSURE
As
disclosed elsewhere in this report, on June 21, 2019, we acquired Bangtong International in the Reverse Acquisition. Item 2.01(f)
of Form 8-K states that if the registrant was a shell company, as we were immediately before the reverse acquisition transaction
disclosed under Item 2.01, then the registrant must disclose the information that would be required if the registrant were filing
a general form for registration of securities on Form 10.
Accordingly,
we are providing below the information that would be included in a Form 10 if we were to file a Form 10. Please note that the
information provided below relates to the combined enterprises after our acquisition of Bangtong International, except that information
relating to periods prior to the date of the Reverse Acquisition only relates to Bangtong International and its subsidiaries and
consolidated entities unless otherwise specifically indicated.
BUSINESS
Our
Corporate History and Background
We
were incorporated on March 19, 2013 under the name “Sunrise Tours, Inc.” under the laws of the state of Nevada. We
originally intended to develop and offer special services, including 3D virtual tours for companies that would like to promote
their venues on the Internet and through electronic media. On January 20, 2016, we filed a Certificate of Amendment with the Secretary
of State of Nevada and changed our corporate name to “Luboa Group, Inc.” Concurrently with the name change, we changed
our principal business plan to developing specialized agricultural products and a carbon emission trading platform in Asia. However,
since inception, we have not engaged in active business operations and have not generated significant amount of revenue.
On
January 7, 2019, through a series of private transactions, our former officer and director, Mr. Feng Jiang acquired an aggregate
of 10,799,000 shares of common stock of the Company, representing 93.09% of the issued and outstanding share capital of the Company
on a fully-diluted basis, and accordingly became the controlling shareholder of the Company, which caused a change in control
of the Company.
Upon
the change of control of the Company, all of our then officers and directors resigned from their respective offices and Mr. Jiang
became our President, CEO, CFO, Treasurer, Secretary and Chairman of the Board of Directors.
On
April 1, 2019, we entered into the Exchange Agreement with Bangtong International and holders of all outstanding capital stock
of Bangtong International, pursuant to which on June 21, 2019, we acquired 100% of the outstanding capital stock of Bangtong International,
and in exchange, we issued to the former shareholders of Bangtong International an aggregate of 100,000,000 shares of the Company’s
common stock. As a result of the Reverse Acquisition, Bangtong International became our wholly-owned subsidiary and the former
shareholders of Bangtong International became the holders of approximately 89.6% of our issued and outstanding capital stock on
a fully-diluted basis. For accounting purposes, the transaction with Bangtong International was treated as a reverse acquisition,
with Bangtong International as the acquirer and the Company as the acquired party. Unless the context suggests otherwise, when
we refer in this report to business and financial information for periods prior to the consummation of the Reverse Acquisition,
we are referring to the business and financial information of Bangtong International and its subsidiaries and consolidated entities.
In connection with the Reverse Acquisition, Mr. Feng Jiang resigned from his positions as of President, CEO, CFO, Treasurer, Secretary
and Chairman of the Board of Directors. Mr. Xianyi Hao was appointed as our new President, CEO, CFO, Treasurer, Secretary and
Chairman of the Board of Directors.
As
a result of our acquisition of Bangtong International, we now own all of the issued and outstanding shares of Bangtong International,
a holding company, which in turn owns all of the equity capital of Bangtong Development and its subsidiaries.
As
of the date of this report, we have the following subsidiaries and affiliated entities:
Bangtong
International, a Seychelles holding company, was formed on May 25, 2018. Xianyi Hao is the sole director of Bangtong International.
Bangtong
Development, a Seychelles holding company, was formed on May 24, 2018. Xianyi Hao is the sole director of Bangtong Development.
Bangtong
Group, a Hong Kong holding company, was formed on May 30, 2018. The sole director of Bangtong Group is Xianyi Hao.
Jiaxing
Bangtong, a PRC company, was formed on November 5, 2018 and is engaged in the business of electronic technology development, service
and consulting. Its legal representative is Qi Wang.
Shenzhen
Bangtong, a PRC company, was formed on November 27, 2015 and is engaged in the business of electronic technology development and
e-commerce. Its legal representative is Xianyi Hao
.
Jiaxing
Electronic, a PRC company, was formed on September 3, 2018 and is expected to engage in the e-commerce business. Its legal
representative is Qi Wang
.
Shenyang
Bangtong, a PRC company, was formed on May 23, 2018 and is expected to engage in the logistics business with warehousing and delivery
capabilities. Its legal representative is Ming Zhao.
Hegang
Bangtong is a PRC trading company. We expect that Hegang Bangtong’s business will focus on our inventory procurement from
Russia and other European countries. Hegang Bangtong was formed on July 13, 2018 and it legal representative is Xianyi Hao.
As
described below in more detail, through our variable interest entities in PRC (“VIEs”), including Shenzhen Bangtong
and its subsidiaries, Jiaxing Electronic, Shenyang Bangtong and Hegang Bangtong, which have contractual arrangements with Jiaxing
Bangtong, we are a new startup company developing our e-commerce business.
Our
Corporate Structure
Foreign
ownership of Internet-based businesses is subject to significant restrictions under current PRC laws and regulations. We, as a
Nevada corporation and our subsidiaries, including Bangtong International, Bangtong Development, Bangtong Group and Jiaxing Bangtong,
are all restricted from holding licenses that are necessary for our online e-commerce business in China. To comply with these
restrictions, our consolidated VIEs, Shenzhen Bangtong and its subsidiaries are expected to directly operate our business. We
have entered into contractual arrangements with our VIE and its shareholders. Through these arrangements, we exercise effective
control over the operations of these entities and receive the economic benefits of these entities. As a result of these contractual
arrangements, under U.S. GAAP, we are considered the primary beneficiary of Shenzhen Bangtong and thus consolidate its results
in our consolidated financial statements.
The
following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiaries, the VIEs
and the shareholders of the VIEs.
Agreements
that provide us with effective control over Shenzhen Bangtong and its subsidiaries
Loan
Agreement.
On November 6, 2018, Jiaxing Bangtong and each shareholder of Shenzhen Bangtong entered into a loan agreement.
Pursuant to the loan agreements, Jiaxing Bangtong agreed to provide an aggregate of RMB12,230,000 of loan to the shareholders
of Shenzhen Bangtong solely for the purpose of capital contribution. The shareholders of Shenzhen Bangtong should cause Shenzhen
Bangtong at the request of Jiaxing Bangtong to, execute contracts on business cooperation with Jiaxing Bangtong and provide Jiaxing
Bangtong with all the information on its business operations and financial condition. In addition, at the request of Jiaxing Bangtong
or a party designated by Jiaxing Bangtong, the shareholders of Shenzhen Bangtong should cause Shenzhen Bangtong appoint any persons
designated by Jiaxing Bangtong as directors and/or executive director of Jiaxing Bangtong. The shareholders also agreed not to
sell, transfer or dispose of any equity interests in Shenzhen Bangtong or allow the encumbrance on these equity interests. The
shareholders can only repay the loan by the transfer of all their equity interests in Shenzhen Bangtong to Jiaxing Bangtong or
its designated persons. As of the date of this report, the loan has not been extended to the shareholders of Shenzhen Bangtong.
Equity
Interest Pledge Agreement.
On November 6, 2018, Jiaxing Bangtong and Shenzhen Bangtong and each shareholder of Shenzhen
Bangtong entered into an equity interest pledge agreement. Pursuant to the equity interest pledge agreements, each shareholder
of Shenzhen Bangtong agreed to pledge 100% equity interests in Shenzhen Bangtong to Jiaxing Bangtong to guarantee their and Shenzhen
Bangtong’s performance of their obligations under the contractual arrangements including the exclusive business cooperation
agreement, the exclusive option agreement, the loan agreement and the power of attorney. In the event of a breach by Shenzhen
Bangtong or its shareholders of their contractual obligations under these agreements, Jiaxing Bangtong, as pledgee, will have
the right to dispose of the pledged equity interests in Shenzhen Bangtong. The shareholders of Shenzhen Bangtong also undertake
that, during the term of the equity interest pledge agreements, they will not dispose of the pledged equity interests or create
or allow any encumbrance on the pledged equity interests. During the term of the equity pledge agreements, Jiaxing Bangtong also
has the right to receive all of the dividends distributed on the pledged equity interests. As of the date of this report, we have
completed the registration of the equity interest pledges with the relevant office of the administration for industry and commerce
in accordance with the PRC Property Rights Law
.
Power
of Attorney.
On November 6, 2018, each shareholder of Shenzhen Bangtong granted irrevocable and exclusive power of attorney
to Jiaxing Bangtong as his/her attorney-in-fact to exercise all shareholder rights, including, but not limited to, attend shareholders
meeting of Shenzhen Bangtong, voting on their behalf on all matters of Shenzhen Bangtong, disposing of all or part of the shareholder’s
equity interest in Shenzhen Bangtong, approving the amendments to Shenzhen Bangtong’s articles of association and electing,
appointing or removing legal representative, directors, supervisors and executive officers of Shenzhen Bangtong. Each power of
attorney will remain in force for so long as the shareholder remains a shareholder of Shenzhen Bangtong. Each shareholder has
waived all the rights which have been authorized to Jiaxing Bangtong under each power of attorney.
Spouse
Consent Letters.
Pursuant to the spouse consent letters dated November 6, 2018, each spouse of the shareholders of Shenzhen
Bangtong, if any, confirmed that his/her spouse can perform the obligations under the contractual arrangements and has sole discretion
to amend and terminate the contractual arrangements. Each spouse agreed that the equity interest in Shenzhen Bangtong held by
and registered in the name of his/her spouse will be disposed of pursuant to the equity interest pledge agreement, the exclusive
option agreement and the power of attorney. In addition, in the event that each spouse obtains any equity interest in Shenzhen
Bangtong held by his/her spouse for any reason, he/she agreed to be bound by the contractual arrangements.
Agreement
that allows us to receive economic benefits from Shenzhen Bangtong
Exclusive
Business Cooperation Agreement.
On November 6, 2018, Jiaxing Bangtong and Shenzhen Bangtong entered into an exclusive
business cooperation agreement. Under the agreement, Jiaxing Bangtong has the exclusive right to provide Shenzhen Bangtong with
comprehensive technical support, consulting services and other related services. Without Jiaxing Bangtong’s prior written
consent, Shenzhen Bangtong may not accept any same or similar services provided by any third party and may not establish same
or similar cooperation relationships with any third party regarding the matters contemplated by this agreement. Shenzhen Bangtong
agreed to pay Jiaxing Bangtong an annual service fee, at an amount to be determined by the parties by considering, among other
things, the complexity of the services, the time that may be spent for providing such services, the value and specific content
of the service provided, the market price of the same types of services, and the operating condition of Shenzhen Bangtong. In
addition, Jiaxing Bangtong will own the exclusive intellectual property rights created as a result of the performance of this
agreement. This agreement will remain effective until terminated unilaterally by Jiaxing Bangtong or otherwise upon the expiration
of the operation term of a party according to this agreement.
Agreement
that provides us with the option to purchase the equity interest in Shenzhen Bangtong
Exclusive
Option Agreement.
On November 6, 2018, Jiaxing Bangtong, Shenzhen Bangtong and each shareholder of Shenzhen Bangtong entered
into an exclusive option agreement. Pursuant to the exclusive option agreement, each shareholder of Shenzhen Bangtong irrevocably
grants Jiaxing Bangtong an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the
extent permitted under PRC law, all or part of the shareholder’s equity interests in Shenzhen Bangtong. In addition, the
purchase price should be the amount of registered capital, which may be subject to fair value adjustments if required by the PRC
laws. Without the prior written consent of Jiaxing Bangtong, the shareholders of Shenzhen Bangtong and Shenzhen Bangtong may not
amend Shenzhen Bangtong’s articles of association, increase or decrease the registered capital, dispose of its assets or
business, create any encumbrance on its assets or business, incur any debts or guarantee liabilities, enter into any material
contracts, merger with or acquire any other persons or make any investments, provide any loans for any third parties or distribute
dividends to the shareholders. Each shareholder of Shenzhen Bangtong agrees that, without the prior written consent of Jiaxing
Bangtong, he/she will not dispose of his/her equity interests in Shenzhen Bangtong or create or allow any encumbrance on the equity
interests. Each exclusive option agreement will remain effective until all equity interests have been transferred or assigned
in accordance with the agreement.
The
foregoing description of the contractual arrangements is qualified in its entirety by reference to the text of the Loan Agreement,
Equity Interest Pledge Agreement, a copy of each these agreements is incorporated by reference as Exhibits 10.1 through 10.6 hereto.
In
the opinion of Jin Yong Law Firm, our PRC legal counsel:
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the
ownership structure of Jiaxing Bangtong and our VIEs is not in violation of PRC laws or regulations currently in effect; and
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the
contractual arrangements among Jiaxing Bangtong, our VIEs and their respective shareholders governed by PRC law are valid,
binding and enforceable, and do not result in any violation of PRC laws or regulations currently in effect.
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However,
we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and
application of current and future PRC laws, regulations and rules, and there can be no assurance that the PRC regulatory authorities
will ultimately take a view that is consistent with the opinion stated above. Accordingly, the PRC regulatory authorities may
in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. If the PRC
government finds that the agreements that establish the structure for operating our mobile internet business do not comply with
PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited
from continuing operations. See “Risk Factors—Risks Relating to our Commercial Relationship with VIEs— PRC laws
and regulations governing our businesses and the validity of certain of our Contractual Arrangements are uncertain. If we are
found to be in violation of such PRC laws and regulations, our business may be negatively affected and we may be forced to relinquish
our interests in those operations, and “Risk Factors— Risk Related to Doing Business in China —Uncertainties
in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.”
The
chart below presents our corporate structure as of the date of this report:
Our
principal executive offices are located at Room 202-1, Building #21 of Intelligence and Wealth Center, Jiaxing, Zhejiang Province,
China, 314000. The telephone number at our principal executive office is +86-537-82239727.
Our
Business Plan
We
are a startup e-commerce company with operations in China and most of our subsidiaries and VIEs were formed in 2018. We have yet
to officially launch our e-commerce platform, Ingertona(英格多纳), which is still under development and
is expected to offer our full array of product offerings when it is ready. Accordingly, we have not yet commenced planned operations
to any significant measure. Our operations to date have been devoted primarily to start-up, development and operational activities,
which include:
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1.
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Formation
of our subsidiaries;
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2.
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Development
of our business plan;
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3.
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Research
on marketing channels/strategies for our planned business; and
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4.
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The
development of our e-commerce platform.
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Our
E-Commerce Platform
On October 26, 2018, Jiaxing Electronic
entered into a strategic cooperation contract with Beijing Xietongtianxia Technology Co., Ltd. (“Beijing Xietong”),
pursuant to which, Beijing Xietong agreed to act as Jiaxing Electronics’ strategic consultant for its business,
including but not limited to providing technical support to Jiaxing Electronic’s development and operation of its
e-commerce platform. Our e-commerce platform, Ingertona, includes the following principal components:
1.
Website – ingertona.cn. The PC-based website provides a user-friendly and intuitive interface allowing consumers
to conveniently search for, find and purchase the products they are looking for. Our website contains product information, such
as description, specification, pictures, price and applicable delivery expenses. Customers can conveniently browse and search
for products based on product functionality and can sort product listings by popularity, consumer ratings, price and brand. Various
kinds of online payment methods will be offered to customers at the time they place their orders, such as WeChat Pay, AliPay and
UnionPay. Customers can log into their accounts to check the status of their orders. We are at the final stage of developing the
website and are currently testing its performance and functionality. We expect to fully launch our website platform during the
second half of 2019.
2.
Mobile app- Our mobile application, Ingertona (英格多纳), for iOS and Android operating systems allows
consumers to conveniently search and purchase the products on their mobile devices. Our mobile application offers similar features
as our PC-based website. We are at the final stage of the development of the mobile application and currently testing its performance
and functionality. We expect to fully roll out our mobile application during the second half of 2019.
3.
WeChat public account – Customers can also access our e-commerce platform through our WeChat public account. As WeChat has
both desktop and mobile versions, our customers can easily access our product offerings from their computers and mobile devices.
We have established the WeChat public account, which is currently under trail operations. We expect that we will officially launch
this account during the second half of 2019.
Our
Business Model
Registered
users of our Ingertona e-commerce platform can be divided into two categories – third-party merchants and customers. Third-party
merchants, including enterprise merchants and individual merchants, sell various merchandise products on the platform and customers
purchase these products using the same platform. Leveraging our multifaceted e-commerce platform, we plan to offer both online
market place and online direct sales businesses to our online customers.
In
our online marketplace business, third-party merchants may establish online stores to offer products to customers over our online
marketplace. We will charge an annual service fee on our merchants for our services, such as webpage maintenance, WeChat account
access, and certain promotion activities. We intend to charge commission based on a percentage of transaction value generated
on our online marketplace. The commission percentages are expected to range from 0.5% to 5.0% depending on the business and product
category. In addition, we plan to provide marketing and advertisement services to our third-party merchants. Prices for advertisements
on our platform network will be fixed under contracts between us and the third-party merchants. The prices will depend on the
display locations, the number of time slots and the display size. We intend to review our prices periodically and make adjustments
as necessary in light of market conditions.
While
we will continually seek to add more products that appeal to our customers, we intend to initially offer groceries, such
as soft drinks, dairy products, fruits and chocolate candies, skin care products and daily necessities through our third-party
merchants. Our initial phase of business plan will focus on marketing of the above categories due to the proven popularity
of purchasing these items on the internet. We plan to continuously add products and categories to our e-commerce platform.
In
our online direct sales business, we plan to acquire products from suppliers and sell them directly to customers. Before our own
can provide all fulfillment and delivery services, we may rely partially on independent couriers to deliver products. Sometimes
suppliers in our direct sales operation may deliver products to our customers themselves. Third-party sellers on our marketplace
may also use their own logistics network or other third-party couriers to deliver products.
To
provide customers with a more dynamic and interactive integrated shopping experience, we also plan to open offline franchise stores
as a supplement to our growth strategy during the second half of 2019. Merchants registered with us can apply to join the franchise
and operate the stores. New franchisees are required to pay an initial fee for a franchise license and once a franchise store
begins operations, franchisees are required to pay us annually as royalty.
Sales
and Marketing
We
plan to engage various marketing channels to expand our business to more merchants and customers. In order to attract more third-party
merchants, we intend to waive platform user fees in the initial stage of platform operation. To enhance the awareness of our e-commerce
platform, we intend to launch various advertising campaigns through a variety of media. We will join the offline e-commerce organizations,
hold app promotion meetings and invite merchants to promote our brand image. In addition, we intend to provide various incentives
to our customers to increase their spending and loyalty, and we will send online messages to our customers periodically with product
recommendations or promotions.
We
also intend to offer a personalized e-commerce experience to our customers by delivering targeted product recommendations based
on customers’ browsing and purchase histories.
In
addition to the online marketing activities, we also utilize offline activities to attract more customers and promote our brand
recognition. For example, according to customer purchasing behavior and preferences, we will divide them into different “communities”
and organize parties, group tours and other social gatherings in which our registered merchants may act as sponsors by providing
goods or services to the event. We may charge certain commission on products sold by our registered merchants in such events.
Our
Competition
The
e-commerce industry in China is intensely competitive. The online commerce market is rapidly evolving and intensely competitive,
and we expect the competition to intensify in the future. Our current or potential competitors include “Little Red Book
(Xiao Hong Shu)” and “Foreign Port (Yang Ma Tou)”.
We
anticipate that the e-commerce market will continually evolve and will continue to experience rapid technological change, evolving
industry standards, shifting customer requirements, and frequent innovation. We must continually innovate to remain competitive.
We believe that the principal competitive factors in our industry are:
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brand
recognition and reputation;
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product
quality and selection;
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c
onvenience
and pricing;
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fulfillment
capabilities; and
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customer
service.
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Many
of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than us. In addition, online retailers may be acquired by, receive
investments from or enter into other commercial relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Some of our competitors may be able to secure merchandise from vendors on
terms that are more favorable, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to website and systems development than our company.
Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can
be no assurance that we will be able to compete successfully against current and future competitors, and competitive pressures
faced by us may have a material adverse effect on our financial condition, operational results, business, and prospects. In addition,
new and enhanced technologies may increase the competition in the online retail industry. New competitive business models may
appear, for example based on new forms of social media or social commerce.
Our
Intellectual Property
While
we currently do not own any patents or software copyrights in China, we believe trademarks, copyrights, patents, domain names,
know-how, proprietary technologies, and similar intellectual property will be critical to our success. We intend to rely on intellectual
properties laws and confidentiality and non-compete agreements with our employees and others to protect our proprietary rights
that we may have. We are in the process of registering our domain name: www. m.ingertona.cn.
Regulations
Online
commerce in China is subject to a number of laws and regulations. This section summarizes material PRC regulations relevant to
our business and operations in China and the key provisions of such regulations.
Regulations
Relating to Foreign Investment
Investment
activities in the PRC by foreign investors are mainly governed by the Guidance Catalog of Industries for Foreign Investment (2017
revision), or the Catalog, which was promulgated jointly by the Ministry of Commerce and the National Development and Reform Commission
on June 28, 2017 and entered into force on July 28, 2017. The Catalog divides industries into four categories in terms of foreign
investment, which are “encouraged,” “restricted,” and “prohibited,” and all industries that
are not listed under one of these categories are deemed to be “permitted.” Establishment of wholly foreign-owned enterprises
is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint
ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition,
foreign investment in restricted category projects is subject to government approvals. Foreign investors are not allowed to invest
in industries in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless
specifically restricted by other PRC regulations.
In
June 2018, the Ministry of Commerce and the National Development and Reform Commission promulgated the Special Management Measures
(Negative List) for the Access of Foreign Investment, or the Negative List, effective July 2018. The Negative List expands the
scope of permitted industries by foreign investment by reducing the number of industries that fall within the Negative List where
restrictions on the shareholding percentage or requirements on the composition of board or senior management still exists. Foreign
investment in value-added telecommunications services (except for e-commerce) falls within the Negative List.
In
October 2016, the Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Establishment and Change
of Foreign-invested Enterprises, most recently amended in July 2017. Pursuant to these measures, the establishment and change
of foreign-invested enterprises are subject to record-filing procedures, instead of prior approval requirements, provided that
such establishment or change does not involve special entry administration measures. If the establishment or change of foreign-invested
enterprise matters involve the special entry administration measures, the approval of the Ministry of Commerce or its local counterparts
is still required.
On
March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, which will come into effect on January
1, 2020 and upon then the existing foreign investment laws in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative
Joint Venture Law and the Wholly Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation rules
and ancillary regulations will be replaced. According to the Foreign Investment Law, foreign investment shall enjoy pre-entry
national treatment, except for those foreign invested entities that operate in industries deemed to be either “restricted”
or “prohibited” in the “negative list.” Foreign invested entities operating in foreign “restricted”
or “prohibited” industries will require entry clearance and other approvals. However, it is unclear whether the “negative
list” will differ from the Negative List. In addition, the new law does not comment on the concept of “de facto control”
or contractual arrangements with VIEs, however, it has a catch-all provision under definition of “foreign investment”
to include investments made by foreign investors in China through means stipulated by laws or administrative regulations or other
methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions
to provide for contractual arrangements as a form of foreign investment. See “Risk Factors—Risks Relating to our Commercial
Relationship with VIEs— Our contractual arrangement with VIEs may be affected by the newly enacted Foreign Investment Law.”
Regulations
Relating to Value-Added Telecommunication Services
Among
all of the applicable laws and regulations, the Telecommunication Regulations of the People’s Republic of China, or the
Telecom Regulations, promulgated by the PRC State Council on September 25, 2000 and amended on July 29, 2014 and February 6, 2016,
respectively, is the primary governing law, and sets out the general framework for the provision of telecommunications services
by domestic PRC companies. Under the Telecom Regulations, telecommunications service providers are required to procure operating
licenses prior to their commencement of operations. The Telecom Regulations distinguish “basic telecommunications services”
from “value-added telecommunication services”. Value-added telecommunication services are defined as telecommunications
and information services provided through public networks. The Telecom Catalogue was issued as an attachment to the Telecom Regulations
to categorize telecommunications services as either basic or value-added. In February 2003 and December 2015, the Telecom Catalogue
was updated, respectively, categorizing online data and transaction processing, information services, among others, as value-added
telecommunication services.
The
Administrative Measures on Telecommunications Business Operating License, promulgated by the Ministry of Industry and Information
Technology in 2009 and amended in July 2017, which set forth more specific provisions regarding the types of licenses required
to operate value-added telecommunication services, the qualifications and procedures for obtaining such licenses and the administration
and supervision of such licenses. Under these regulations, a commercial operator of value-added telecommunication services must
first obtain a license from the Ministry of Industry and Information Technology or its provincial level counterparts, otherwise
such operator might be subject to sanctions including corrective orders and warnings from the competent administration authority,
fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered to close.
Regulations
Relating to E-Commerce
In
May 2010, the State Administration of Industry and Commerce adopted the Interim Measures for the Administration of Online Commodities
Trading and Relevant Services, which took effective in July 2010. Under these measures, enterprises or other operators which engage
in online commodities trading and other services and have been registered with the State Administration of Industry and Commerce
or its local branches must make the information stated in their business license available to the public or provide a link to
their business license on their website. Online distributors must adopt measures to ensure safe online transactions, protect online
shoppers’ rights and prevent the sale of counterfeit goods. Information on products and transactions released by online
distributors must be authentic, accurate, complete and sufficient.
In
January 2014, the State Administration of Industry and Commerce promulgated the Administrative Measures for Online Trading, which
terminated the above interim measures and became effective in March 2014. The Administrative Measures for Online Trading further
strengthen the protection of consumers and impose more stringent requirements and obligations on online business operators and
third-party online marketplace operators. For example, online business operators are required to issue invoices to consumers for
online products and services. Consumers are generally entitled to return products purchased from online business operators within
seven days upon receipt, without giving any reason. Online business operators and third-party online marketplace operators are
prohibited from collecting any information on consumers and business operators, or disclosing, selling or providing any such information
to any third party, or sending commercial electronic messages to consumers, without their consent. Fictitious transactions, deletion
of adverse comments and technical attacks on competitors’ websites are prohibited as well. In addition, third-party online
marketplace operators are required to examine and verify the identifications of the online business operators and set up and keep
relevant records for at least two years. Moreover, any third-party online marketplace operator that simultaneously engages in
online trading for products and services should clearly distinguish itself from other online business operators on the marketplace
platform.
In
March 2016, the State Administration of Taxation, the Ministry of Finance and the General Administration of Customs jointly issued
the Circular on Tax Policy for Cross-Border E-commerce Retail Imports, which took effect in April 2016. Pursuant to this circular,
goods imported through the cross-border e-commerce retail are subject to tariff, import value-added tax, or VAT, and consumption
tax based on the types of goods. Individuals purchasing any goods imported through cross-border e-commerce retail are taxpayers,
and e-commerce companies, companies operating e-commerce transaction platforms or logistic companies are required to withhold
the taxes.
On
August 31, 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective
on January 1, 2019. Pursuant to the E-Commerce Law, an e-commerce platform operator shall (i) collect, verify and register the
truthful information submitted by the merchants that apply to sell products or provide services on its platform, including the
identities, addresses, contacts and licenses, establish registration archives and update such information on a regular basis;
(ii) submit the identification information of the merchants on its platform to market regulatory administrative department as
required and remind the merchants to complete the registration with market regulatory administrative department; (iii) submit
identification information and tax-related information to tax authorities as required in accordance with the laws and regulations
regarding the administration of tax collection and remind the individual merchants to complete the tax registration; (iv) record
and retain the information of the products and information on its platform and the sales information for no less than 3 years;
(v) display the platform service agreement and the transaction rules or links to such information on the homepage of the platform;
(vi) display the noticeable labels regarding the products or services provided by the platform operator itself on its platform,
and take liabilities for such products and services; (vii) establish a credit evaluation system, display the credit evaluation
rules, provide consumers with accesses to make comments on the products and services provided on its platform, and restrain from
deleting such comments; and (viii) establish intellectual property protection rules, and take necessary measures when any intellectual
property holder notify the platform operator that his intellectual property rights have been infringed. An e-commerce platform
operator shall take joint liabilities with the relevant merchants on its platform and may be subject to warnings and fines up
to RMB2,000,000 where (i) it fails to take necessary measures when it knows or should have known that the products or services
provided by the merchants on its platform do not meet the personal or property safety requirements or such merchants’ other
acts may infringe on the lawful rights and interests of the consumers; or (ii) it fails to take necessary measures, such as deleting
and blocking information, disconnecting, terminating transactions and services, when it knows or should have known that the merchants
on its platform infringe any intellectual property rights of any other third party. With respect to products or services affecting
the consumers’ life and health, if an e-commerce platform operator fails to verify the merchants’ qualification or
fails to fulfill its obligations to safeguard the safety of consumers, which results in damages to the consumers, it shall take
corresponding liabilities and may be subject to warnings and fines up to RMB2,000,000.
We
are subject to these measures as a result of our online direct sales and online marketplace.
Regulations
Relating to Internet Information Security
In
1997, the Ministry of Public Security promulgated measures that prohibit use of the internet in ways which, among other things,
result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service provider
violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut
down its websites.
Internet
information in China is regulated and restricted from a national security standpoint. The Standing Committee of the National People’s
Congress has enacted the Decisions on Maintaining Internet Security on December 28, 2000 and further amended on August 27, 2009,
which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system
of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial
information; or (v) infringe intellectual property rights.
The
PRC Cybersecurity Law was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and
became effective on June 1, 2017. Under this regulation, network operators, including online lending information service providers,
shall comply with laws and regulations and fulfill their obligations to safeguard security of the network when conducting business
and providing services, and take all necessary measures pursuant to laws, regulations and compulsory national requirements to
safeguard the safe and stable operation of the networks, respond to network security incidents effectively, prevent illegal and
criminal activities, and maintain the integrity, confidentiality and usability of network data.
We
have, in accordance with relevant provisions on network security of the PRC, established necessary mechanisms to protect information
security, including, among others, adopting necessary network security protection technologies such as anti-virus firewalls, intrusion
detection and data encryption, keeping record of network logs, and implementing information classification framework.
Regulations
Relating to Privacy Protection
The
Several Provisions on Regulating the Market Order of Internet Information Services, issued by the Ministry of Industry and Information
Technology in December 2011, provide that, an internet information service provider may not collect any user personal information
or provide any such information to third parties without the consent of a user. An internet information service provider must
expressly inform the users of the method, content and purpose of the collection and processing of such user personal information
and may only collect such information necessary for the provision of its services. An internet information service provider is
also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal
information, online lending service providers must take immediate remedial measures and, in severe circumstances, make an immediate
report to the telecommunications regulatory authority.
In
addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the
National People’s Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal
Information issued by the Ministry of Industry and Information Technology in July 2013, any collection and use of user personal
information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be
within the specified purposes, methods and scopes.
The
Guidelines jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require service providers
to improve technology security standards, and safeguard user and transaction information. The Guidelines also prohibit service
providers from illegally selling or disclosing users’ personal information. Pursuant to the Ninth Amendment to the Criminal
Law issued by the Standing Committee of the National People’s Congress in August 2015, which became effective in November
2015, any internet service provider that fails to fulfill the obligations related to internet information security administration
as required by applicable laws and refuses to rectify upon orders is subject to criminal penalty for the result of (i) any dissemination
of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any
serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal
information to others in a way violating the applicable law, or (ii) steals or illegally obtain any personal information is subject
to criminal penalty in severe situation.
Regulations
Relating to Advertising Business
The
State Administration for Market Regulation is the government agency responsible for regulating advertising activities in the PRC.
According to PRC laws and regulations, companies that engage in advertising activities must obtain a business license from the
State Administration for Market Regulation or its local branches which specifically includes operating an advertising business
within its business scope. The business license of an advertising company is valid for the duration of its existence, unless the
license is suspended or revoked due to a violation of any relevant law or regulation. PRC advertising laws and regulations set
forth certain content requirements for advertisements in the PRC including, among other things, prohibitions on false or misleading
content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination
or infringement of the public interest. Advertisers, advertising agencies, and advertising distributors are required to ensure
that the content of the advertisements they prepare or distribute is true and in full compliance with applicable law. In providing
advertising services, advertising operators and advertising distributors must review the supporting documents provided by advertisers
for advertisements and verify that the content of the advertisements complies with applicable PRC laws and regulations. Prior
to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated
to verify that such censorship has been performed and approval has been obtained. The release or delivery of advertisements through
the internet must not impair the normal use of the network by users. The advertisements released in pop-up form on a webpage and
other forms must show the close flag prominently and ensure one-click close. Violation of these regulations may result in penalties,
including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to eliminate
the effect of illegal advertisement. In circumstances involving serious violations, the State Administration for Market Regulation
or its local branches may revoke the violators’ licenses or permits for their advertising business operations.
In
July 2016, the State Administration of Industry and Commerce issued the Interim Measures for the Administration of Internet Advertising
to regulate internet advertising activities. According to these measures, no advertisement of any medical treatment, medicines,
food for special medical purpose, medical apparatuses, pesticides, veterinary medicines, dietary supplement or other special commodities
or services subject to examination by an advertising examination authority as stipulated by laws and regulations may be published
unless the advertisement has passed such examination. In addition, no entity or individual may publish any advertisement of over-the-counter
medicines or tobacco on the internet. An internet advertisement must be identifiable and clearly identified as an “advertisement”
to the consumers. Paid search advertisements are required to be clearly distinguished from natural search results. In addition,
the following internet advertising activities are prohibited: providing or using any applications or hardware to intercept, filter,
cover, fast forward or otherwise restrict any authorized advertisement of other persons; using network pathways, network equipment
or applications to disrupt the normal data transmission of advertisements, alter or block authorized advertisements of other persons
or load advertisements without authorization; or using fraudulent statistical data, transmission effect or matrices relating to
online marketing performance to induce incorrect quotations, seek undue interests or harm the interests of others. Internet advertisement
publishers are required to verify relevant supporting documents and check the content of the advertisement and are prohibited
from publishing any advertisement with unverified content or without all the necessary qualifications. Internet information service
providers that are not involved in internet advertising business activities but simply provide information services are required
to block any attempt to publish an illegal advisement that they are aware of or should reasonably be aware of through their information
services.
Regulations
Relating to Intellectual Property
The
Standing Committee of the National People’s Congress and the State Council have promulgated comprehensive laws and regulations
to protect trademarks. The Trademark Law of the PRC (2013 revision) promulgated on August 23, 1982 and subsequently amended on
February 22, 1993, October 27, 2001 and August 30, 2013, respectively, and the Implementation Regulation of the Trademark Law
(2014 revision) issued by the State Council on August 3, 2002 and amended on April 29, 2014 are the main regulations protecting
registered trademarks. The Trademark Office under the State Administration for Industry and Commerce administrates the registration
of trademarks on a “first-to-file” basis, and grants a term of ten years to registered trademarks.
The
PRC Copyright Law, adopted in 1990 and revised in 2001, 2010 respectively, with its implementation rules adopted on August 8,
2002 and revised in 2011 and 2013, respectively, and the Regulations for the Protection of Computer Software as promulgated on
December 20, 2001 and amended in 2011 and 2013 provide protection for copyright of computer software in the PRC. Under these rules
and regulations, software owners, licensees and transferees may register their rights in software with the National Copyright
Administration Center or its local branches to obtain software copyright registration certificates.
The
Ministry of Industry and Information Technology promulgated the Administrative Measures on Internet Domain Name on August 24,
2017 to protect domain names. According to these measures, domain name applicants are required to duly register their domain names
with domain name registration service institutions. The applicants will become the holder of such domain names upon the completion
of the registration procedure.
Regulations
Relating to Employment
The
PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees.
All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the
PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious
violations may constitute criminal offences.
On
December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on
labor dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but
the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees as
determined by the Ministry of Human Resources and Social Security. Additionally, dispatched workers are only permitted to engage
in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry
of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched
workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees
and dispatched workers). The Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract
Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees prior to March
1, 2016.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance
funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and
a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages
of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations
where they operate their businesses or where they are located. The enterprise may be ordered to pay the full amount within a deadline
if it fails to make adequate contributions to various employee benefit plans and may be subject to fines and other administrative
sanctions.
Regulations
Relating to Foreign Exchange
Regulations
on Foreign Currency Exchange
Under
the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations
issued by the State Administration of Foreign Exchange and other relevant PRC government authorities, payment of current account
items in foreign currencies, such as trade and service payments, payment of interest and dividends can be made without prior approval
from the State Administration of Foreign Exchange by following the appropriate procedural requirements. By contrast, the conversion
of RMB into foreign currencies and remittance of the converted foreign currency outside the PRC for the purpose of capital account
items, such as direct equity investments, loans and repatriation of investment, requires prior approval from the State Administration
of Foreign Exchange or its local office.
On
February 13, 2015, the State Administration of Foreign Exchange promulgated the Circular on Simplifying and Improving the Foreign
Currency Management Policy on Direct Investment, effective from June 1, 2015, which cancels the requirement for obtaining approvals
of foreign exchange registration of foreign direct investment and overseas direct investment from the State Administration of
Foreign Exchange. The application for the registration of foreign exchange for the purpose of foreign direct investment and overseas
direct investment may be filed with qualified banks, which, under the supervision of the State Administration of Foreign Exchange,
may review the application and process the registration.
The
Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign
Capital of Foreign-invested Enterprise was promulgated on March 30, 2015 and became effective on June 1, 2015. According to this
Circular, a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign
exchange capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights
and interests (or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested
enterprises are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise
shall truthfully use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested
enterprise makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first
go through domestic re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment
with the foreign exchange bureau (bank) at the place of registration. The Circular of the State Administration of Foreign Exchange
on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts was promulgated and became
effective on June 9, 2016. According to this Circular, enterprises registered in PRC may also convert their foreign debts from
foreign currency into Renminbi on self-discretionary basis. This Circular provides an integrated standard for conversion of foreign
exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self—discretionary
basis, which applies to all enterprises registered in the PRC. This Circular reiterates the principle that Renminbi converted
from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business
scope and may not be used for investments in securities or other investment with the exception of bank financial products that
can guarantee the principal within the PRC unless otherwise specifically provided. Besides, the converted Renminbi shall not be
used to make loans for related enterprises unless it is within the business scope or to build or to purchase any real estate that
is not for the enterprise own use with the exception for the real estate enterprise.
On
January 26, 2017, the State Administration of Foreign Exchange promulgated the Circular on Further Improving Reform of Foreign
Exchange Administration and Optimizing Genuineness and Compliance Verification, which stipulates several capital control measures
with respect to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check
whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing
records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses
before remitting any profits. Moreover, pursuant to this Circular, domestic entities must explain in detail the sources of capital
and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure
for outbound investment.
Regulations
on Foreign Exchange Registration of Overseas Investment by PRC Residents
The
State Administration of Foreign Exchange issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, which became effective in July 2014,
to replace the Circular of the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange
in Equity Finance and Roundtrip Investments by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign
exchange matters in relation to the use of special purpose vehicles by PRC residents or entities to seek offshore investment and
financing or conduct round trip investment in China. Circular 37 defines a “special purpose vehicle” as an offshore
entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing
or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment”
is defined as direct investment in China by PRC residents or entities through special purpose vehicles, namely, establishing foreign-invested
enterprises to obtain the ownership, control rights and management rights. Circular 37 stipulates that, prior to making contributions
into a special purpose vehicle, PRC residents or entities be required to complete foreign exchange registration with the State
Administration of Foreign Exchange or its local branch. In addition, the State Administration of Foreign Exchange promulgated
the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February
2015, which amended Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified
banks rather than the State Administration of Foreign Exchange in connection with their establishment or control of an offshore
entity established for the purpose of overseas investment or financing.
PRC
residents or entities who had contributed legitimate onshore or offshore interests or assets to special purpose vehicles but had
not obtained registration as required before the implementation of the Circular 37 must register their ownership interests or
control in the special purpose vehicles with qualified banks. An amendment to the registration is required if there is a material
change with respect to the special purpose vehicle registered, such as any change of basic information (including change of the
PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers
or divisions. Failure to comply with the registration procedures set forth in Circular 37 and the subsequent notice, or making
misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip
investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise,
including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation,
to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents
or entities to penalties under PRC foreign exchange administration regulations.
Regulations
on Stock Incentive Plans
The
State Administration of Foreign Exchange promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in
February 2012, replacing the previous rules issued by the State Administration of Foreign Exchange in March 2007. Pursuant to
the Stock Incentive Plan Notice and other relevant rules and regulations, PRC residents participating in stock incentive plan
in an overseas publicly-listed company are required to register with the State Administration of Foreign Exchange or its local
branches and follow certain other procedures. Participants of a stock incentive plan who are PRC residents must conduct the registration
and other procedures with respect to the stock incentive plan through a qualified PRC agent, which could be a PRC subsidiary of
the overseas publicly listed company or another qualified institution appointed by the PRC subsidiary. In addition, the PRC agent
is required to update the relevant registration should there be any material change to the stock incentive plan, the PRC agent
or other material changes. The PRC agent must, on behalf of the PRC residents who have the right to exercise the employee stock
options, apply to the State Administration of Foreign Exchange or its local branches for an annual quota for the payment of foreign
currencies in connection with the PRC residents’ exercise of the employee stock options. The foreign exchange proceeds received
by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas
listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents prior to distribution to such PRC
residents.
We
intend to adopt a share incentive plan in the future, under which we will have the discretion to award
incentives and rewards to eligible participants. We plan to advise the recipients of awards under our share incentive plan to
handle relevant foreign exchange matters in accordance with the Stock Incentive Plan Notice. However, we cannot guarantee that
all employee awarded equity-based incentives can successfully register with the State Administration of Foreign Exchange in full
compliance with the Stock Incentive Plan Notice.
Regulations
on Dividend Distribution
Distribution
of dividends of foreign investment enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and
amended in 2000 and 2016, respectively, and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990
and amended in 2001 and 2014, respectively. Under these regulations, foreign investment enterprises in the PRC may distribute
dividends only out of their accumulative profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, no less than 10% of the accumulated profits of the foreign investment enterprises in the PRC are required to be allocated
to fund certain reserve funds each year unless these reserves have reached 50% of the registered capital of the enterprises. A
PRC company is not permitted to distribute any profits until any losses from previous fiscal years have been offset. Profits retained
from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Regulations
Relating to Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-Owned Assets Supervision and Administration
Commission, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory
Commission and the State Administration of Foreign Exchange, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009. These regulations,
among other things, require that (i) PRC entities or individuals obtain approval from the Ministry of Commerce before they establish
or control a special purpose vehicle overseas, provided that they intend to use the special purpose vehicle to acquire their equity
interests in a PRC company at the consideration of newly issued share of the special purpose vehicle, or Share Swap, and list
their equity interests in the PRC company overseas by listing the special purpose vehicle in an overseas market; (ii) the special
purpose vehicle obtains approval from the Ministry of Commerce before it acquires the equity interests held by the PRC entities
or PRC individual in the PRC company by Share Swap; and (iii) the special purpose vehicle obtains China Securities Regulatory
Commission approval before it lists overseas.
Regulations
Relating to Taxation
Dividend
Withholding Tax
In
March 2007, the National People’s Congress enacted the Enterprise Income Tax Law which became effective on January 1, 2008
and amended on February 24, 2017. According to Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable
by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any
such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding
arrangement. Pursuant to the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates, issued on January 29, 2008 and supplemented and revised on February 29, 2008, and the Arrangement between Mainland China
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect
to Taxes on Income, which became effective on December 8, 2006 and applicable to income derived in any year of assessment commencing
on or after April 1, 2007 in Hong Kong and in any year commencing on or after January 1, 2007 in the PRC, such withholding tax
rate may be lowered to 5% if a Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by
PRC tax authorities and holds at least 25% of the equity interest in that particular PRC subsidiary at all times within the 12-month
period immediately prior to the distribution of the dividends. Furthermore, pursuant to the Announcement on Issues concerning
“Beneficial Owners” in Tax Treaties issued on February 3, 2018 by the State Administration of Taxation, when determining
the status of “beneficial owners,” a comprehensive analysis may be conducted through materials such as articles of
association, financial statements, records of capital flows, minutes of board of directors, resolutions of board of directors,
allocation of manpower and material resources, the relevant expenses, functions and risk assumption, loan contracts, royalty contracts
or transfer contracts, patent registration certificates and copyright certificates, etc. However, even if an applicant has the
status as a “beneficiary owner,” if the competent tax authority finds necessity to apply the principal purpose test
clause in the tax treaties or the general anti-tax avoidance rules stipulated in domestic tax laws, the general anti-tax avoidance
provisions shall apply.
Enterprise
Income Tax
In
December 2007, the State Council promulgated the Implementing Rules of the Enterprise Income Tax Law, which became effective on
January 1, 2008. The Enterprise Income Tax Law and its relevant implementing rules (i) impose a uniform 25% enterprise income
tax rate, which is applicable to both foreign-invested enterprises and domestic enterprises (ii) permits companies to continue
to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces new tax incentives,
subject to various qualification criteria.
The
Enterprise Income Tax Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de
facto management bodies” located within China may be considered PRC resident enterprises and therefore be subject to PRC
enterprise income tax at the rate of 25% on their worldwide income. The implementing rules further define the term “de facto
management body” as the management body that exercises substantial and overall management and control over the production
and operations, personnel, accounts and properties of an enterprise. If an enterprise organized under the laws of jurisdiction
outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax
consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income.
Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and with respect to
gains derived by its non-PRC enterprise shareholders from transfer of its shares.
On
October 17, 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident
Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and
partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets
by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Under Bulletin
7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident
enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have
a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result,
gains derived from such indirect transfer may be subject to PRC enterprise income tax. In respect of an indirect offshore transfer
of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and
therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate
of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident
enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax
at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and
the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to Bulletin 37, the withholding
party shall declare and pay the withheld tax to the competent tax authority in the place where such withholding party is located
within seven days from the date of occurrence of the withholding obligation. Both Bulletin 37 and Bulletin 7 do not apply to transactions
of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public
stock exchange. See “Risk Factors—Risks Related to Doing Business in China—We and our existing shareholders
face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed
to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.”
Value-Added
Tax
In
November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added
Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated
the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax. Pursuant to this Pilot Plan and the
relevant notice, value added tax at a rate of 6% is generally imposed, on a nationwide basis, on the revenue generated from the
provision of service in lieu of business tax in the modern service industries. Value added tax of a rate of 6% applies to revenue
derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input value
added tax paid on taxable purchases against the output value added tax chargeable on the modern services provided.
Further,
on March 20, 2019, the MOF, the SAT and the General Administration of Customs jointly issued the Announcement on Policies for
Deepening the VAT Reform, or Announcement 39, to further reduce value-added tax rates. According to the Announcement 39, (i) for
general VAT payers’ sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the
applicable VAT rate is adjusted to 13% or 9% respectively; (ii) for the agricultural products purchased by taxpayers to which
an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased
by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a
10% deduction rate; (iv) for the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export
refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable
activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%.
The Announcement 39 came into effect on April 1, 2019 and shall be prevail in case of any conflict with existing provisions
Licenses
and Permits
The
governing law for Internet information service is the Measures for the Administration of Internet Information Services, or the
Internet Content Provider (“ICP”) Measures, which went into effect on September 25, 2000. Under the ICP Measures,
any entity that provides information to online Internet users must obtain an operating license from Ministry of Industry and Information
Technology (“MIIT”) or its local branch at the provincial level in accordance with the Telecom Regulations described
above. The ICP Measures further stipulate that entities providing online information services in areas of news, publishing, education,
medicine, health, pharmaceuticals and medical equipment must obtain permission from responsible national authorities prior to
applying for an operating license from MIIT or its local branch at the provincial or municipal level. Moreover, ICPs must display
their operating license numbers in a conspicuous location on their websites. ICPs must police their websites to remove categories
of harmful content that are broadly defined. We are in the process of applying for the ICP license and expect to obtain such license
by the end of August 2019 before our e-commerce platform, Ingertona, commences its commercial operation.
Employees
Currently
we have a total of 15 employees, all of whom are full-time employees. The following table sets forth the number of our full-time
employees by function.
Function
|
|
Number
of Employees
|
Administration
|
|
|
6
|
|
Technology
|
|
|
4
|
|
Sales
and Marketing
|
|
|
5
|
|
Total
|
|
|
15
|
|
None
of our employees belong to a union or are a party to any collective bargaining or similar agreement. We consider our relationships
with our employees to be good.
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together
with all of the other information included in this report, before making an investment decision. If any of the following risks
actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Special
Notes Regarding Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements,
as well as the significance of such statements in the context of this report.
Risks
Related to Our Business
Our
independent registered auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
audited consolidated financial statements included in this report include a paragraph that indicates that they were prepared assuming
that we would continue as a going concern. We incurred net loss of $985,842 and net cash used in operating activities of $787,467
during the year ended December 31, 2018. As of March 31, 2019, we had incurred an accumulated deficit of $1,625,856. These conditions
raise substantial doubt about the ability of the Company to continue as a going concern. The ability to continue as a going concern
is dependent upon generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations
and repay our liabilities arising from normal business operations when they become due. Management plans to obtain additional
funding and implement its strategic plan to allow the opportunity for the Company to continue as a going concern; however, there
can be no assurance that we will be successful in these plans or in attracting equity or alternative financing on acceptable terms,
or if at all.
We
are a startup company and face challenges often encountered by startups.
We
have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries,
such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties (which we use
to plan our business) are incorrect or change due to changes in our markets, or if we do not address these risks successfully,
our operating and financial results could differ materially from our expectations and our business could suffer.
We
may continue to incur losses in the future, and may not be able to return to profitability, which may cause the market price of
our shares to decline.
As
a startup company, we have not generated revenue. Our current operations are small with a short history. We may be unable to achieve
our performance targets, which will impact the Company’s operating results. Our ability to achieve profitability depends
on the competitiveness of our products and services as well as our ability to control costs and to provide new products and services
to meet the market demands and attract new customers. Due to the numerous risks and uncertainties associated with the development
of our business, we cannot guarantee that we may be able to achieve profitability in the short-term or long-term.
Significant
delay or failure to obtain an ICP license, which is required for us to provide commercial internet information services, may have
a material adverse effect on our business and results of operations.
Our
main online e-commerce services, to be operated by our consolidated variable interest entity, Jiaxing Electronic,
require us to obtain an ICP license. An ICP license is a value-added telecommunications business operating license required for
provision of commercial internet information services under PRC laws and regulations Jiaxing Electronic is in the process
of obtaining an ICP license as an internet information provider. Although we do not anticipate any difficulty to obtain such license,
there can be no assurance that we will successfully obtain the license in a timely fashion. Any significant delay or failure to
obtain an ICP license may prevent or delay our efforts to commercialize and derive revenues from the operation of our e-commerce
platform that we are developing, and have a material adverse impact on our business and results of operations.
We
have a limited operating history and face many of the risks and difficulties frequently encountered by development stage companies.
We
have had limited operations to date and have not generated any revenues. Therefore, it might be difficult to evaluate the merits
of investing in our company. Potential investors should be aware of the difficulties normally encountered by new companies and
the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses,
difficulties, complications and delays encountered in connection with the operations that we plan to undertake. These potential
problems include, but are not limited to, unanticipated problems relating to the ability to generate sufficient cash flow to operate
our business, and additional costs and expenses that may exceed current estimates. We expect to incur significant losses into
the foreseeable future. We recognize that if the effectiveness of our business plan is not forthcoming, we will not be able to
continue business operations. There is no history upon which to base any assumption as to the likelihood that we will prove successful,
and it is doubtful that we will generate any operating revenues or ever achieve profitable operations. If we are unsuccessful
in addressing these risks, our business will most likely fail.
Our
industry is highly fragmented and competitive, and increased competition could reduce our operating income.
The
e-commerce industry is highly concentrated with minimal barriers to entry and competitors can launch websites at a relatively
low cost. Our business is particularly subject to rapidly and frequently changing consumer trends and preferences. Our continued
success depends in part on our ability to anticipate and respond to these changes, and we may not be able to respond in a timely
or commercially appropriate manner to these changes. Our failure to accurately predict these trends could negatively affect our
inventory levels, sales and consumer opinion of us as a source for the latest products. We will be competing against larger companies
with central purchasing efficiencies, inventory economies of scale, and in some cases, brick-and-mortar locations. Given our small
size, we will need to compete on:
|
●
|
customer
service excellence;
|
|
|
|
|
●
|
selection
of our niche products;
|
|
|
|
|
●
|
accessibility;
|
|
|
|
|
●
|
convenience;
|
|
|
|
|
●
|
price;
|
|
|
|
|
●
|
order
fulfillment speed; and
|
|
|
|
|
●
|
brand
recognition.
|
Our
competitors may have longer operating histories, greater financial resources, greater brand recognition, larger customer bases
and significantly deeper marketing budgets, which, in turn, may result in lower margins and a decreased market share for our company.
There is no assurance that we will compete effectively against present and future competitors, and this competition may have a
material adverse effect on our financial condition, operational results, business, and prospects.
We
are dependent on the growth of e-commerce.
Our
future revenues and growth are dependent upon the continued acceptance of online purchases as the medium of choice for retail
purchases. Consumer acceptance of e-commerce is dependent upon the maintenance of reliable infrastructure to support technology
demands that increased internet usage places upon bandwidth. Government regulation may cause disruptions in service due to delays
in the development of new standards to control various levels of internet activity. Third party internet service providers may
also cause service interruptions outside of our control. Such delays could adversely affect our ability to provide adequate customer
service to our e-commerce platform users. If online usage growth declines or grows slower than expected, if consumer’s ability
to access the internet, or if the infrastructure necessary to sustain online commerce is temporarily or permanently lost, our
financial condition, operational results, business, and prospects could be materially adversely affected.
We
will require additional capital to support business growth, and this capital might not be available on acceptable terms, if at
all.
We
intend to continue to make investments to support our business growth and may require additional funds to respond to business
challenges, including the need to update our website, add to our inventory, and improve our operating infrastructure or acquire
complementary businesses and technologies. Accordingly, we will need to engage in continued equity or debt financings to secure
additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing
stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges
superior to those of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating
to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain
additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional
financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory
to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be
impaired, and our business may be harmed.
Actual
or perceived security vulnerabilities in mobile devices could negatively affect our business.
The
security of mobile devices and wireless networks is crucial to our business. Viruses, worms and other malicious software programs
that attack mobile devices and wireless networks have been developed and deployed. Security threats could lead some mobile subscribers
to reduce or delay their purchases of mobile content and applications in an attempt to minimize the threat. Wireless carriers
and device manufacturers may also spend more on protecting their devices and networks from attack. This could delay adoption of
new mobile devices which tend to include more features and functionalities that facilitate increased use of mobile content and
applications. In any such instance, actual or perceived security threats and the reactions to those threats could negatively affect
our results of operations.
If
we fail to attract and retain qualified senior executive and key technical personnel, our business will not be able to expand.
We
are dependent on the continued availability of Xianyi Hao, and the availability of new employees to implement our business plans.
The market for skilled employees is highly competitive, especially for employees in technical fields. Although we expect that
our compensation programs will be intended to attract and retain the employees required for us to be successful, there can be
no assurance that we will be able to retain the services of all our key employees or a sufficient number to execute our plans,
nor can there be any assurance we will be able to continue to attract new employees as required.
Our
personnel may voluntarily terminate their relationship with us at any time, and competition for qualified personnel, especially
software engineers, is intense. The process of locating additional personnel with the combination of skills and attributes required
to carry out our strategy could be lengthy, costly and disruptive.
If
we lose the services of key personnel, or fail to replace the services of key personnel who depart, we could experience a severe
negative effect on our financial results and stock price. In addition, there is intense competition for highly qualified software
engineering and marketing personnel in the locations where we principally operate.
The
loss of the services of any key software engineering, marketing or other personnel or our failure to attract, integrate, motivate
and retain additional key employees could have a material adverse effect on our business, operating and financial results and
stock price.
We
may not be able to manage our expansion of operations effectively.
We
are in the process of developing our business in order to meet the potentially increasing demand for our future products, as
well as capture new market opportunities. Our current business operations are small with a short history. We may be unable to
achieve our performance targets, which will impact the Company’s operating results. As we continue to grow, we must
continue to improve our operational and financial systems, procedures and controls, increase service capacity and output, and
expand, train and manage our growing employee base. In order to fund our on-going operations and our future growth, we need
to have sufficient internal sources of liquidity or access to additional financing from external sources. Furthermore, our
management will be required to maintain and strengthen our relationships with our customers and other third parties.
Currently, we only have 15 employees. As a result, our continued expansion has placed, and will continue to place,
significant strains on our management personnel, systems and resources. We also will need to further strengthen our internal
control and compliance functions to ensure that we will be able to comply with our legal and contractual obligations and
minimize our operational and compliance risks. Our current and planned operations, personnel, systems, internal procedures
and controls may not be adequate to support our future growth. If we are unable to manage our growth effectively, we may not
be able to take advantage of market opportunities, execute our business strategies or respond to competitive
pressures.
Our
holding company structure may limit the payment of dividends.
We
have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investment. In
addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions
to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into
U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders
upon conversion of the dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits
according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China
are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits
under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards,
we will be unable to pay any dividends.
After-tax
profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits
as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax
earnings as presented in our financial statements.
However,
there are certain differences between PRC accounting standards and regulations and U.S. GAAP, arising from different treatment
of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.
To
the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for
the Company are located in China, the PCAOB may not be able to inspect such audit documentation and, as a result, you may be deprived
of the benefits of such inspection.
Our
independent registered public accounting firm issued an audit opinion on the financial statements included in this Form 8-K and
will issue audit reports related to the Company in the future. As the auditor of a company filing reports with the SEC and as
a firm registered with the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the
PCAOB. However, to the extent that our auditor’s work papers are or become located in China, such work papers will not be
subject to inspection by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese
authorities. Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in
those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to
improve future audit quality. The inability of the PCAOB to conduct inspections of our auditors’ work papers in China would
make it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as
compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our
reported financial information and procedures and the quality of our financial statements. As a result, our investors may be deprived
of the benefits of PCAOB’s oversight of our auditors through such inspections.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock
price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed
and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed
so-called reverse acquisitions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial
commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around
financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management
from growing our company.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny
of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental
agency that is located in China where substantially all of our operations and business are located have conducted any due diligence
on our operations or reviewed or cleared any of our disclosure.
We
are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules
and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose
operations are located primarily in the United States, however, substantially all of our operations are located in China. Since
substantially all of our operations and business takes place in China, it may be more difficult for the staff of the SEC to overcome
the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for
similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports
and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to the review of the China Securities Regulatory
Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our
SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence
on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements
has been reviewed or otherwise been scrutinized by any local regulator.
Risks
Relating to our Commercial Relationship with VIEs
PRC
laws and regulations governing our businesses and the validity of certain of our Contractual Arrangements are uncertain. If we
are found to be in violation of such PRC laws and regulations, our business may be negatively affected and we may be forced to
relinquish our interests in those operations.
We
plan to engage in e-commerce business when our platform is fully tested. The PRC government e-commerce businesses through strict
business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign
ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign investors are not allowed
to own more than 50% equity interest in any PRC company engaging in value-added telecommunications business. The primary foreign
investor must have experience and a good track record in providing value-added telecommunications services overseas.
Because
we were incorporated in Nevada, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly-owned
PRC subsidiary, Jiaxing Bangtong, is a foreign-invested enterprise. Accordingly, our subsidiary is not eligible to operate a value-added
telecommunications service business in China. As a result, we plan to conduct our e-commerce business in China through our consolidated
VIEs and their affiliates. Jiaxing Bangtong has entered into the Contractual Arrangements with our consolidated VIEs and their
shareholders.
We
believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations.
Our PRC legal counsel is of the opinion that our current ownership structure, the ownership structure of our PRC subsidiary, our
consolidated VIEs and their subsidiaries, and the Contractual Arrangements among them are not in violation of existing PRC laws,
rules and regulations.
As
there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and the Telecommunications Regulations
and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government
authorities, such as the Ministry of Commerce or other authorities that regulate online services providers and other participants
in the telecommunications industry, would ultimately take a view that is consistent with the opinion of our PRC legal counsel
or agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or
other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC
laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities
have broad discretion in interpreting these laws and regulations.
If
our corporate structure and contractual arrangements are deemed by the Ministry of Commerce or other regulators having competent
authority to be illegal, either in whole or in part, we may lose control of our consolidated VIEs and may have to modify such
structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material
disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any
existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such
violations, including:
|
●
|
revoking
our business and operating licenses;
|
|
●
|
levying
fines on us;
|
|
●
|
confiscating
any of our income that they deem to be obtained through illegal operations;
|
|
●
|
shutting
down our services;
|
|
●
|
discontinuing
or restricting our operations in China;
|
|
●
|
imposing
conditions or requirements with which we may not be able to comply;
|
|
●
|
requiring
us to change our corporate structure and contractual arrangements;
|
|
●
|
restricting
or prohibiting our use of the proceeds from overseas offerings to finance our PRC consolidated VIEs’ business and operations;
and
|
|
●
|
taking
other regulatory or enforcement actions that could be harmful to our business.
|
Furthermore,
new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate
structure and contractual arrangements. See “Risks Relating to our Commercial Relationship with VIEs— Our contractual
arrangement with VIEs may be affected by the newly enacted Foreign Investment Law.” Occurrence of any of these events could
materially and adversely affect our business and financial condition and results of operations. In addition, if the imposition
of any of these penalties or requirements to restructure our corporate structure causes us to lose the right to direct the activities
of our consolidated VIEs or our right to receive their economic benefits, we would no longer be able to consolidate the financial
results of such VIEs in our consolidated financial statements. If our corporate structure and contractual arrangements are deemed
to be illegal by relevant regulators, our business and results of operations would be materially and adversely affected and the
price of our shares may decline.
Our
arrangements with the VIEs and their shareholders may be subject to scrutiny by the PRC tax authorities. Any adjustment of related
party transaction pricing could lead to additional taxes, and therefore which could have an adverse effect on our income and expenses.
The
tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted
in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or VIEs or their equity holders
owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws,
rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our VIEs,
may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC
tax authorities determine that our agreements with the VIEs and their shareholders were not entered into based on arm’s
length negotiations. As a result, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing
adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
Our
contractual arrangement with VIEs may be affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which will take effect
on January 1, 2020, and replace the existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture
Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, or Existing FIE Laws, together with their
implementation rules and ancillary regulations. However, uncertainties still exist in relation to interpretation and implementation
of the FIL, especially in regard to, including, among other things, the nature of VIE contractual arrangements, the promulgation
schedule of both the “negative list” under the FIL and specific rules regulating the organization form of foreign-invested
enterprises within the five-year transition period. While FIL does not define contractual arrangements as a form of foreign investment
explicitly, we cannot assure you that future laws and regulations will not provide for contractual arrangements as a form of foreign
investment. Therefore, there can be no assurance that our control over our VIEs through contractual arrangements will not be deemed
as foreign investment in the future. In the event that any possible implementing regulations of the FIL, any other future laws,
administrative regulations or provisions deem contractual arrangements as a way of foreign investment, or if any of our operations
through contractual arrangements is classified in the “restricted” or “prohibited” industry in the future
“negative list” under the FIL, our contractual arrangements may be deemed as invalid and illegal, and we may be required
to unwind the VIE contractual arrangements and/or dispose of any affected business. Also, if future laws, administrative regulations
or provisions mandate further actions to be taken with respect to existing contractual arrangements, we may face substantial uncertainties
as to whether we can complete such actions in a timely manner, or at all. Furthermore, under the FIL, foreign investors or the
foreign investment enterprise should be imposed legal liabilities for failing to report investment information in accordance with
the requirements. In addition, the FIL provides that foreign invested enterprises established according to the existing laws regulating
foreign investment may maintain their structure and corporate governance within a five-year transition period, which means that
we may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period.
Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially
and adversely affect our current corporate structure, corporate governance and business operations.
Our
contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership.
We
rely on contractual arrangements with our VIEs to operate our electronic platform in China and other businesses in which foreign
investment is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing
us with control over our VIEs.
If
we had direct ownership of the VIEs, we would be able to exercise our rights as an equity holder directly to effect changes in
the boards of directors of the entity, which could effect changes at the management and operational level. Under our contractual
arrangements, we would be able to change the members of the boards of directors of the entity only by exclusively exercising the
equity holders’ voting rights and would have to rely on the variable interest entity and the variable interest entity equity
holders to perform their obligations in the contractual arrangements in order to exercise our control over the variable interest
entity. The variable interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not
act in the best interests of our company or may not perform their obligations under these contracts. For example, our VIEs and
their equity holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations,
including maintaining our website and using our domain names and trademarks which the relevant variable interest entity has exclusive
rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option,
we may replace the equity holders of the VIEs at any time pursuant to the contractual arrangements. However, if any equity holder
is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved, we will
have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies,
which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. See “Any failure by
our VIEs or their equity holders to perform their obligations under the contractual arrangements would have a material adverse
effect on our business, financial condition and results of operations.” Consequently, the contractual arrangements may not
be as effective in ensuring our control over the relevant portion of our business operations as direct ownership.
Any
failure by our VIEs or their equity holders to perform their obligations under the contractual arrangements would have a material
adverse effect on our business, financial condition and results of operations.
If
our VIEs or their equity holders fail to perform their respective obligations under the contractual arrangements, we may have
to incur substantial costs and expend additional resources to enforce such arrangements. Although we have entered into exclusive
option agreements in relation to our VIEs, which provides that we may exercise an option to acquire, or nominate a person to acquire,
ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules and
regulations, the exercise of the option is subject to the review and approval of the relevant PRC governmental authorities. We
have also entered into an equity interest pledge agreement with respect to the VIE to secure certain obligations of such VIES
or their equity holders to us under the contractual arrangements. However, the enforcement of such agreement through arbitral
or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover,
our remedies under the equity pledge agreement are primarily intended to help us collect debts owed to us by the variable interest
entity equity holders under the contractual arrangements and may not help us in acquiring the assets or equity of the variable
interest entity.
The
contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings
in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United
States. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of
a VIE should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel
or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability
to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court
judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in
PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements,
we may not be able to exert effective control over the VIEs, and our ability to conduct our business, as well as our financial
condition and results of operations, may be materially and adversely affected.
The
shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business
and financial condition.
The
equity interests of each of our VIEs are held by numerous shareholders, including Xiaoyi Hao, our Chairman and Chief Executive
Officer. These shareholders may have potential conflicts of interest with us. These shareholders may breach, or cause our VIEs
to breach, the existing contractual arrangements, which would have a material adverse effect on our ability to effectively control
our VIEs and their subsidiaries and receive economic benefits from them. For example, these shareholders may be able to cause
our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under
the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of
these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except
that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer
all of their equity interests in our VIEs to a PRC entity or individual designated by us, to the extent permitted by PRC laws.
If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings,
which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal
proceedings.
Risk
Related to Doing Business in China
Changes
in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.
We
conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition and prospects
are significantly dependent on economic and political developments in China. China’s economy differs from the economies
of developed countries in many aspects, including the level of development, growth rate and degree of government control over
foreign exchange and allocation of resources. While China’s economy has experienced significant growth in the past 30 years,
the growth has been uneven across different regions and periods and among various economic sectors in China. We cannot assure
you that China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that
if there is a slowdown, such slowdown will not have a negative effect on its business and results of operations.
The
PRC government exercises significant control over China. Accordingly, our results of operations, financial condition and prospects
are significantly dependent on economic and political developments in China. Certain measures adopted by the PRC government may
restrict loans to certain industries, such as changes in the statutory deposit reserve ratio and lending guidelines for commercial
banks by the People’s Bank of China. These current and future government actions could materially affect our liquidity,
access to capital, and ability to operate our business.
The
global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into
recession. Since 2012, growth of the Chinese economy has slowed down. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy but may also
have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed
to boost the Chinese economy, may contribute to higher inflation, which could adversely affect our results of operations and financial
condition. See “—Future inflation in China may inhibit our ability to conduct business in China.”
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs. The PRC
legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential
value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms
of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many
laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties,
which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention. In addition, all of our executive officers and directors
are residents of China and not of the United States, and substantially all the assets of these persons are located outside the
United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce
a judgment obtained in the United States against our Chinese operations and subsidiaries.
You
may have difficulty enforcing judgments against us.
Most
of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition,
all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion
of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on
the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are
not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition,
there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to
PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures
Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China
does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments
with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the
United States.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over the internet industry, including foreign ownership
of, and the licensing and permit requirements pertaining to, companies in the internet industry. Our ability to operate in China
may be harmed by changes in internet-related laws and regulations and these laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainties. While we believe that our operations in China are
in material compliance with all applicable legal and regulatory requirements, new laws and regulations may be promulgated that
will regulate internet activities, including online retail. If these new laws and regulations are promulgated, additional licenses
may be required for our operations. If our operations do not comply with these new regulations at the time they become effective,
or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.
Future
inflation in China may inhibit our ability to conduct business in China.
According
to the National Bureau of Statistics of China, the annual average percent changes in the consumer price index in China for 2016,
2017 and 2018 were 2.0%, 1.6% and 2.1%, respectively. Although we have not been materially affected by inflation in the past,
we can provide no assurance that we will not be affected in the future by higher rates of inflation in China. For example, certain
operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation.
Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly
reduce the value and purchasing power of these assets.
Restrictions
on currency exchange may limit our ability to receive and use our sales effectively.
We
believe all of our revenues that we generate in the future will be settled in RMB, and any future restrictions on currency exchanges
may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend
or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility
of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs
may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized
to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our ordinary shares will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between
those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the
RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value
of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future
PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange
market.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise
fund and conduct our business.
Substantially
all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to
make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our
PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards
and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual
after-tax profits determined in accordance with PRC generally accepted accounting principles to a statutory general reserve fund
until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only
be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations
on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Failure
to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
We
are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain
social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to
certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local
government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been
implemented consistently by the local governments in China given the different levels of economic development in different locations.
Although we have made contributions to some employee benefit plans, such as social security plans, we may have not made adequate
employee benefit payments required by PRC regulations. We may be required to make up the contributions for these plans as well
as pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial
condition and results of operations may be adversely affected.
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On
March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council
of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside
of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules
of the EIT Law define de facto management as “substantial and overall management and control over the production and operations,
personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies,
or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled
offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior
management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops,
board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income
and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear
as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We
may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source
income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing
rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that
such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated
as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect
to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed
on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring
our shares.
If
we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S.
and China, and our PRC tax may not be creditable against our U.S. tax.
Heightened
scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations
and its acquisition strategy.
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
SAT Circular 698, effective on January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect
Asset Transfer by Non-PRC Resident Enterprises, or SAT Announcement 7, effective on February 3, 2015, issued by the State Administration
of Taxation (“SAT”), if a non-resident enterprise transfers the equity interests of or similar rights or interests
in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial
purpose, but rather to avoid PRC corporate income tax, the transaction will be re-characterized and treated as a direct transfer
of PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7 specifies certain factors that should be considered
in determining whether an indirect transfer has a reasonable commercial purpose. However, as SAT Announcement 7 is newly issued,
there is uncertainty as to the application of SAT Announcement 7 and the interpretation of the term “reasonable commercial
purpose.”
Under
SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders
has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate
income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax
due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from
the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
Although
SAT Announcement 7 is generally effective as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction
that took place prior to its effectiveness has not yet been finally settled. As a result, SAT Announcement 7 could be determined
by PRC tax authorities to be applicable to the historical reorganization, and it is possible that these transactions could be
determined by PRC tax authorities to lack a reasonable commercial purpose. As a result, the transfer of shares by certain shareholders
to other parties could be subject to corporate income tax of up to 10% on capital gains generated from such transfers, and PRC
tax authorities could impose tax obligations on the transferring shareholders or subject us to penalty if the transferring shareholders
do not pay such obligations and withhold such tax.
SAT
Announcement 7 and its interpretation by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers
of shares in a publicly-traded entity that is listed overseas is available if the purchase of the shares and the sale of the shares
both take place in open-market transactions. However, if a shareholder of an entity that is listed overseas purchases shares in
the open market and sells them in a private transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject
to SAT Circular 698 and SAT Announcement 7, which could subject such shareholder to additional reporting obligations or tax burdens.
Accordingly, if a holder of the Company’s ordinary shares purchases such ordinary shares in the open market and sells them
in a private transaction, or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities
may take actions, including requesting to provide assistance for their investigation or impose a penalty on it, which could have
a negative impact on the company’s business operations.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China.
The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments
or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always
be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our
existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents,
or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese
anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Risks
Related to the Market for our Common Stock
Our
common stock is quoted on the OTC market, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTC market. The OTC market is a significantly more limited market than the New York Stock Exchange
or NASDAQ. The quotation of our shares on the OTC market may result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future. We plan to list our common stock as soon as practicable. However,
we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able
to maintain any such listing.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The
SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock
is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes
additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers
and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to
sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers
to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of
a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information
on the limited market in penny stock.
There
can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common
stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the
SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction
would be in the public interest.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to “emerging
growth companies” will make our common shares less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging
growth company,” we may take advantage of exemptions from various reporting requirements that are applicable to other public
companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be
an “emerging growth company” until the end of 2020, although circumstances could cause us to lose that status earlier,
including if we become a large accelerated filer or if we have issued an aggregate of $1 billion in non-convertible debt during
the preceding 3 years. We cannot predict if investors will find our common stock less attractive because we may rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and the price of our common stock may be more volatile.
We
do not intend to pay dividends for the foreseeable future.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common
stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors
and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable
law and other factors our board deems relevant.
Our
largest stockholder holds a significant percentage of our outstanding voting securities and may be able to control our management
and affairs.
Zhuohong
International Development Limited, our largest stockholder, is the beneficial owner of approximately 47.3% of our outstanding
voting securities. As a result, it possesses significant influence, and can elect a majority of our board of directors and authorize
or prevent proposed significant corporate transactions. Its ownership and control may also have the effect of delaying or preventing
a future change in control, impeding a merger, consolidation, takeover, or other business combination, or discourage a potential
acquirer from making a tender offer.
Fulfilling
our obligations incident to being a public company, including with respect to the requirements of and related rules under the
Sarbanes-Oxley Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could
have a material adverse effect on our future results of operations and our stock price.
As
a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require us to implement various
corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with
these public company obligations requires us to devote significant time and resources and places significant additional demands
on our finance and accounting staff and on our financial accounting and information systems. We plan to hire additional accounting
and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated
with being a public company include increased auditing, accounting and legal fees and expenses, investor relations expenses, increased
directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees,
as well as other expenses.
We
are required under the Sarbanes-Oxley Act of 2002 to document and test the effectiveness of our internal control over financial
reporting. In addition, we are required under the Exchange Act to maintain disclosure controls and procedures and internal control
over financial reporting. Any failure to maintain effective controls or implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If
we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in
the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply
with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC or other regulatory
authorities.
Compliance
with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations,
have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting. Our management team will need to invest significant management time and financial resources to comply
with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses
and a diversion of management time and attention from revenue generating activities to compliance activities.
Provisions
in our charter documents and under Nevada law could discourage a takeover that stockholders may consider favorable.
Provisions
in our articles of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our
management. Our board of directors has the right to determine the authorized number of directors and to elect directors to fill
a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents
stockholders from being able to control the size of or fill vacancies on our board of directors. In addition, we are authorized
to issue up to 20,000,000 shares of preferred stock, in one or more classes or series as may be determined by our board of directors.
The issuance of shares of preferred stock, while providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting stock.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Overview
Bangtong
International, a Seychelles holding company, was formed on May 25, 2018. The following financial data was extracted from the audited
consolidated financial statements of Bangtong International and its subsidiaries for the years ended December 31, 2018 and 2017,
and the unaudited consolidated financial statements of the Company and its subsidiaries for the three months ended March 31, 2019
and 2018. Currently, Bangtong International does not conduct any substantive operations.
Our
revenues were $nil both for the years ended December 31, 2018 and 2017, and for the three months ended March 31, 2019 and 2018.
Our net loss was $985,842 and $2,029, $637,985 and $1,466 for the respective periods. Losses have principally occurred as a result
of the lack of a source of recurring revenues and the substantial resources required for our initial operations which included
the general and administrative expenses associated with such activities. These conditions raise substantial doubt about our ability
to continue as a going concern.
Results
of Operation
Comparison
for The Years Ended December 31, 2018 and 2017
The
following table sets forth key components of our results of operations during the year ended December 31, 2018 and 2017.
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost
of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross
profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
income
|
|
|
2,743
|
|
|
|
-
|
|
|
|
2,743
|
|
General
and administrative expense
|
|
|
(988,585
|
)
|
|
|
(2,029
|
)
|
|
|
(986,556
|
)
|
Net
loss
|
|
$
|
(985,842
|
)
|
|
$
|
(2,029
|
)
|
|
$
|
(983,813
|
)
|
Revenue
We
did not generate any revenues for both years as we did not sell any products during these years. We are developing our e-commerce
platform which will serve consumers through our retail website that enables third-party sellers to sell their products on the
online marketplace. We expect that the platform is ready in the first quarter of 2020 and we will start generating revenues during
the 2020 fiscal year.
Cost
of revenue
As
we did not earn any revenue, we did not incur any cost of revenue during both years.
Gross
profit and gross margin
As
a result of no revenue and cost of revenue being realized, gross profit and gross margin were $nil for both years.
General
and administrative expense
Our
general and administrative expense consists primarily of salary expense, travelling expenses, as well as consultancy fees. Our
general and administrative expenses increased by $986,556 to $988,585 for the year ended December 31, 2018 from 2017. Such increase
incurred mainly because we engaged consultants to develop our e-commerce platform and to provide consulting services in connection
with the Reverse Acquisition.
Net
loss
As
a result of the cumulative effect of the factors described above, our net loss increased by $983,813 to $985,842 for the year
ended December 31, 2018.
Liquidity
and Capital Resources
Working
capital:
|
|
Year
Ended
December
31, 2018
|
|
|
Year
Ended
December
31, 2017
|
|
Total
current assets
|
|
$
|
1,592,696
|
|
|
$
|
967
|
|
Total
current liabilities
|
|
|
807,979
|
|
|
|
3,074
|
|
Working
capital surplus (deficiency)
|
|
$
|
(784,717
|
)
|
|
$
|
(2,107
|
)
|
As
of December 31, 2018, we had cash and cash equivalents of $970,752. To date, we have financed our operations primarily through
contributions by owners and borrowings from related parties. The following table provides detailed information about our net cash
flows for the year ended December 31, 2018 and 2017:
Cash
flows:
|
|
Year
Ended
December
31, 2018
|
|
|
Year
Ended
December
31, 2017
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(787,467
|
)
|
|
$
|
931
|
|
Net
cash (used in) investing activities
|
|
|
(54,917
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,778,046
|
|
|
|
-
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
34,123
|
|
|
|
36
|
|
Net
increase in cash and cash equivalents
|
|
|
969,785
|
|
|
|
967
|
|
Cash
and cash equivalents at the beginning of year
|
|
|
967
|
|
|
|
-
|
|
Cash
and cash equivalents at the end of year
|
|
$
|
970,752
|
|
|
$
|
967
|
|
Operating
Activities
Net
cash used in operating activities was $787,467 for the year ended December 31, 2018, as compared to net cash provided by operating
activities of $931 for the year ended December 31, 2017. The increase in net cash used in operating activities was mainly attributable
to more expenses were incurred for the operation during the 2018 fiscal year.
Investing
Activities
Net
cash used in investing activities for the year ended December 31, 2018 was $54,917, as compared to $nil for the year ended December
31, 2017. The increase in net cash used in investing activities was mainly attributable to the acquisition of leasehold improvements,
equipment and motor vehicles.
Financing
Activities
Net
cash provided by financing for the year ended December 31, 2018 was $1,778,046, as compared to $nil for the year ended December
31, 2017. The increase of net cash provided by financing activities was mainly attributable to the capital contributions from
our existing stockholders to finance our operations.
Capital
Expenditures
Capital
expenditures for the year ended December 31, 2018 and 2017 were $54,917 and $nil, respectively. The increase in capital expenditures
was due to the acquisition of leasehold improvements, equipment and motor vehicles. We anticipate increasing our capital expenditures
in the 2019 fiscal year.
Contractual
Obligations and Commercial Commitments
We
had the following contractual obligations and commercial commitments as of December 31, 2018:
|
|
Total
|
|
|
Less
than
1 year
|
|
|
1-5
years
|
|
|
More
than
5 years
|
|
Operating
lease
|
|
$
|
119,087
|
|
|
$
|
41,775
|
|
|
$
|
77,312
|
|
|
$
|
-
|
|
For
the year ended December 31, 2018, we entered into a three-year operating lease agreement commencing in October 2018 and expiring
on September 2021. The effective monthly lease expense is $3,609 (RMB 24,822). The outstanding lease commitment as of
December 31, 2018 was $119,087.
Comparison
for The Three Months Ended March 31, 2019 and 2018
The
following table sets forth key components of our results of operations during the three months ended March 31, 2019 and 2018.
|
|
Three
Months
Ended
March
31, 2019
|
|
|
Three
Months
Ended
March
31, 2018
|
|
|
Change
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost
of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross
profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
income
|
|
|
527
|
|
|
|
-
|
|
|
|
527
|
|
General
and administrative expense
|
|
|
(638,512
|
)
|
|
|
(1,466
|
)
|
|
|
(637,046
|
)
|
Net
loss
|
|
$
|
(637,985
|
)
|
|
$
|
(1,466
|
)
|
|
$
|
(636,519
|
)
|
Revenue
We
did not generate any revenues for both periods as we did not sell any products during these years. We are developing our e-commerce
platform which will serve consumers through our retail website that enables third-party sellers to sell their products on the
online marketplace. We expect that the platform is ready in the first quarter of 2020 and we will start generating revenues during
the 2020 fiscal year.
Cost
of revenue
As
we did not earn any revenue, we did not incur any cost of revenue during both periods.
Gross
profit and gross margin
As
a result of no revenue and cost of revenue being realized, gross profit and gross margin were $nil for both periods.
General
and administrative expense
Our general and administrative
expense consists primarily of salary expense, travelling expenses, as well as consultancy fees. Our general and administrative
expenses increased by $637,046 to $638,512 for the three months ended March 31, 2019. Such increase incurred mainly because beginning
the 2018 fiscal year, we engaged consultants to develop our e-commerce platform and to provide consulting services
in connection with the Reverse Acquisition transaction.
Net
loss
As
a result of the cumulative effect of the factors described above, our net loss increased by $636,519 to $637,985 for the three
months ended March 31, 2019.
Liquidity
and Capital Resources
Working
capital:
|
|
2019
|
|
|
2018
|
|
Total
current assets
|
|
$
|
1,007,547
|
|
|
$
|
1,111
|
|
Total
current liabilities
|
|
|
1,015,304
|
|
|
|
4,781
|
|
Working
capital deficiency
|
|
$
|
(7,757
|
)
|
|
$
|
(3,670
|
)
|
As
of March 31, 2019, we had cash and cash equivalents of $762,626. To date, we have financed our operations primarily through contributions
by owners and borrowings from related parties. The following table provides detailed information about our net cash flows for
the three months ended March 31, 2019 and 2018:
Cash
flows:
|
|
2019
|
|
|
2018
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(96,710
|
)
|
|
$
|
107
|
|
Net
cash (used in) investing activities
|
|
|
(134,243
|
)
|
|
|
-
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
22,287
|
|
|
|
37
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(208,126
|
)
|
|
|
144
|
|
Cash
and cash equivalents at the beginning of year
|
|
|
970,752
|
|
|
|
967
|
|
Cash
and cash equivalents at the end of year
|
|
$
|
762,626
|
|
|
$
|
1,111
|
|
Operating
Activities
Net
cash used in operating activities was $96,710 for the three months ended March 31, 2019, as compared to net cash provided by operating
activities of $107 for the three months ended March 31, 2018. The increase in net cash used in operating activities was mainly
attributable to more expenses were incurred for the operation during the 2019 period.
Investing
Activities
Net
cash used in investing activities for the three months ended March 31, 2019 was $134,243, as compared to $nil for the three months
ended March 31, 2018. The increase in net cash used in investing activities was mainly attributable to the acquisition of leasehold
improvements, equipment and motor vehicles.
Capital
Expenditures
Capital
expenditures for the three months ended March 31, 2019 and 2018 were $134,243 and $nil, respectively. The increase in capital
expenditures was due to the acquisition of leasehold improvements, equipment and motor vehicles. We anticipate increasing our
capital expenditures in the 2019 fiscal year.
Contractual
Obligations and Commercial Commitments
We
had the following contractual obligations and commercial commitments as of March 31, 2019:
|
|
Total
|
|
|
Less
than
1 year
|
|
|
1-5
years
|
|
|
More
than
5 years
|
|
Operating
lease
|
|
$
|
110,955
|
|
|
$
|
42,932
|
|
|
$
|
68,023
|
|
|
$
|
-
|
|
In
the 2018 fiscal year, we entered into a three-year operating lease agreement commencing in October 2018 and expiring on September
2021. The effective monthly lease expense is $3,609 (RMB 24,822). The total lease payments as of March 31, 2019 was $110,955
with the imputed interest of $8,419. Under the adoption of the new lease guidance, we recorded $102,536 of right-of-use assets,
$39,714 in current operating lease liabilities and $62,822 in non-current operating lease liabilities as of March 31, 2019.
We
believe that our current cash and financing from our existing stockholders are adequate to support operations for at least the
next 12 months. We may, however, in the future, require additional cash resources due to changing business conditions, implementation
of our strategy to commence and expand our business we may decide to pursue. If our own financial resources are insufficient to
satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities.
The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result
in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our
operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional
funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall
business prospects.
Inflation
Inflation
and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will
materially affect our business in the foreseeable future. However, our management will closely monitor price changes in our industry
and continually maintain effective cost control in operations.
Off
Balance Sheet Arrangements
We
do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital
resources that is material to an investor in our securities.
Seasonality
Our
operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern
may change, however, as a result of new market opportunities or new product introductions.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and
related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant
to the preparation of our financial statements. These accounting policies are important for an understanding of our financial
condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial
condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the
possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe
the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our
financial statements:
Basis
of Presentation
The
accompanying financial statements include the balances and results of operations of the Company have been prepared pursuant to
the rules and regulations of the U.S. Securities and Exchanges Commission (“SEC”) and in conformity with generally
accepted accounting principles in the U.S. (“US GAAP”).
The
accompanying financial statements are presented on the basis that the Company is a going concern. The going concern assumption
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Basis
of Consolidation
The
consolidated financial statements include the financial statements of the Company and its subsidiaries. Subsidiaries are all entities
over which the Company has control. Control exists when the Company has the power over the entity, exposure, or rights to variable
returns from involvement in the entity, and the ability to use power over the entity to affect returns through its power over
the entity. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial
statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the
date that control ceases.
Use
of estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, related disclosures of contingent liabilities at the balance sheet date, and revenue
and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s
financial statements include the economic lives and impairment of leasehold improvements and equipment, allowance for doubtful
accounts and etc. Actual results could differ from those estimates and such differences could affect the results of operations
reported in future periods.
Recognition
of revenue
The
Company offers an online marketplace through its e-commerce platform that enables third-party sellers to sell their products to
consumers. The e-commerce platform has yet been launched and the Company has not yet generated any revenues.
The
Company adopted ASC topic 606, Revenue from Contracts with Customers (“ASC 606”), from January 1, 2018. Revenues for
the year ended December 31, 2018 were presented under ASC 606, and revenues for the years ended December 31, 2017 was not adjusted
and continue to be presented under ASC topic 605, Revenue Recognition (“ASC 605”). The Company’s revenue recognition
policies effective on the adoption date of ASC 606 are presented as below.
Consistent
with the criteria of ASC 606, the Company recognizes revenues when the Company satisfies a performance obligation by transferring
a promised good or service (that is, an asset) to a customer. An asset is transferred when the customer obtains control of that
asset.
In
accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related
costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified
goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration
to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and
its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, revenues
should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the
specified goods or services to be provided by other parties. Revenue is recorded net of value-added taxes.
The
Company recognizes revenue net of discounts and return allowances when the products are delivered and title passes to customers.
Significant judgement is required to estimate return allowances. For online direct sales business with return conditions, the
Company reasonably estimate the possibility of return based on the historical experience, changes in judgments on these assumptions
and estimates could materially impact the amount of net revenues recognized.
Recent
accounting pronouncements
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 requires revenue
recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company
expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including
identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction
price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies
the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature,
amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, “Identifying
Performance Obligations and Licensing.” ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance
obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU
2014-09. The Company adopted this ASU on January 1, 2018 and determined it had no impact on its consolidated financial statements
as of March 31, 2019 and December 31, 2018.
In
January 2016, the FASB issued a new pronouncement ASU 2016-01 Financial Instruments-Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities. The ASU requires equity investments (except those accounted for under the equity method of accounting
or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net
income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in
the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments.
ASU
2016-01 was further amended in February 2018 by ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to
clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU 2016-01.
This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change
its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable
election that would apply to that security and all identical or similar investments of the same issued.
ASU
2016-01 and ASU 2018-03 are effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the
balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do
not have readily determinable fair values which should be applied prospectively. The Company adopted this ASU on January 1, 2018
and determined it had no impact on its consolidated financial statements as of March 31, 2019 and December 31, 2018.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases
with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use
assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities.
For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company expects
to adopt ASU 2016-02 in the first quarter of fiscal year 2019. Adoption of this standard resulted in the recognition of right-of-use
assets and operating lease liabilities. As of March 31, 2019, the adoption of this standard did not have a material impact on
the Company’s operating results or cash flows.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to
be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted
from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected
on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases
that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables,
net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded
from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this Update are
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities
may adopt the amendments in this Update 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). The Company is in the
process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update
require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this ASU on update are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method
each period presented. The Company adopted this ASU on January 1, 2018 and determined it had no impact on its consolidated financial
statements as of March 31, 2019 and December 31, 2018.
The
Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will
have a significant impact on the Company’s financial statements.
PROPERTIES
All
land in China is owned by the state or local governments. Individuals and companies are permitted to acquire rights to use land
or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for
a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant
Chinese laws. Granted land use rights are transferable and may be used as collateral for borrowings and other obligations.
Our executive offices are located at Room
202-1, Building #21 of Intelligence and Wealth Center, Jiaxing, Zhejiang Province, China, 314000 which consist of 787.24
square meters, all of which are dedicated to administrative office space. We lease our facilities pursuant to a lease agreement
that our PRC subsidiary, Bangtong Technology entered into with Jiaxing Innovation Park Development Co., Ltd. for a lease
term commencing on October 1, 2018 and ending on September 30, 2021. Currently we pay our rent in an amount of RMB 287,342.60
(approximately $41,775) per year. We believe that all our real property has been adequately maintained, is generally
in good condition, and is suitable and adequate for our business. We do not own or rent any other real estate or other properties.
We
believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate
for our business.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of our common stock as of June 21, 2019 (i) by each person
who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii)
by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below
is in care of the Company, Room 201, Building NO. 22 of Zhifu Center, Xiuzhou District, Jiaxing, Zhejiang Province, China, 314000.
Name
and Address of Beneficial Owner
|
|
Title
of Class
|
|
Amount
and
Nature
of
Beneficial
Ownership
(1)
|
|
|
Percent
of
Class
(2)
|
|
Xianyi
Hao, Chairman, CEO, President and CFO
|
|
Common
Stock
|
|
|
1,380,000
|
|
|
|
1.2
|
%
|
Guanhua
International Limited
(3)
|
|
Common
Stock
|
|
|
7,480,000
|
|
|
|
6.7
|
%
|
Zhengyu
International Limited
(4)
|
|
Common
Stock
|
|
|
10,280,000
|
|
|
|
9.2
|
%
|
Wanbo
International Limited
(5)
|
|
Common
Stock
|
|
|
28,050,000
|
|
|
|
25.1
|
%
|
Zhuohong
International Development Limited
(6)
|
|
Common
Stock
|
|
|
52,810,000
|
|
|
|
47.3
|
%
|
Feng Jiang
|
|
Common Stock
|
|
|
8,786,948
|
|
|
|
7.9
|
%
|
*
Less than 1%
(1)
|
Beneficial
Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect
to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power
with respect to the shares of our common stock.
|
|
|
(2)
|
A
total of 111,600,000 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of June
21, 2019. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.
|
|
|
(3)
|
Chunrong
Jin is the sole director of Guanhua International Limited and has voting and dispositive power of the securities held by Guanhua
International Limited.
|
|
|
(4)
|
Xiaming
Jin is the sole director of Zhengyu International Limited and has voting and dispositive power of the securities held by Zhengyu
International Limited.
|
|
|
(5)
|
Bo
Fang is the sole director of Wanbo International Limited and has voting and dispositive power of the securities held by Wanbo
International Limited.
|
|
|
(6)
|
Ke
Yi is the sole director of Zhuohong International Development Limited and has voting and dispositive power of the securities
held by Zhuohong International Development Limited.
|
Changes
in Control
Prior
to the closing of the Reverse Acquisition, all 100,000,000 shares of common stock issued on April 1, 2019 pursuant to the
Exchange Agreement were held in escrow and deemed to be in full control of the Company. As of June 21, 2019, the closing date
of the Reverse Acquisition, all of these shares were released from and delivered out of escrow to the following entities and individuals
in the amounts set opposite their names.
Xianyi
Hao
|
|
|
1,380,000
|
|
Guanhua
International Limited
|
|
|
7,480,000
|
|
Zhengyu
International Limited
|
|
|
10,280,000
|
|
Wanbo
International Limited
|
|
|
28,050,000
|
|
Zhuohong
International Development Limited
|
|
|
52,810,000
|
|
This
constituted a change of control of the Company. Other than the transactions and agreements previously described, our officers
and directors are not aware of any arrangements which if consummated may result in a change in control of the Company at a subsequent
date.
DIRECTORS
AND EXECUTIVE OFFICERS
Directors
and Executive Officers
The
following sets forth information about our director and executive officer as of the date of this report:
NAME
|
|
AGE
|
|
POSITION
|
Xianyi
Hao
|
|
54
|
|
Chairman,
President, Chief Executive Officer, Chief Financial Officer, Treasury and Secretary
|
Xianyi
Hao
. Mr. Jiang has nearly 30 years’ experience in planning and management work. He has served as our Chairman, Chief
Executive Officer, President and Chief Financial Officer since June 21, 2019. From November 2013 to December 2017, Mr. Hao worked
at Shenyang Guanchen Trading Company as its general manager. Since January 2018 Mr. Hao has been General Manager of Shenzhen Bangtong
and Chief Executive Officer of Shenyang Bangton. Mr. Hao graduated from Liaoning University with a Bachelor’s degree of
International Trade.
Involvement
in Certain Legal Proceedings
To
the best of our knowledge, none of our directors or executive officers has, during the past ten years:
|
●
|
been
convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other
minor offences);
|
|
|
|
|
●
|
had
any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or
business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or
within two years prior to that time;
|
|
|
|
|
●
|
been
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction
or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement
in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities,
or to be associated with persons engaged in any such activity;
|
|
|
|
|
●
|
been
found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated;
|
|
|
|
|
●
|
been
the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an
alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial
institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement
or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or
any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
|
|
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●
|
been
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined
in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons associated with a member.
|
EXECUTIVE
COMPENSATION
Summary
Compensation Table - Fiscal Years Ended December 31, 2018 and 2017
The
following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named
persons for services rendered in all capacities during the noted periods. No other executive officers received total annual salary
and bonus compensation in excess of $100,000.
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Nonequity
Incentive Plan Compensation
($)
|
|
|
Nonqualified
Deferred Compensation Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Xianyi
Hao, CEO
(1)
|
|
|
2018
|
|
|
|
8,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,742
|
|
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Feng
Jiang, former CEO
(2)
|
|
|
2018
|
|
|
|
1,795
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,795
|
|
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Hsin-Nan
Lin, former CEO
(3)
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Mr.
Hao became our Chief Executive Office on June 21, 2019. The compensation shown in this table includes the amount Mr. Hao received
from our subsidiaries prior to the consummation of the Reverse Acquisition.
|
|
|
|
|
(2)
|
Mr.
Jiang served as our Chief Executive Officer from January 7, 2019 until June 21, 2019. The compensation shown in this table
includes the amount Mr. Jiang received from our subsidiaries prior to the consummation of the Reverse Acquisition.
|
|
|
|
|
(3)
|
Mr.
Lin served as our Chief Executive Officer until January 7, 2019.
|
Employment
Agreements
All
of our employees have executed our standard employment agreements as required by the Chinese labor law. Our employment agreements
with our executives provide the amount of each executive officer’s salary, title and establish their eligibility to receive
a bonus. The employment agreement between Shenyang Bangtong and Mr. Hao, dated January 1, 2018, provides that Mr. Hao is employed
as Shenyang Bangtong’s CEO with a two-year term of employment until December 31, 2019. Mr. Hao receives a monthly salary
of RMB 5,000 (approximately $725) under the employment agreement. He is also subject to customary confidentiality covenants under
the employment agreement.
Outstanding
Equity Awards at Fiscal Year End
No
unexercised options, stock that has not vested or outstanding equity incentive plan awards were held by any of our named executive
officers at December 31, 2018.
Compensation
of Directors
No
member of our board of directors received any compensation for his or her services as a director during the year ended December
31, 2018.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS,
AND
DIRECTOR INDEPENDENCE
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of our fiscal year ended December 31, 2017, or any currently
proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000
or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related
person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”).
|
●
|
On
April 1, 2019, we entered into the Exchange Agreement with Bangtong International and holders of all outstanding capital stock
of Bangtong International, pursuant to which on June 21, 2019, we acquired 100% of the outstanding capital stock of Bangtong
International. In exchange, we issued to the former shareholders of Bangtong International, including our Chairman and Chief
Executive Officer, Xianyi Hao, who received 1,380,000 shares.
|
|
|
|
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●
|
As
of March 31, 2019, we owe Shenyang Bangtong Science & Technology Co., Ltd., an aggregate of $795,070, which balance is
unsecured, non-interest bearing and repayable upon demand. One of our major shareholders is also a shareholder of Shenyang
Bangtong Science & Technology Co., Ltd.
|
|
|
|
|
●
|
As
of March 31, 2019, we prepaid Shenyang Zhuohong Investment Co., Ltd. $73,737 for services in connection with the Reverse Acquisition. Shenyang Zhuohong Investment Co., Ltd. is a subsidiary
of our major shareholder, Zhuohong International Development Limited.
|
Promoters
and Certain Control Persons
We
did not have any promoters at any time during the past five fiscal years.
Director
Independence
We
currently do not have any independent directors, as the term “independent” is defined by the rules of the Nasdaq Stock
Market.
LEGAL
PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to
time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have
a material adverse affect on our business, financial condition or operating results.
MARKET
PRICE AND DIVIDENDS ON OUR COMMON EQUITY
AND
RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is currently eligible to be quoted on the OTC market under the symbol “LBAO.” However, our common stock
has not been traded on the OTC market except on a limited and sporadic basis and there is no assurance that a regular public trading
market will ever develop. OTC market securities are not listed and traded on the floor of an organized national or regional stock
exchange. Instead, OTC market securities transactions are conducted through a telephone and computer network connecting dealers.
OTC market issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional
or national stock exchange.
Approximate
Number of Holders of Our Common Stock
As
of June 21, 2019, there were approximately 26 holders of record of our common stock. This number excludes the shares of
our common stock owned by stockholders holding stock under nominee security position listings.
Dividend
Policy
We
have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors.
We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate
paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends,
subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and
amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant.
Securities
Authorized for Issuance under Equity Compensation Plans
We
do not have in effect any compensation plans under which our equity securities are authorized for issuance.
RECENT
SALES OF UNREGISTERED SECURITIES
As
previously reported in the Current Report on Form 8-K filed on April 2, 2019, we issued 100,000,000 shares of our common stock
to the shareholders of Bangtong International on April 1, 2019 pursuant to the Exchange Agreement. The total consideration for
such shares was 72,720,000 ordinary shares of Bangtong International, which are all the issued and outstanding shares of Bangtong
International. The number of our shares issued to the shareholders of Bangtong International was determined based on an arms-length
negotiation. The issuance of these shares was made in reliance on the exemption provided by Section 4(a)(2) of the Securities
Act for the offer and sale of securities not involving a public offering and Regulation S promulgated thereunder.
DESCRIPTION
OF SECURITIES
Common
Stock
We
are authorized to issue up to 1,980,000,000 shares of common stock, par value $0.001 per share. Each outstanding share of common
stock entitles the holder thereof to one vote per share on all matters. Our bylaws provide that elections for directors shall
be by a plurality of votes. Stockholders do not have preemptive rights to purchase shares in any future issuance of our common
stock. Upon our liquidation, dissolution or winding up, and after payment of creditors and preferred stockholders, if any, our
assets will be divided pro-rata on a share-for-share basis among the holders of the shares of common stock.
The
holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board
of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable
future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions
to us, including as a result of restrictive covenants in loan agreements, and other regulatory restrictions. See “Risks
Related to Doing Business in China—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and
other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit
our business, pay dividends to you, and otherwise fund and conduct our business.”
All
of the issued and outstanding shares of our common stock are duly authorized, validly issued, fully paid and non-assessable. To
the extent that additional shares of our common stock are issued, the relative interests of existing stockholders will be diluted.
Preferred
Stock
We
are authorized to issue up to 20,000,000 shares of preferred stock, par value $0.001 per share, in one or more classes or series
within a class as may be determined by our board of directors, who may establish, from time to time, the number of shares to be
included in each class or series, may fix the designation, powers, preferences and rights of the shares of each such class or
series and any qualifications, limitations or restrictions thereof. Any preferred stock so issued by the board of directors may
rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up
of us, or both. Moreover, under certain circumstances, the issuance of preferred stock or the existence of the unissued preferred
stock might tend to discourage or render more difficult a merger or other change of control.
No
shares of our preferred stock are currently outstanding. The issuance of shares of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock.
Anti-Takeover
Effects of Nevada Law and Our Articles of Incorporation and Bylaws
The
provisions of Nevada law, our articles of incorporation and bylaws may have the effect of delaying, deferring or discouraging
another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging
takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with
our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly
or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals
could result in an improvement of their terms.
Anti-takeover
Effects of Nevada Law
Business
Combinations
The
“business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS,
prohibit a Nevada corporation with at least 200 stockholders from engaging in various “combination” transactions with
any interested stockholder: for a period of three years after the date of the transaction in which the person became an interested
stockholder, unless the transaction is approved by the board of directors prior to the date the interested stockholder obtained
such status; or after the expiration of the three-year period, unless:
|
●
|
the
transaction is approved by the board of directors or a majority of the voting power held by disinterested stockholders, or
|
|
|
|
|
●
|
if
the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per
share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the
combination or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value
per share of common stock on the date of announcement of the combination and the date the interested stockholder acquired
the shares, whichever is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock,
if it is higher.
|
A
“combination” is defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer
or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having: (a)
an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate
market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (c) 10% or more
of the earning power or net income of the corporation.
In
general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within three
years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover
or change in control attempts and, accordingly, may discourage attempts to acquire our company even though such a transaction
may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Our
articles of incorporation state that we have elected not to be governed by the “business combination” provisions.
Control
Share Acquisitions
The
“control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS, which apply only to Nevada corporations
with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and which conduct business
directly or indirectly in Nevada, prohibit an acquirer, under certain circumstances, from voting its shares of a target corporation’s
stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s
disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less
than a majority, and a majority or more, of the outstanding voting power. Once an acquirer crosses one of the above thresholds,
those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control
shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that
if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power,
all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment
for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.
Our
articles of incorporation state that we have elected not to be governed by the “control share” provisions.
Articles
of Incorporation and Bylaw Provisions
Our
articles of incorporation and our bylaws include a number of provisions that could deter hostile takeovers or delay or prevent
changes in control of our management team, including the following:
|
●
|
No
Cumulative Voting
. Nevada law provides that stockholders are not entitled to the right to cumulate votes in the election
of directors unless a corporation’s articles of incorporation provides otherwise. Our articles of incorporation and
bylaws do not provide for cumulative voting.
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|
|
|
|
●
|
Preferred
Stock
. As discussed above, the ability of our board to issue preferred stock without further stockholder approval could
make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control.
|
Transfer
Agent and Registrar
Our
stock transfer agent is Transfer Online, Inc.. Their mailing address is 512 SE Salmon St., Portland, OR 97214, and
their phone number is (503) 227-2950.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Our
articles of incorporation provide that we will indemnify to the fullest extent permitted by law any person made or threatened
to be made a party to any threatened, pending or completed by action or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he or she is or was our director or officer or a director or officer of another entity
at our request against judgments, fines, penalties, excise taxes, amounts paid in settlement and costs, charges and expenses (including
attorney’s fees and disbursements) that he or she incurs in connection with such action or proceeding.
Insofar
as indemnification by us for liabilities arising under the Exchange Act may be permitted to our directors, officers and controlling
persons pursuant to provisions of the articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification
by such director, officer or controlling person of us in the successful defense of any action, suit or proceeding is asserted
by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by us is against public policy as expressed in the Exchange Act and will be governed by the final
adjudication of such issue.
At
the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours
in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.