Form 10-Q Hanjiao Group, Inc. For: Mar 31
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| (Mark One) | ||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
| (State of other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
People's Republic of China
(Address of principal executive offices) (Zip Code)
Registrant's Phone: +
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol | Name of each exchange on which registered |
| N/A |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| Emerging growth company |
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of May 11, 2022, the issuer had shares of common stock issued and outstanding.
| TABLE OF CONTENTS | Page | |
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 10 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 39 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 44 |
| Item 4. | Controls and Procedures | 44 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 46 |
| Item 1A. | Risk Factors | 46 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 46 |
| Item 3. | Defaults Upon Senior Securities | 46 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 46 |
| Item 5. | Other Information | 46 |
| Item 6. | Exhibits | 47 |
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INTRODUCTORY COMMENT
We are not a Chinese operating company but a Nevada holding company with operations conducted through our wholly owned subsidiaries based in Hong Kong and the British Virgin Islands and our variable interest entity based in the PRC. Our investors hold shares of common stock in Hanjiao Group, Inc., the Nevada holding company. This structure presents unique risks as our investors may never directly hold equity interests in our operating variable interest entity and will be dependent upon dividends, loans or other transfers of cash or assets from our subsidiaries and variable interest entity to finance our cash flow needs. Our ability to obtain dividends, loans or other distribution of cash or assets from our subsidiaries and variable interest entity are significantly affected by regulations promulgated by the PRC and Hong Kong authorities. Any change in the interpretation of existing rules and regulations or the promulgation of new rules and regulations may materially affect our operations and or the value of our securities, including causing the value of our securities to significantly decline or become worthless. For a detailed description of the risks facing the Company associated with our structure, please refer to “Risk Factors – Risk Relating to Doing Business in China” set forth in our Annual Report for the year ended December 31, 2021 filed with the Securities and Exchange Commission on April 15, 2022 (the “Annual Report”).
Hanjiao Group Inc., our Hong Kong and PRC subsidiaries and our PRC variable interest entity are required to obtain permission from the Chinese authorities including the China Securities Regulatory Commission, or CSRC, or Cybersecurity Administration Committee, or CAC, to operate or to issue securities to foreign investors. However, in light of the recent statements and regulatory actions by the PRC government, such as those related to Hong Kong’s national security, the promulgation of regulations prohibiting foreign ownership of Chinese companies operating in certain industries, which are constantly evolving, and anti-monopoly concerns, we may be subject to the risks of uncertainty of any future actions of the PRC government in this regard including the risk that we inadvertently conclude that such approvals are not required, that applicable laws, regulations or interpretations change such that we are required to obtain approvals in the future, or that the PRC government could disallow our holding company and or variable interest entity structure, which would likely result in a material change in our operations, including our ability to continue our existing holding company and variable interest entity structure, carry on our current business, accept foreign investments, and offer or continue to offer securities to our investors. These adverse actions could cause the value of our common stock to significantly decline or become worthless. We may also be subject to penalties and sanctions imposed by the PRC regulatory agencies, including the Chinese Securities Regulatory Commission, if we fail to comply with such rules and regulations, which would likely adversely affect the ability of the Company’s securities to continue to trade on the Over-the-Counter Bulletin Board, which would likely cause the value of our securities to significantly decline or become worthless.
There are prominent legal and operational risks associated with our operations being in China. For example, as a U.S.-listed PRC public company, we may face heightened scrutiny, criticism and negative publicity, which could result in a material change in our operations and the value of our common stock. It could also significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. We are subject to risks arising from the legal system in China where there are risks and uncertainties regarding the enforcement of laws including where the Chinese government can change the rules and regulations in China and Hong Kong, including the enforcement and interpretation thereof, at any time with little to no advance notice and can intervene at any time with little to no advance notice. Changes in Chinese internal regulatory mandates, such as the M&A rules, Anti-Monopoly Law, and the Data Security Law, may target the Company's corporate structure and impact our ability to conduct business in China, accept foreign investments, or list on an U.S. or other foreign exchange. By way of example, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. In April 2020, the Cyberspace Administration of China and certain other PRC regulatory authorities promulgated the Cybersecurity Review Measures, which became effective in June 2020. Pursuant to the Cybersecurity Review Measures, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security. On July 10, 2021, the Cyberspace Administration of China issued a revised draft of the Measures for Cybersecurity Review for public comments (“Draft Measures”), which required that, in addition to “operator of critical information infrastructure,” any “data processor” carrying out data processing activities that affect or may affect national security should also be subject to cybersecurity review, and further elaborated the factors to be considered when assessing the national security risks of the relevant activities, including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad. The Cyberspace Administration of China has said that under the proposed rules companies holding data on more than 1,000,000 users must now apply for cybersecurity approval when seeking listings in other nations because of the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments,” The cybersecurity review will also investigate the potential national security risks from overseas IPOs. On January 4, 2022, the CAC, in conjunction with 12 other government departments, issued the New Measures for Cybersecurity Review (the "New Measures") on January 4, 2022. The New Measures amends the Draft Measures released on July 10, 2021 and became effective on February 15, 2022.
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The business of our subsidiaries and variable interest entities are not subject to cybersecurity review with the Cyberspace Administration of China, or CAC, given that we do not possess a large amount of personal information in our business operations. In addition, we are not subject to merger control review by China’s anti-monopoly enforcement agency due to the level of our revenues which provided from us and audited by our auditor and the fact that we currently do not expect to propose or implement any acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million (approximately USD$627,400). Currently, these statements and regulatory actions have had no impact on our daily business operations, the ability to accept foreign investments and list our securities on an U.S. or other foreign exchange. However, since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list our securities on an U.S. or other foreign exchange. For a detailed description of the risks facing the Company associated with our operations in China please refer to “Risk Factors – Risk Factors Relating to Doing Business in China” in the Annual Report.
The recent joint statement by the SEC and PCAOB, and the Holding Foreign Companies Accountable Act (HFCAA) all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act and the Accelerating the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or investigate completely our auditor, and that as a result, an exchange may determine to delist our securities. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two thus reducing the time before our securities may be prohibited from trading or being delisted. Our auditor is based in New York and is subject to PCAOB inspection. It is not subject to the determinations announced by the PCAOB on December 16, 2021. However, due to the recent developments in connection with the implementation of the Holding Foreign Companies Accountable Act, we cannot assure you whether the SEC or other regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. The requirement in the HFCA Act that the PCAOB be permitted to inspect the issuer’s public accounting firm within two or three years, may result in the delisting of our securities from applicable trading markets in the U.S, in the future if the PCAOB is unable to inspect our accounting firm at such future time. Please see “Risk Factors- The Holding Foreign Companies Accountable Act requires the Public Company Accounting Oversight Board (PCAOB) to be permitted to inspect the issuer's public accounting firm within three years. This three year period will be shortened to two years if the Accelerating Holding Foreign Companies Accountable Act is enacted. There are uncertainties under the PRC Securities Law relating to the procedures and requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence within the territory of the PRC. If the U.S. securities regulatory agencies are unable to conduct such investigations, they may suspend or de-register our registration with the SEC and delist our securities from applicable trading markets within the US.” in the Annual Report.
In addition to the foregoing risks, we face various legal and operational risks and uncertainties arising from doing business in China as summarized below and in “Risk Factors — Risks Relating to Doing Business in China” in the Annual Report.
| · | There are still intermittent regional outbreaks of the coronavirus and its variants in 2022 (such as in Beijing and Shanghai), movement in China is still limited. Given that COVID-19 has developed into a highly infective and less lethal, the intermittent outbreak of COVID-19 in surrounding areas still has a negative impact on our business activities. |
| · | Adverse changes in economic and political policies of the PRC government could have a material and adverse effect on overall economic growth in China and Hong Kong, which could materially and adversely affect our business. | |
| · | We are a holding company and will rely on dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct business. We do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends. | |
| · | PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our subsidiary and variable interest entity in China or to our subsidiary in Hong Kong. | |
| · | Substantial uncertainties exist with respect to the interpretation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations. |
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| · | We are subject to the risks arising from the legal system in China. The Chinese government can change the rules and regulations in China and Hong Kong, including the enforcement and interpretation thereof, at any time with little to no advance notice and can intervene at any time with little to no advance notice. We are currently not required to obtain approval from Chinese authorities to list on U.S. exchanges. However, if our subsidiaries or the holding company were required to obtain approval in the future, or we erroneously conclude that approvals were not required, or we were denied permission from Chinese authorities to operate or to list on U.S. exchanges, we will not be able to continue listing on a U.S. exchange and the value of our common stock would likely significantly decline or become worthless, which would materially affect the interest of the investors. There is a risk that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China/Hong Kong-based issuers, which could result in a material change in our operations and/or the value of our securities. Further, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers would likely significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. Please see “The PRC government has significant oversight and discretion over the conduct of our business operations or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, and may intervene with or influence our operations, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless, as the government deems appropriate to further regulatory, political and societal goals.” in the Annual Report. | |
| · | Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment. | |
| · | We may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. We may be liable for improper use or appropriation of personal information provided by our customers. | |
| · | 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 shareholders. | |
| · | PRC regulation of loans to, and direct investments in, PRC or Hong Kong entities by offshore holding companies may delay or prevent us from using proceeds from this offering and/or future financing activities to make loans or additional capital contributions to our subsidiary and variable interest entity in China or our Hong Kong subsidiary. | |
| · | Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, may limit our ability to acquire Hong Kong and PRC companies or to inject capital into our subsidiary and variable interest entity in China or our Hong Kong subsidiary, may limit the ability of our subsidiary and variable interest entity in China or our Hong Kong subsidiary to distribute profits to us or may otherwise materially and adversely affect us. | |
| · | The recent joint statement by the SEC and PCAOB, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or investigate completely our auditor, and that as a result an exchange may determine to delist our securities. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (HFCAA) which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two thus reducing the time before our securities may be prohibited from trading or being delisted. Our auditor is located in New York and is not subject to the determinations announced by the PCAOB on December 16, 2021. Please see “Risk Factors- The Holding Foreign Companies Accountable Act requires the Public Company Accounting Oversight Board (PCAOB) to be permitted to inspect the issuer's public accounting firm within three years. This three year period will be shortened to two years if the Accelerating Holding Foreign Companies Accountable Act is enacted. There are uncertainties under the PRC Securities Law relating to the procedures and requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence within the territory of the PRC. If the U.S. securities regulatory agencies are unable to conduct such investigations, they may suspend or de-register our registration with the SEC and delist our securities from applicable trading market within the US.” in the Annual Report. |
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| · | You may be subject to PRC income tax on dividends from us or on any gain realized on the transfer of shares of our common stock. | |
| · | We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies. | |
| · | We are organized under the laws of the State of Nevada as a holding company that conducts its business through our variable interest entities in China and a number of subsidiaries organized under the laws of foreign jurisdictions such as Hong Kong and the British Virgin Islands. This may have an adverse impact on the ability of U.S. investors to enforce a judgment obtained in U.S. Courts against these entities, bring actions in China or Hong Kong against us or our management or to effect service of process on the officers and directors managing the foreign subsidiaries. | |
| · | U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China. | |
| · | There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our variable interest entity in the PRC, and distributions payable by our variable interest entity and dividends payable by our PRC subsidiary to our offshore subsidiaries may not qualify to enjoy certain treaty benefits. |
References in this registration statement to the “Company,” “HJGP,” “we,” “us” and “our” refer to Hanjiao Group, Inc., a Nevada company and all of its subsidiaries on a consolidated basis. Where reference to a specific entity is required, the name of such specific entity will be referenced.
Transfers of Cash to and from Our Subsidiaries and Variable Interest Entity
Hanjiao Group, Inc. is a Nevada holding company with no operations of its own. We conduct our operations in China primarily through our variable interest entity Beijing Yingjun Technology Co., Ltd. (“Beijing VIE”) in China. We may rely on distributions or other transfers of cash or assets to be paid by Beijing VIE to fund our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. In order for us to pay dividends to our shareholders, we will rely on payments made from Beijing VIE to Hanjiao Group, Inc. As of the date of this prospectus, there has been no dividends or distributions of cash or assets made among the holding company, its variable interest entity, or the subsidiaries and no dividends or distributions of cash or assets made to U.S. investors except as set forth below in the section entitled “Dividend Payments.”
We do not intend to make dividends or distributions to investors of Hanjiao Group, Inc. in the foreseeable future.
We currently intend to retain all available funds and future earnings, if any, for the operation and expansion of our business and do not anticipate declaring or paying any dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, contractual requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments.
Hanjiao Group, Inc. (Nevada corporation)
Subject to the Nevada Revised Statutes and our bylaws, the board of directors of Hanjiao Group, Inc. may authorize and declare a dividend to shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately following the dividend, the value of our assets will exceed our liabilities and we will be able to pay our debts as they become due. There is no further Nevada statutory restriction on the amount of funds which may be distributed by us by dividend. Accordingly, Hanjiao Group, Inc. is permitted under the Nevada laws to provide funding to our variable interest entity in China and our subsidiaries in the PRC and Hong Kong through loans or capital contributions without restrictions on the amount of the funds, subject to satisfaction of applicable government registration, approval and filing requirements.
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Inooka Holding Ltd. (Hong Kong)
Inooka Holding Ltd. is permitted under the laws of Hong Kong to provide and receive funding to and from Hanjiao Group, Inc. through dividend distributions without restrictions on the amount of the funds. If our Hong Kong subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by us. The laws and regulations of the PRC do not currently have any material impact on transfer of cash from Hanjiao Group, Inc. to Inooka Holding Ltd. or from Inooka Holding Ltd. to Hanjiao Group, Inc. There are no restrictions or limitations under the laws of Hong Kong imposed on the conversion of HK dollar into foreign currencies and the remittance of currencies out of Hong Kong or across borders and to U.S investors.
Beijing Yingjun Technology Co., Ltd. (China Variable Interest Entity)
PRC Laws
Current PRC regulations permit PRC entities to pay dividends to Hong Kong subsidiaries only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our subsidiary and VIE in China are required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. As of the date of this annual report, we have a PRC subsidiary that has contractual arrangements with our variable interest entity.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiary or VIE in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations, we may be unable to pay dividends on our common stock.
Cash dividends, if any, on our common stock will be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.
Certain payments from PRC entities to a Hong Kong subsidiary will be subject to PRC taxes, including business taxes and VAT. As of the date of this annual report, our Hong Kong subsidiary has not made any transfers, dividends or distributions to date. We do not expect our Hong Kong subsidiary to make any such transfers, dividends or distributions in the foreseeable future.
Dividend Payments
In 2018, in accordance with a board resolution dated December 30, 2018, Beijing VIE recorded dividends payable of $754,763; and the dividends were distributed in the same year.
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In 2019, the board of directors of Beijing VIE declared dividends of RMB 33,929,000 (approximately US$4,918,000) in total.
During 2019, total dividends for RMB 33,899,000 (approximately US$4,914,000) were distributed as follows:
| · | RMB 20,100,000 (approximately US$2,914,000) was distributed to Ms. Tian Xiangyang through an accounting offset; | |
| · | RMB 8,278,000 (approximately US$1,200,000) of dividends payable to Ms. Tian Xiangyang was offset against the balance due from her; | |
| · | RMB 3,955,000 (approximately US$567,000) expected to be paid by Mr. Niu Jianxin to Ms. Tian Xiangyang via a related party loan to the Company. As of the date of this report, neither the Company nor Ms. Tian Xiangyang has received payment from Mr. Niu; | |
| · | RMB 1,250,000 (approximately US$181,000) was distributed to Ms. Tian Xiangyang. |
As a result, Hanjiao Group, Inc. had a dividends payable of $4,300 (RMB 30,000) as of December 31, 2019, which amount was distributed in the first quarter of 2020.
In accordance with a board resolution dated January 21, 2020, Beijing VIE declared dividends of RMB 5,080,900 (approximately US$722,000), which amount was distributed in the first quarter of 2020.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC entity. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including, without limitation, that (a) the Hong Kong entity must be the beneficial owner of the relevant dividends; and (b) the Hong Kong entity must directly hold no less than 25% share ownership in the PRC entity during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong entity must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by a PRC subsidiary to its immediate holding company. As of the date of this prospectus, we do not have a PRC subsidiary. In the event that we acquire or form a PRC subsidiary in the future and such PRC subsidiary desires to declare and pay dividends to our Hong Kong subsidiary, our Hong Kong subsidiary will be required to apply for the tax resident certificate from the relevant Hong Kong tax authority. In such event, we plan to inform the investors through SEC filings, such as a current report on Form 8-K, prior to such actions. See “Risk Factors – Risk Factors Relating to Doing Business in China.”
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical facts, included in this Form 10-Q including, without limitation, statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof); expansion and growth of the Company's business and operations; and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate under the circumstances. However, whether actual results or developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, including general economic, market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation; and other factors, most of which are beyond the control of the Company.
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These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "will," or similar terms. These statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, and its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations for its limited history; (ii) the Company's business and growth strategies; and, (iii) the Company's financing plans. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Such factors that could adversely affect actual results and performance include, but are not limited to, the Company's limited operating history, potential fluctuations in quarterly operating results and expenses, government regulation, technological change and competition. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to our filings with the SEC under the Exchange Act and the Securities Act of 1933, as amended, including the Risk Factors section of the Company’s Current Report on Form 8-K/A filed with the U.S. Securities and Exchange Commission (the “SEC”) on August 14, 2020.
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements.
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANJIAO GROUP, INC.
Index to Unaudited Condensed Consolidated Financial Statements
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HANJIAO GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Advance to suppliers, net | ||||||||
| Inventories, net | ||||||||
| Prepayments and other current assets, net | ||||||||
| Total current assets | ||||||||
| Long-term investment | ||||||||
| Property and equipment, net | ||||||||
| Non-current advance to supplier | ||||||||
| Right-of-use assets | ||||||||
| Deposits | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ deficit | ||||||||
| Current liabilities | ||||||||
| Taxes payable | $ | $ | ||||||
| Other payables and other current liabilities | ||||||||
| Lease liabilities, current | ||||||||
| Due to related parties | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, non current | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Shareholders’ deficit | ||||||||
| Common stock: $ par value; authorized shares; issued and outstanding shares at March 31, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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HANJIAO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative expenses | ||||||||
| Selling expenses | ||||||||
| Finance expenses, net | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other expenses | ||||||||
| Other expenses, net | ( | ) | ( | ) | ||||
| Loss from equity investment | ( | ) | ( | ) | ||||
| Total other expenses, net | ( | ) | ( | ) | ||||
| Loss before provision for income taxes | ( | ) | ( | ) | ||||
| Provision for income taxes | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive (loss) income: | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of ordinary shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Loss per ordinary share | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 12 |
HANJIAO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT)
| Ordinary shares | Additional | Accumulated other | Total | |||||||||||||||||||||||||
Number of shares | Amount | paid-in capital | Statutory reserves | Deficit | comprehensive loss | shareholders’ (deficit) | ||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | – | |||||||||||||||||||||||||||
| Balance as of March 31, 2021 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Ordinary shares | Additional | Accumulated other | Total | |||||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Statutory reserves | Deficit | comprehensive loss | shareholders’ (deficit) | ||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation | – | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of March 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 13 |
HANJIAO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Equity investment loss | ||||||||
| Bad debt expense | ||||||||
| Provision for (reversal of) slow-moving inventories | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Advance to suppliers | ( | ) | ||||||
| Inventories | ||||||||
| Due from related parties, net | ( | ) | ( | ) | ||||
| Prepayments and other current assets | ( | ) | ( | ) | ||||
| Advance from customers | ( | ) | ||||||
| Taxes payable | ( | ) | ( | ) | ||||
| Lease liabilities | ( | ) | ||||||
| Other payables and other current liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental non-cash financing information: | ||||||||
| Initial recognition of right-of-use assets and lease liabilities | $ | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 14 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Hanjiao Group, Inc. (“HJPG” or the “Company”), known previously as AS Capital, Inc. (“ASIN”), is a holding company that, through its subsidiaries and variable interest entity (collectively, the “Company”) is engaged in the business of selling healthcare and other related products to the middle-aged and elderly market segments in the People’s Republic of China (the “PRC” or “China”) through its internet platform and offline service centers.
HJPG conducts business primarily through its variable interest entity, Beijing Luji Technology Co., Ltd. (“Beijing Luji”) that was formed in Beijing, China on March 27, 2007. HJPG does not have a direct equity ownership interest in Beijing Luji but relies on a series of contractual arrangements, or variable interest entity (VIE) agreements (“VIE Agreements”), through Beijing Hongtao Management Consulting Co., Ltd.) (“Beijing Hongtao) to control and receive substantially all of the economic risks and benefits of Beijing Luji’s business in the PRC in which foreign investment is restricted or prohibited. The VIE Agreements are designed to mimic direct ownership of Beijing Luji and allow the financial condition and results of operations of Beijing Luji to be consolidated with the financial statements of HJPG.
On July 15, 2021, Beijing Hongtao Management Consulting Co., Ltd. changed its name to Beijing Hanze Management Consulting Co., Ltd. (“Beijing Hanze”). On July 16, 2021, Beijing Luji Technology Co., Ltd. changed its name to Beijing Yingjun Technology Co., Ltd. (“Beijing Yingjun”). Beijing Yingjun and Beijing Hanze executed a supplementary agreement on July 16, 2021, confirming that all the original terms and conditions related to the VIE Agreements remain unchanged and they continue to be valid.
The Company’s current corporate structure is as follows:
| 15 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
| · | HanJiao International Holding Limited (“HanJiao”) is a holding company incorporated in the British Virgin Islands on July 5, 2018. |
| · | Luji Technology International Holding Limited (“Luji Technology”), a holding company incorporated in the British Virgin Islands on July 5, 2018, is wholly owned by HanJiao. |
| · | Inooka Holding Ltd. (“Inooka”), a company established in Hong Kong on July 18, 2018, is wholly owned by Luji Technology. |
| · | Beijing Hongtao Management Consulting Co., Ltd. (“Beijing Hongtao”), a wholly foreign-owned enterprise (“WFOE”) was established in China on October 11, 2018 and it is a wholly owned subsidiary of Inooka. On July 15, 2021, Beijing Hongtao Management Consulting Co., Ltd. changed its name to Beijing Hanze Management Consulting Co., Ltd. (“Beijing Hanze”). Beijing Hanze provides consulting and technical services to Beijing Yingjun Technology Co., Ltd. that was incorporated in China on March 27, 2007. Beijing Yingiun established Guovi Investment Fund Management (Beijing) Co., Ltd. (“Beijing Guoyi”) with registered capital of RMB 50 million (approximately US$973,000) on February 19, 2016, which is inactive. |
On August 6, 2020, ASIN and HanJiao International Holding Limited (“HanJiao”) consummated a Share Exchange Agreement (the “Share Exchange Transaction”). In connection with the Share Exchange Transaction, ASIN issued 86,000,000 shares of its common stock to acquire all the equity shares of HanJiao. Upon the completion of the Share Exchange Transaction, the shareholders of HanJiao owned approximately 88.5% of the common stock of ASIN. On October 20, 2020, the Company changed its name from “AS Capital, Inc.” to “Hanjiao Group, Inc.”
Reorganization and Variable Interest Entities
On May 15, 2019, Beijing Hanze, Beijing Yingjun and their shareholders entered into a series of contractual arrangements (the “VIE Agreements”) to control and receive the economic benefits of Beijing Yingjun’s business. The VIE Agreements are designed to provide Beijing Hanze with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Beijing Yingjun, including absolute control rights and the rights to the assets, property, revenue and income of Beijing Yingjun.
To complete the corporate reorganization, the shareholders of Luji Technology transferred their respective ownership interest in Luji Technology in exchange for their respective ownership interest in HanJiao on September 16, 2019 (the “Share Transfer”).
Based on the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (‘ASC’) Topic 805, the VIE Agreements executed between Beijing Hanze and Beijing Yingjun and the Share Transfer constituted a reorganization of entities under common control since all these entities were controlled by the same major shareholder before and after the reorganization. As such, the Company’s consolidated financial statements have been prepared as if the reorganization had occurred retroactively and the existing corporate structure had been in existence throughout all periods presented.
The accounts of Beijing Yingjun and its wholly owned subsidiary are consolidated in the accompanying unaudited condensed consolidated financial statements pursuant to ASC 810-10, Consolidation.
| 16 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The carrying amounts of the VIE’s consolidated assets and liabilities are as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Current assets | $ | $ | ||||||
| Property and equipment, net | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | ||||||||
| Total liabilities | ( | ) | ( | ) | ||||
| Net liabilities | $ | ( | ) | $ | ( | ) | ||
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Other payables and accrued liabilities | $ | $ | ||||||
| Other payables – related parties | ||||||||
| Taxes payable | ||||||||
| Total liabilities | $ | $ | ||||||
The summarized operating results of the VIE are as follows:
For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating revenues | $ | $ | ||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
NOTE 2 – LIQUIDITY AND GOING CONCERN
As indicated in the accompanying unaudited
condensed consolidated financial statements, the Company had a net loss of approximately $
| 17 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and/or classification of the recorded asset amounts and/or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements include the accounts of the Company and include the assets, liabilities, revenues and expenses of the subsidiaries and VIE. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this report should be read in conjunction with the information included in the Company’s annual report for the year ended December 31, 2021.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and the VIE and its subsidiary. All inter-company transactions and balances have been eliminated upon consolidation.
VIE Agreements with Beijing Hanze
The Company does not have a direct equity ownership interest in Beijing Yingjun but relies on the VIE Agreements to control and receive the economic benefits of Beijing Yingjun’s business. The Company relies on contractual arrangements with its variable interest entity to operate its online to office (O2O) business in the PRC in which foreign investment is restricted or prohibited. The O2O platform integrates the Company’s e-commerce platform with physical outlets (service centers) to connect consumers and merchants in a dynamic marketplace. Pursuant to the VIE Agreements, the Company, through Beijing Hanze, is able to exercise effective control over, bears the risks of, enjoys substantially all of the economic benefits of its VIE and its subsidiary and has an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law. The Company’s management concluded that Beijing Yingjun and its subsidiary are variable interest entities of the Company and Beijing Hanze is the primary beneficiary of Beijing Yingjun and its subsidiary. As such, the financial statements of the VIE and its subsidiary are included in the consolidated financial statements of the Company. Each of the VIE Agreements is described in detail below:
Exclusive Consulting and Services Agreement
Pursuant to the Exclusive Consulting and Service Agreement signed on May 15, 2019, between Beijing Hanze and Beijing VIE, as amended by that certain Supplement to the Exclusive Consulting and Sevice Agreement, dated March 31, 2022, Beijing Hanze agrees to provide various services exclusively to Beijing VIE including development and research services for business-related software, pre-job and on-the-job training services, technology development and transfer services, public relations services, market research and consulting services, short and medium-term market development and planning services, various technical support services, consulting services related to business compliance, organization and planning services related to marketing and membership activities. For services rendered to Beijing VIE by Beijing Hanze under this agreement, Beijing Hanze is entitled to collect 100% of the net income of Beijing VIE.
| 18 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The Exclusive Consulting and Services Agreement shall remain in effect for ten years from the date of signing unless it is terminated by Beijing Hanze in advance or upon the mutual agreement of both parties. Unless otherwise required by law, Beijing VIE shall not have any right to terminate the agreement. Prior to the termination of this agreement, the parties may extend the term of this agreement in accordance with the requirements of Beijing Hanze.
Business Operations Agreement
Pursuant to the Business Operations Agreement signed on May 15, 2019, by and among the Beijing Yingjun shareholders, Beijing Yingjun and Beijing Hanze. Beijing Yingjun agreed not to conduct any transactions that may materially affect its assets, business, personnel, obligations, rights or company operations, without the prior written consent of Beijing Hanze. Beijing Hanze agrees to provide advice to Beijing Yingjun from time to time regarding the appointment and dismissal of employees, daily management and financial management systems. Beijing Yingjun and Beijing Yingjun shareholders also agree to appoint designees of Beijing Hanze to serve as its board of directors and on the senior management team of Beijing Yingjun. In connection with this agreement, the Beijing Yingjun shareholders executed a power of attorney of the Business Operations Agreement in which the Beijing Yingjun shareholders shall irrevocably authorize the designated personnel of Beijing Hanze to exercise their shareholders’ rights on their behalf, including voting rights at the shareholders' meeting in the name of the shareholders. The Beijing Yingjun shareholders further agree that they will replace the person authorized in the above power of attorney at any time upon Beijing Hanze's request. The Business Operations Agreement shall remain in effect for ten years from the date of signing unless earlier terminated by Beijing Hanze by delivering 30 days prior written notice or upon the mutual agreement of all parties. Beijing Yingjun and the Beijing Yingjun shareholders do not have the right to terminate the agreement unilaterally. Upon the termination of any agreement between Beijing Hanze and Beijing Yingjun, Beijing Hanze shall be entitled to terminate all agreements between such parties.
Equity Disposal Agreement
Pursuant to the Equity Disposal Agreement signed on May 15, 2019, by and among the Beijing Yingjun shareholders, Beijing Yingjun and Beijing Hanze, the Beijing Yingjun shareholders granted to Beijing Hanze an exclusive option right to purchase all of their equity interests in Beijing Yingjun to secure the execution of the Equity Pledge Agreement in which the details are set out below. Under the terms of this agreement, Beijing Hanze has an exclusive right to purchase, to the extent permitted under PRC law, at any time, all or any part of the equity interests of the Beijing Yingjun shareholders in Beijing Yingjun or an option to transfer the equity interests in Beijing Yingjun to any third party designated by Beijing Hanze. The option price shall be the minimum permitted by the laws and regulations of the PRC. The Equity Disposal Agreement has a term of ten years from the date of signing, and it may be renewed at Beijing Hanze’s discretion.
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement signed on May 15, 2019, by and among the Beijing Yingjun shareholders and Beijing Hanze, the Beijing Yingjun shareholders pledged all of their equity interests in Beijing Yingjun to Beijing Hanze to guarantee the performance of Beijing Yingjun’s obligations under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement. Under the terms of the agreement, in the event that Beijing Yingjun or its shareholders breach their respective contractual obligations under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement, or upon occurrence of any event of default as set forth in the Equity Pledge Agreement, Beijing Hanze shall be entitled to exercise its rights under this agreement, subject to certain cure periods. The Beijing Yingjun shareholders further agree not to dispose of the pledged equity interests or take any actions that would prejudice Beijing Hanze’s interest.
| 19 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The Equity Pledge Agreement shall be effective until Beijing Yingjun and the Beijing Yingjun shareholders have performed all of their obligations under the Exclusive Consulting and Services Agreement, the Equity Disposal Agreement and the Business Operations Agreement and the written approval of Beijing Hanze has been obtained.
Agency Agreement
Pursuant to the Agency Agreement signed on May 15, 2019, among the Beijing Yingjun shareholders and Beijing Hanze, the Beijing Yingjun shareholders granted Beijing Hanze an irrevocable license for the longest period permitted under law the right to exercise the voting rights of the Beijing Yingjun shareholders in accordance with the laws of the PRC and the Articles of Association of Beijing Yingjun. During the term of this Agreement, none of the Beijing Yingjun shareholders shall be entitled to transfer their interest in Beijing Yingjun to any third party other than entities or individuals designated by Beijing Hanze. This Agency Agreement shall be irrevocable and continuously valid from the date of execution of this Agency Agreement, and it can be terminated at Beijing Hanze’s discretion.
During the three months ended March 31, 2022 and the year ended December 31, 2021, HanJiao, Luji Technology and Inooka did not have any business activities.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for doubtful accounts and slow-moving inventory, and the useful lives of property and equipment. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC Section 820, “Fair Value Measurements and Disclosures.” ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level 1, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.
| 20 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash on hand, cash on deposit and other highly liquid investments which are unrestricted as to withdrawal or use, and which
have original maturities of three months or less when purchased. The Company maintains cash with various financial institutions in the
PRC. As of March 31, 2022 and December 31, 2021, the Company had cash and cash equivalents of approximately $
Risks and Uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among other factors, the political, economic and legal environment and foreign currency restrictions. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, changes in the future could affect the Company’s interest in these entities.
The outbreak of COVID-19 that started in late January 2020 in the PRC had negatively affected our business. In March 2020, the World Health Organization declared COVID-19 as a pandemic and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in China and the U.S. in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company’s business operations and its workforce are concentrated in China, the Company’s business, results of operations, and financial condition through March 31, 2022 have been adversely affected. There is an uncertainty around the breadth and duration of business disruptions related to COVID-19 and its variants, as well as its impact on the Company’s business. To mitigate the overall financial impact of COVID-19 on the Company’s business, management continues to explore opportunities to reduce its operating overhead and works closely with its service centers to develop promotional activities that will hopefully generate additional sales in 2022.
Inventories
Inventories consist of finished goods and they
are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The Company periodically
evaluates its inventories and will record an allowance for inventories that are either slow-moving, may not be saleable or whose cost
exceeds its net realizable value. For three months ended March 31, 2022 and 2021, the provision for (reversal of) slow-moving inventory
amounted to approximately $
| 21 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Advance to Suppliers
Advance to suppliers consists of payments to
suppliers for finished goods that have not been delivered to the Company. The Company periodically evaluates and reviews its advance
to suppliers to determine whether its carrying value has been impaired. As of March 31, 2022, advances to suppliers and non-current advance
to supplier were $
Long-term Investment
Long-term investment consists of the Company’s equity investment for strategic or business development purposes. The Company applies the equity method of accounting for its equity investment, according to FASB ASC 323 “Investment—Equity Method and Joint Ventures,” over which it has significant influence but does not own a majority equity interest or otherwise control. Under the equity method, the Company’s share of the profits or losses of the equity investees are recorded in its consolidated statements of comprehensive income (loss).
The Company reviews its investment at least annually to determine whether a decline in fair value to below the carrying value is other-than-temporary. The primary factors the Company considers in its determination are the duration and severity of the decline in fair value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information such as recent financing activities. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the investment will be written down to its fair value.
No events have occurred that indicated an impairment in fair value for the three months ended March 31, 2022.
Property and Equipment, Net
Property and equipment are carried at cost and are depreciated on the straight-line basis over the estimated useful lives of the underlying assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of its property and equipment, when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Estimated useful lives are as follows, taking into account the assets’ estimated residual value:
| Classification | Estimated useful lives | |
| Property | ||
| Vehicles | ||
| Office equipment | ||
| Furniture and fixtures | ||
| Software |
| 22 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Long-lived Assets
Finite-lived assets and intangibles are reviewed
for impairment testing when circumstances require. For purposes of evaluating the recoverability of long-lived assets, when undiscounted
future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. The
long-lived assets of the Company that are subject to evaluation consist primarily of property and equipment, and long-term investment.
For the three months ended March 31, 2022 and 2021, the Company did
Leases
In January 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”) requiring leases to be recognized on the balance sheet as a right-of-use asset and lease liability for all long-term leases and requiring disclosure of key information about leasing arrangements in order to increase transparency and comparability among organizations.
Effective July 1, 2020, the Company adopted ASU 2016-02, “Leases” (Topic 842), and elected the practical expedients that do not require it to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company also adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component.
The Company measures the lease liability based on the present value of the lease payments discounted by the relevant borrowing rate and reduces the carrying value of the lease liability for lease payments made. Leases with an initial expected term of 12 months or less are considered short-term and are not recorded on the Company’s consolidated balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term.
Revenue Recognition
The Company follows FASB ASC 606, Revenue from Contracts with Customers
The core principle underlying the revenue recognition standard is that the Company will recognize revenue to represent the transfer of products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This requires the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of the product or the benefit of the services transfers to the customer. Under the guidance of ASC 606, the Company is required to (a) identify the contract with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) the Company satisfies its performance obligations.
Product Sales: Beijing Yingjun, the Company’s VIE, is primarily engaged in the sale of healthcare and other products (such as nutrition or dietary supplements; water and air purifiers and smart watches) to the middle aged and elderly market segments in the PRC. Beijing Yingjun sells these products under its own “Fozgo” brand and related healthcare products for other vendors through its internet platform and offline service centers. Revenue from product sales is recognized when control passes to the customer, which generally occurs at a point in time when products are delivered. Allowance for sales returns, that reduces revenues, are estimated based on historical experience. Revenues are recorded net of value-added taxes, business taxes, discounts and surcharges and allowance for returns.
| 23 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Beijing Yingjun collects cash from customers before or upon delivery of products mainly through banks and third-party online payment platforms (such as Alipay). Cash collected from customers before product delivery is recognized as advance from customers.
Cost of Revenues
Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain designated products as well as allowances for and write-down of slow-moving inventories.
General and Administrative Expenses
General and administrative expenses consist mainly of payroll and related costs for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources, professional fees and other general corporate expenses as well as costs associated with the use by these functions of facilities and equipment, such as depreciation and rental expenses.
Selling Expenses
Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, marketing and selling expenses that are related to events and activities at the Company’s service centers designed to promote product sales as well as operating expenses related to the service centers.
Finance Expenses (Income)
Finance expenses consist mainly of service fees related to the use of third-party online payment platforms, bank fees and interest expenses related to borrowings, net of interest income from bank and related bank products.
Other Income (Expenses)
Other income consists primarily of income from the administration of Beijing Yingjun’s online marketplace. Other expenses consist mainly of estimated tax penalties and charitable contributions.
Income Taxes
The Company follows FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating losses that are available to offset the future taxable income. A valuation allowance is established when deemed necessary to reduce deferred tax assets to the amount expected to be realized.
| 24 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The Company follows FASB ASC 740-10-25, “Accounting
for Uncertainty in Income Taxes”, which requires income tax positions to meet a more-likely-than-not recognition threshold to be
recognized in the financial statements. Under ASC 740-10-25, tax positions that previously failed to meet the more-likely-than-not threshold
should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions
that
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or the deferred tax asset valuation allowance.
Enterprise Income Tax
Under the Provisional Regulations of the PRC concerning income tax on enterprises promulgated by the PRC (the “EIT Law”), the Company was qualified as a high and new technology enterprise starting in 2021 and enjoyed a preferential tax rate of 15% for 3 years that expired in 2024. An entity can re-apply to be a high and new technology enterprise when the prior certificate expires.
Value-Added Tax
The VAT rate for revenue generated from providing
products is
Foreign Currency Translation
The functional currency of the Company’s operations in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements are translated into U.S. dollars (“USD”) using the period end rates of exchange for assets and liabilities, equity is translated at historical exchange rates, and average rates of exchange (for the period) are used for revenues and expenses and cash flows. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into USD are included in determining comprehensive income (loss). Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in its functional currency. The Company does not enter into any material transactions in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
| 25 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The exchange rates as of March 31, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and 2021 are as follows:
| March 31, | December 31, | Three months ended March 31, | ||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Foreign currency | Balance Sheet | Balance Sheet | Profits/Loss | Profits/Loss | ||||||||||||
| RMB:1USD | ||||||||||||||||
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income (loss). Other comprehensive income (loss) consists entirely of foreign currency translation adjustments resulting from the Company’s translation of its financial statements from its functional currency into USD.
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of ordinary shares plus dilutive potential ordinary shares outstanding during the period. When the Company has a loss, the potential ordinary shares are not included since their inclusion would be anti-dilutive. For the three months ended March 31, 2022 and 2021, there were potential ordinary shares, such as options, warrants or conversion rights, that would have a dilutive effect on the Company’s earnings (loss) per share.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326). The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU was initially to be effective for annual and interim periods beginning after December 15, 2019 for issuers and December 15, 2020 for non-issuers. In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This ASU added optional transition relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar financial assets. The ASUs should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). On November 19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13 to be fiscal years beginning after December 15, 2022 and interim periods therein. The Company is still evaluating the impact of accounting standard of credit losses on the Company’s unaudited condensed consolidated financial statements and related disclosures.
| 26 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) to simplify accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU within annual reporting period of December 31, 2021 and expects that the adoption of this ASU will not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements”. The amendments in this Update represent changes to clarify the Codification or correct unintended application of guidance that is not expected to have a significant effect on current accounting practices or create a significant administrative cost to most entities. The amendments in this Update affect a wide variety of Topics in the Codification and apply to all reporting entities within the scope of the affected accounting guidance. ASU 2020-10 is effective for annual periods beginning after July 1, 2021 for public business entities. Early application is permitted. The amendments in this Update should be applied retrospectively. The Company believes the adoption of this new standard will not have a material impact on Company’s unaudited condensed consolidated financial statements and related disclosures.
The Company does not believe that other recently issued accounting standards, if currently adopted, will have a material effect on the Company’s unaudited condensed consolidated financial statements.
NOTE 4 – CASH AND CASH EQUIVALENTS
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Cash and cash equivalents: | ||||||||
| Cash on hand | $ | $ | ||||||
| Cash equivalents: | ||||||||
| Bank deposits | ||||||||
| Other cash equivalents | ||||||||
| Total cash equivalents | ||||||||
| Total cash and cash equivalents | $ | $ | ||||||
NOTE 5 – INVENTORIES, NET
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Finished goods | $ | $ | ||||||
| Less: allowance for slow-moving inventories | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
| 27 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
The Company reviews its inventories periodically
to determine if any reserves are necessary for slow-moving inventory or if a write-down is necessary when the carrying value exceeds net
realizable value. For the three months ended March 31, 2022, provision for slow-moving inventory amounted to approximately $
NOTE 6 – ADVANCE TO SUPPLIERS
| March 31, | December 31, | |||||||||
| Supplier | For the purchase of | 2022 | 2021 | |||||||
| (Unaudited) | ||||||||||
| Baoqing Meilai Modern Agricultural Service Co., Ltd. (1) | Selenium enriched rice | $ | $ | |||||||
| Shandong Kangqi Muye Industry Co., Ltd. | Specialty wooden phonograph | |||||||||
| Chongqing Zhouhai Intelligent Technology Co., Ltd. | Smart watches | |||||||||
| Beijing Huihui Huicheng Tianxia Network Technology Co., Ltd. | Tea | |||||||||
| One Four One Three (Tianjin) Network Technology Development Co., Ltd. | Various products | |||||||||
| Others | Nutritional supplements | |||||||||
| Less: allowance for doubtful accounts | ||||||||||
| Advance to Suppliers, net | $ | $ | ||||||||
| Non-current advance to supplier | ||||||||||
| Baoqing Meilai Modern Agricultural Service Co., Ltd. (1) | ||||||||||
| (1) |
NOTE 7 – PREPAYMENTS AND OTHER CURRENT ASSETS, NET
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Business advance to employees | $ | $ | ||||||
| Prepaid service fees | ||||||||
| Loans to employees | ||||||||
| Others | ||||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Total Prepaid Expenses and Other Current Assets | $ | $ | ||||||
| 28 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 8 – LONG-TERM INVESTMENT
On March 15, 2019, Beijing Yingjun executed
an Equity Acquisition Agreement with Rongcheng Health Group Co., Ltd. and acquired a
NOTE 9 – PROPERTY AND EQUIPMENT, NET
At March 31, 2022 and December 31, 2021, property and equipment is as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Property (1) | $ | $ | ||||||
| Office furniture | ||||||||
| Computer equipment | ||||||||
| Vehicles | ||||||||
| Software | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Less: accumulated amortization related to software | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| (1) |
(2) Software mainly includes financial and management systems purchased by the Company and WeChat mini program developed by the Company.
For three months ended March 31, 2022 and 2021,
depreciation expense amounted to $
NOTE 10 – DEPOSITS AND OTHER ASSETS, NON-CURRENT
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Office rental deposit | $ | $ | ||||||
| Total | $ | $ | ||||||
| 29 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 11 – RELATED PARTY BALANCES AND TRANSACTIONS
As of March 31, 2022 and December 31, 2021, due to related parties is as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Tian Xiangyang (1) | $ | $ | ||||||
| Total | $ | $ | ||||||
| (1) |
NOTE 12 – TAXES PAYABLE
At March 31, 2022 and December 31, 2021, taxes payable is as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| VAT payable | $ | $ | ||||||
| Income tax payable | ||||||||
| Other taxes payable | ||||||||
| Total | $ | $ | ||||||
Under PRC tax rules that are in effect, Beijing Luji, the Company’s VIE, is subject to penalties for any unpaid VAT and income taxes. The Company has accrued and recorded the related estimated penalties for unpaid VAT and income taxes as of March 31, 2022 and December 31, 2021, respectively in other current liabilities (see Note 14).
Other taxes payable consists mainly of tax obligations related to the city construction tax, education fund and withholding taxes related to dividends distributed to the Company’s shareholders.
| 30 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 13 – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company has the following operating leases:
| · | Office lease located in Unit 605, 6th Floor, Building 5, No. 1 Hang Feng Road, Beijing in the PRC (annual payment of approximately $160,000) that will expire on March 30, 2022. |
| · | Office lease located in Unit 1206, 12th Floor, Building 5, No.1 Hang Feng Rd, Beijing in the PRC (annual payment of approximately $93,000) that will expire on July 20, 2022. |
| · | Office lease located in Unit 805&806, Building A, International Finance Center, No.1 Xisanhuan North Rd, Beijing in the PRC (annual payment of approximately $127,000) that will expire on March 31, 2024. |
These lease agreements do not contain any material residual value guarantees or material restrictive covenants, and they do not contain options to extend at the time of expiration.
Upon the adoption of ASU 2016-02 on July 1, 2020, the Company recognized lease liabilities of approximately $477,600, with corresponding right-of-use (“ROU”) assets of the same amount based on the present value of the future minimum rental payments of the lease, using an incremental a borrowing rate of 4.35% to 4.57% based on the duration of the lease terms.
In accordance with FASB ASC 842, during the quarter
ended March 31, 2022, the Company recognized lease liabilities of approximately $
The maturity schedule of the Company’s lease liabilities is as follows:
| Twelve months ending March 31, | Amount | |||
| 2023 | $ | |||
| 2024 | 113,345 | |||
| Total lease payments | ||||
| Less: imputed interest | ||||
| Less: amount prepaid | ||||
| Present value of lease liabilities | $ | |||
Total lease expenses for the three months ended
March 31, 2022 and 2021 were approximately $
| 31 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 14 – OTHER PAYABLES AND OTHER CURRENT LIABILITIES
At March 31, 2022 and December 31, 2021, other payables and other current liabilities are as follows:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| Payroll and benefits (1) | $ | $ | ||||||
| Payable to suppliers | ||||||||
| Commissions payable | ||||||||
| Interest and penalties (2) | ||||||||
| Other current liabilities | ||||||||
| Total | $ | $ | ||||||
| (1) |
| (2) |
NOTE 15 – STATUTORY RESERVES
Pursuant to the laws in the PRC, entities must make appropriations from after-tax profit to a non-distributable “statutory surplus reserve fund.” Subject to certain cumulative limits, the statutory surplus reserve fund requires annual appropriations of 10% of after-tax profit (as determined under accounting principles generally accepted in the PRC) until the aggregated appropriations reach 50% of the registered capital.
As of March 31, 2022 and December 31, 2021, the
balance of the statutory reserve was $
NOTE 16 – INCOME TAXES
The entities within the Company file separate tax returns in the respective tax jurisdictions in which they operate as follows:
British Virgin Islands
HanJiao is a tax-exempt entity incorporated in the British Virgin Islands.
Hong Kong
Inooka was incorporated in Hong Kong and does not conduct any substantial operations of its own. No provision for Hong Kong profits tax has been made in the consolidated financial statements as Inooka Holding Ltd. has no profits or operations for the three months ended March 31, 2022 and 2021.
| 32 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
United States
The Company was incorporated under the laws of the State of Nevada in the United States. It had no taxable income for the U.S. income tax purposes for the three months ended March 31, 2022 and 2021. Nevada does not have a state income tax. The applicable federal tax rate is 21.0%.
PRC
The entities incorporated in the PRC are governed by the income tax law of the PRC and are subject to the PRC enterprise income tax (“EIT”). The EIT rate of the PRC is 25%, which applies to both domestic and foreign invested enterprises. Under the Provisional Regulations of the PRC Concerning Income Tax on Enterprises promulgated by the PRC (the “EIT Law”), Beijing Yingjun qualified as a high and new technology enterprise starting in 2018, and enjoyed a preferential tax rate of 15% for 3 years that expired in 2020 and the Company reapplied to qualify for the same preferential tax rate in 2021 and obtained the qualification in October, 2021. The Company was qualified as a high and new technology enterprise in 2021 and enjoys a preferential tax rate of 15% for 3 years that expires in 2024. Beijing Yingjun can re-apply as a high and new technology enterprise when the prior certificate expires. Income tax is payable at a rate of 15% of PRC taxable income for the three months ended March 31, 2022 and 2021.
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Non-PRC operations | $ | ( | ) | $ | ( | ) | ||
| PRC operations | ( | ) | ( | ) | ||||
| Net loss before provision for income taxes | $ | ( | ) | $ | ( | ) | ||
Provision for income taxes comprised of the followings:
For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Current tax expense | ||||||||
| PRC | $ | $ | ||||||
| Deferred tax expense | ||||||||
| PRC | ||||||||
| Total provision for income taxes | $ | $ | ||||||
The Company’s deferred tax assets are comprised of the following:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net operating loss | ||||||||
| PRC | $ | $ | ||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets, net - long-term | $ | $ | ||||||
| 33 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| PRC statutory tax rate | ||||||||
| Permanent differences | ( | ) | ( | ) | ||||
| Temporary differences | (5.8% | ) | (7.5% | ) | ||||
| Tax holiday effect | ( | ) | ( | ) | ||||
| Effective tax rate | ||||||||
Below is a breakdown of key components that make up the permanent differences:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Penalties related to unpaid VAT and income taxes | ( | ) | ( | ) | ||||
| Non-deductible expenses/donation | ( | ) | ( | ) | ||||
| Others | ( | ) | ( | ) | ||||
| Total | ( | ) | ( | ) | ||||
The Company's deferred tax assets were generated from the net operating loss carry forwards of the PRC entities of the Company. The Company considers the following factors, among other matters, when determining whether some portion or all of the deferred tax assets will more likely than not be realized: the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward years, the Company’s experience with tax attributes expiring unused and tax planning alternatives. The Company’s ability to realize the net deferred tax assets depends on its ability to generate sufficient taxable income within the carry forward years provided for in the tax law.
The Company’s VIE in the PRC had total
net operating loss carry forwards of approximately $
NOTE 17 – COMMITMENTS AND CONTINGENCIES
Contingencies
From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Amounts accrued, as well as the total amount of possible losses with respect to such matters, individually and in the aggregate, are not deemed to be material to the unaudited condensed consolidated financial statements.
| 34 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Variable interest entity structure
In the opinion of management, (i) the corporate structure of the Company is in compliance with existing PRC laws and regulations; (ii) the VIE Arrangements are valid and binding, and do not currently result in any violation of PRC laws or regulations currently in effect; and (iii) the business operations of the WFOE and the VIE are in compliance with existing PRC laws and regulations in all material respects. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly, the Company cannot assure that the PRC regulatory authorities will not ultimately take a contrary view to the foregoing opinion. If the current corporate structure of the Company or the VIE Arrangements is found to be in violation of any existing or future PRC laws and regulations, the Company may be required to restructure its corporate structure and operations in the PRC to comply with changing and new PRC laws and regulations. In the opinion of management, the likelihood of loss in respect of the Company’s current corporate structure or the VIE Arrangements is remote based on current facts and circumstances.
Lease Obligations
The Company leases certain office premises and apartments for employees under operating lease agreements with various terms that are less than one year in duration. Future minimum lease payments amount to approximately $265,384 for the twelve months ending March 31, 2022.
Legal Matters
The Company evaluates all pending legal matters periodically and establishes reserves when it is probable that they will result in a negative outcome, and that the amount of the loss could be reasonably estimated. The Company does not have any legal reserves as of March 31, 2022.
| 35 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
NOTE 18 - CONCENTRATION OF RISK
Risk of doing business in China
The Company conducts its operations and generates its revenue through its Beijing VIE in the PRC. Accordingly, economic, political, and legal developments in the PRC will significantly affect the Company’s business, financial condition, results of operations and prospects. The PRC economy is in transition from a planned economy to a market-oriented economy subject to plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on economic conditions in the PRC. While the Company believes that the PRC will continue to strengthen its economic and trading relationships with foreign countries and that business development in the PRC will continue to follow market forces, there is no assurance that this will be the case. The Company’s interests may be adversely affected by changes in policies by the PRC government, including:
| • | changes in laws, regulations, or their interpretation; | |
| • | confiscatory taxation; | |
| • | restrictions on currency conversion, imports or sources of supplies, or ability to continue as a for-profit enterprise; | |
| • | expropriation or nationalization of private enterprises; and | |
| • | the allocation of resources. |
Concentration of credit risk
The Company places its cash with a financial institution with a high-credit rating. Cash and cash equivalents as of March 31, 2022 was approximately $200,605. A depositor has up to RMB 500,000 insured by the People’s Bank of China Financial Stability Bureau (“FSD”) if the bank fails. While management believes that the financial institution is of high credit quality, it continually monitors its credit worthiness. As of March 31, 2022 approximately $55,183 was deposited in the bank account located in the PRC. This balance is not covered by insurance.
Foreign currency risk
The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
Concentration of supplier risk
The Company’s utilizes various suppliers.
There were two suppliers that accounted for more than 10% of total purchases, for the three months ended March 31, 2022. One supplier
accounted for 68% and the other accounted for
There were three suppliers that accounted for
more than 10% of total purchases, for the three months ended March 31, 2021. One supplier accounted for
| 36 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
Major customers
There were no customers who accounted for more than 10% of total revenue for the three months ended March 31, 2022 and 2021.
NOTE 19 – SUBSEQUENT EVENTS
The Company has analyzed its operations subsequent to March 31, 2022, through the date of filing of this report and has determined that the Company does not have any material subsequent events to disclose in these consolidated financial statements.
NOTE 20 – FINANCIAL INFORMATION OF THE PARENT COMPANY (UNAUDITED)
The Company performed a test on the restricted net assets of its consolidated subsidiaries in accordance with the Securities and Exchange Commission Regulation S-X Rule 5-04 and concluded that it was applicable for the Company to disclose the financial statements for the parent company.
The subsidiary did not pay any dividends to the Company for the periods presented. For the purpose of presenting parent only financial information, the Company records its investment in its subsidiaries under the equity method of accounting. Such investment is presented on the separate condensed balance sheets of the Company as “Investment in subsidiaries” and the income (loss) of the subsidiaries is presented as “share of income (loss) of subsidiaries”. Certain information and footnote disclosures generally included in financial statements prepared in accordance with US GAAP are not required.
The Company did not have any significant capital and other commitments, long-term obligations, or guarantees as of March 31, 2022 and December 31, 2021.
PARENT COMPANY BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Investment in subsidiaries | $ | ( | ) | $ | ( | ) | ||
| Total Current Assets | ( | ) | ( | ) | ||||
| Total Assets | $ | ( | ) | $ | ( | ) | ||
| Liabilities and Shareholders’ Deficit | ||||||||
| Total Liabilities | $ | $ | ||||||
| Shareholders’ Deficit | ||||||||
| Common stock: US$0.0001 par value; authorized - 500,000,000 shares; issued and outstanding 97,201,030 shares at March 31, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Deficit | ( | ) | ( | |||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | ( | ) | $ | ( | ) | ||
| 37 |
Hanjiao Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in U.S. dollars unless otherwise stated)
PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME
| For the Three Months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Share of loss of subsidiaries | $ | ( | ) | $ | ( | ) | ||
| Net loss | ( | ) | ( | ) | ||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
PARENT COMPANY STATEMENTS OF CASH FLOWS
| For the Three Months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss income to cash used in operating activities: | ||||||||
| Share of loss of subsidiaries | ( | ) | ( | ) | ||||
| Net cash provided by used in operating activities | ||||||||
| Changes in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of year | ||||||||
| Cash and cash equivalents at end of year | $ | $ | ||||||
| 38 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our Company’s financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in the report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. See “Cautionary Note Concerning Forward-Looking Statements” on page 2.
The description of our business included in this quarterly report is summary in nature and only includes material developments that have occurred since the latest full description. The full discussion of the history and general development of our business is included in “Item 1. Description of Business” section of the Company’s Annual Report on Form 10-K filed with the SEC April 15, 2022,, which section is incorporated by reference.
Unless otherwise noted, all currency figures quoted as “U.S. dollars”, “dollars” or “US$” refer to the legal currency of the United States. References to “Chinese Yuan” or “Renminbi (“RMB”)” are to the Chinese Yuan, the legal currency of the People’s Republic of China. Throughout this report, assets and liabilities of the Company’s subsidiaries are translated into U.S. dollars using the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
We were incorporated under the laws of the State of Nevada on June 15, 2006, as Jupiter Resources, Inc. Our name was changed to Rineon Group, Inc. on April 30, 2009, and AS Capital, Inc. on October 1, 2018. On August 6, 2020, we consummated a share exchange transaction with the shareholders of HanJiao International Holding Limited, its subsidiaries and variable interest entity, Beijing Yingjun Technology Co., Ltd., or “Beijing VIE”. As a result of the share exchange transaction, we entered into the business of providing health and wellness related products through our e-commerce platform to the middle-aged and elderly populations in the People’s Republic of China (“China” or the “PRC”) which business is conducted through Beijing VIE. On October 20, 2020, we changed our name to Hanjiao Group, Inc. The shares of our common stock are currently quoted under the symbol “HJGP.”
Beijing VIE, a variable interest entity that we control through contractual arrangements, was formed in Beijing, China, on March 27, 2007. Initially, Beijing VIE focused on the provision of services in paper media, publication of magazines and books, and investment in media businesses. Due to the downturn of the paper media industry and the rise of the elderly healthcare services industry, in 2013, Beijing VIE shifted its business focus to the provision of healthcare related products through its e-commerce platform to the middle-aged and elderly segments in the PRC.
In 2016, Beijing VIE expanded its e-commerce operations and introduced its “Fozgo” branded products via its online to offline (O2O) marketplace. The O2O platform integrates its e-commerce platform with physical outlets to connect consumers and merchants in a dynamic marketplace. Its platform not only offers users the convenience of making online purchases, but also provides users the possibility to purchase and receive products at offline service centers. Currently, Beijing VIE’s core product categories include nutritional supplements, cosmetics, smart home products (such as smart watches) and home appliances (such as water filters and air purifiers). Beijing VIE has developed several branch offices with outlets across the PRC with approximately 163,000 users. In 2018 and 2021, Beijing VIE was granted hi-tech enterprise status in the PRC and in 2021, it was identified as Zhongguancun High-tech Enterprise in Beijing.
Beijing VIE owns a 44% equity interest in Rongcheng Tianrun Taxus Co., Ltd. (“Rongcheng Tianrun”), a PRC company. Rongcheng Tianrun is engaged primarily in the cultivation and marketing of Taxus, a type of medicinal plant.
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Our principal executive offices are located at Room 119, No.778 Tanghekou Street, Tanghekou Town, Huairou District, Beijing and our telephone number is +86-10-63622901. At present, enterprises in Huairou District can enjoy the best tax preferential policies in Beijing. We currently operate 10 branches and approximately 200 service centers, serving approximately 163,000 users throughout the PRC. We maintain an Internet website at www.hanjiaoguoji.com. The information contained in, or accessible from, our website is not a part of this Quarterly Report.
Impact of COVID-19 on our business
The outbreak of COVID-19 that started in late January 2020 in the PRC had negatively affected our business. In March 2020, the World Health Organization declared COVID-19 as a pandemic and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in China and the U.S. in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company’s business operations and its workforce are concentrated in China, the Company’s business, results of operations, and financial condition have been adversely affected. For the three months ended March 31, 2022 and 2021, the Company had a net losses of approximately $1.5 and $1.9 million, respectively. At March 31, 2022, the Company has a significant working capital deficiency of approximately $34.9 million, and a shareholders’ deficit of approximately $14.0 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
To mitigate the overall financial impact of COVID-19 on the Company’s business, management introduced cost containment and staff reduction measures, revised product selection and incentive programs and worked with its service centers continuously to enhance their marketing and promotion activities. Management believes that COVID-19 will continue to have a material impact on its financial results for the first half of 2022 and could cause the potential impairment of certain assets. Accordingly, we expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2023 as market conditions in China continue to improve. Until the Company’s operating results improve, the Company hopes to rely on financing from its shareholders to support the Company’s operations.
Results of Operations
Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that we will be able to continue to operate in the future in the normal course of business. Our unaudited condensed consolidated financial statements for the three months ended March 31, 2022, includes a note about our ability to continue as a going concern due to losses from operations in 2021 and through the quarter ended March 31, 2022 as a result of COVID-19. Business closures in the PRC and limitations on business operations arising from COVID-19 has significantly disrupted our ability to generate revenues and cash flow during the three months ended March 31, 2022.
While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2023 as market conditions in China improve. In assessing the Company’s liquidity, management monitors and analyzes its cash on hand and its operating expenses, and existing regulatory obligations and commercial commitments. Based on its latest sales and cash flows projection, management believes that the Company should be able to generate sufficient cash flows from operations to meet its working capital requirements for the next twelve months, and that its capital resources are currently sufficient to maintain its business operations for the next twelve months. Until the Company’s operating results improve, the Company hopes to rely on financing from its shareholders to support the Company’s operations.
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Comparison for the Three Months Ended March 31, 2022 and 2021
The following table sets forth certain financial data for the three months ended March 31, 2022 and 2021
| For the Three Months Ended March 31, | Percentage | |||||||||||||||||||
| 2022 | 2021 | Change | ||||||||||||||||||
| Dollars | % | Dollars | % | % | ||||||||||||||||
| Revenues | $ | 706,047 | 100.0 | $ | 240,495 | 100.0 | 193.6 | |||||||||||||
| Cost of revenues | (447,339 | ) | (63.4 | ) | (115,100 | ) | (47.9 | ) | 288.7 | |||||||||||
| Gross profit | 258,708 | 36.6 | 125,395 | 52.1 | 106.3 | |||||||||||||||
| General and administrative expenses | 522,545 | 74.0 | 753,698 | 313.4 | (30.7 | ) | ||||||||||||||
| Selling expenses | 381,326 | 54.0 | 533,491 | 221,8 | (28.5 | ) | ||||||||||||||
| Finance expenses , net | 6,963 | 1.0 | 10,995 | 4.6 | (36.7 | ) | ||||||||||||||
| Total operating expenses | 910,834 | 129.0 | 1,298,184 | 539.8 | (29.8 | ) | ||||||||||||||
| Operating loss | (652,126 | ) | (92.4 | ) | (1,172,789 | ) | (487.7 | ) | (44.4 | ) | ||||||||||
| Other expenses, net | (817,007 | ) | (115.7 | ) | (747,738 | ) | (310.9 | ) | 9.3 | |||||||||||
| Loss from equity investment | (6,931 | ) | (1.0 | ) | (8,150 | ) | (3.4 | ) | (15.0 | ) | ||||||||||
| Total other expenses, net | (823,938 | ) | (116.7 | ) | (755,888 | ) | (314.3 | ) | 9.0 | |||||||||||
| Loss before provision for income taxes | (1,476,064 | ) | (209.1 | ) | (1,928,677 | ) | (802.0 | ) | (23.5 | ) | ||||||||||
| Provision for income taxes | – | – | – | – | – | |||||||||||||||
| Net loss | (1,476,064 | ) | (209.1 | ) | (1,928,677 | ) | (802.0 | ) | (23.5 | ) | ||||||||||
| Foreign currency translation adjustment | (56,798 | ) | (8.0 | ) | 62,321 | 25.9 | (191.1 | ) | ||||||||||||
| Comprehensive loss | $ | (1,532,862 | ) | (217.1 | ) | $ | (1,866,356 | ) | (776.1 | ) | (17.9 | ) | ||||||||
Revenues: Revenues were approximately $706,000 and approximately $240,000 for the three months ended March 31, 2022 and 2021 respectively. The increase in revenues of approximately $466,000 or 193.6% is due primarily to business recovery after outbreak of the COVID-19 in 2022 as market conditions in China continue to improve. During the three months ended March 31, 2022 and 2021, all revenues were generated in the PRC. During the three months ended March 31, 2022, revenues were mainly attributable to the sales of health foods, cold Gel and franchise income, representing 46.3%, 25.2% and 10.3% of revenues, respectively. During to the same period of 2021 revenues were mainly attributable to the sales of health foods, phonographs, cold Gel, smart watches, cosmetics products and home appliances, , representing 54.5%, 18.4%, 7.7%, 5.1%, 1.2% and 0.7% of revenues, respectively. During the three months ended March 31, 2022 and 2021, no customers accounted for 10% or more of total revenues.
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Cost of revenues: Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately $447,000 for the three months ended March 31, 2022 and $115,000 for the three months ended March 31, 2021. The increase in cost of revenues of approximately $332,000 or 288.7% from the comparable period of 2021 was due mainly to increase in product sales as a result of business recovery from COVID-19 in 2022.
There were two suppliers that accounted for more than 10% of total purchases, for the three months ended March 31, 2022 and 2021, respectively. One supplier (Hainan Shanshiyuan Health Management Co. Ltd.) accounted for 68%, and the other (Baoqing Meilai Modern Agricultural Service Co., Ltd.) accounted for 23% for the three months ended March 31, 2022. One supplier (Shandong Kangqi Wood Industry Co. Ltd.) accounted for 75%, and the other (Suzhou Jianli Space Health Technology Co. Ltd.) accounted for 19% for the three months ended March 31, 2021.
Gross Profit. Gross profit for the three months ended March 31, 2022 and 2021 of approximately $259,000 and $125,000. The increase in gross profit of approximately $133,000 or 106.3% from the comparable period of 2021 was due mainly to the increase in product sales as a result of business recovery from COVID-19 in 2022.
General and Administrative Expenses. General and administrative expenses (“G&A expenses”) consist primarily of costs in salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional fees, audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased 30.7% or approximately $231,000 to approximately $513,000 in the three months ended March 31, 2022 from approximately $754,000 for the three months ended March 31, 2021 was due primarily to the decrease in advisory fees, salary and benefits.
Selling Expenses. Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company’s service centers designed to promote product sales. Selling expenses decreased by 28.5% or approximately $152,000 to approximately $381,000 in the three months ended March 31, 2022 from approximately $533,000 in the same period of 2021. The decrease was due mainly to fewer events and lower travel expenses because of the negative impact of COVID-19.
Finance Income, net. Total net financial expense was approximately $7,000 for the three months ended March 31, 2022, compared to approximately $11,000 for the same period of 2021. The decrease was due mainly to lower interest earned from bank and related bank products in the three months period ended March 31, 2022.
Operating Loss Operating loss was approximately $652,000 for the three months ended March 31, 2022, compared to approximately $1.2 million for the same period of 2021. The decrease in operating loss in 2022 was due primary to the increase of the sales due to business recovery after outbreak of the COVID-19 and decrease of operating expenses.
Total Other Expenses, net. Other expenses consist mainly of estimated tax penalties and charitable contributions. Total net other expenses were approximately $824,000 for the three months ended March 31, 2022, compared to approximately $756,000 for the same period of 2021. The increase in total net other expenses was due primary to increase in estimated tax penalty in 2022.
Provision for Income Taxes. No provision for income taxes was recorded for the three months ended March 31, 2022 and 2021 since the Company reported a pre-tax loss of approximately $1.5 million and $1.9 million for the three months ended March 31, 2022 and 2021.
Net Loss. As a result of the factors described above, net loss was approximately $1.5 million for the three months ended March 31, 2022, a decrease of approximately $1.9 million from approximately $453,000 of net loss for the same period of 2021.
Comprehensive Loss Comprehensive loss was approximately $1.5 million and $1.9 million for the three months ended March 31, 2022 and 2021.
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Liquidity and Capital Resources
As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of approximately $201,000 and $839,000, respectively.
The following table sets forth a summary of our cash flows for the periods as indicated:
| For the Three Months ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net cash used in provided by operating activities | $ | (639,150 | ) | $ | (1,303,663 | ) | ||
| Effect of exchange rate changes on cash and cash equivalents | 905 | (6,549 | ) | |||||
| Net (decrease) in cash and cash equivalents | (638,245 | ) | (1,310,212 | ) | ||||
| Cash and cash equivalents at beginning of period | 838,850 | 3,257,005 | ||||||
| Cash and cash equivalents at end of period | $ | 200,605 | $ | 1,946,793 | ||||
The following table sets forth a summary of our working capital:
| March 31, | December 31, | |||||||||||||||
| 2022 | 2021 | Variation | % | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Total Current Assets | $ | 476,476 | $ | 1,319,947 | $ | (843,471 | ) | (63.9 | ) | |||||||
| Total Current Liabilities | 35,216,772 | 34,453,169 | 763,603 | 2.2 | ||||||||||||
| Working Capital | $ | (34,740,296 | ) | $ | (33,133,222 | ) | $ | (1,607,074 | ) | 4.9 | ||||||
Working Capital. The deterioration in the Company’s working capital was due mainly to continuing net losses generated as a result of COVID-19.
Cash used in operating activities was approximately $639,000 and $1.3 million for three months ended March 31, 2022 and 2021, respectively. The key factors attributing to the net cash outflows in 2022 include: net loss of approximately $1.5 million, adjusted by provision for slow-moving inventories of $149,000; decrease in advance from customers of approximately $244,000; and other payables and other current liabilities of approximately $804,000. The key factors attributing to the net cash outflows in 2021 include: net loss of approximately $1.9 million due mainly to drop in revenues; increase in inventories of approximately $171,000; and increase in tax payable of approximately $244,000. The Company expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. Until the Company’s operating results improve, the Company hopes to rely on financing from its shareholders to support the Company’s operations.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted by the United States of America (“U.S. GAAP”), which require us to make judgments, estimates, and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We believe that our accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations are summarized in “Note 3 - Summary of Significant Accounting Policies” in the notes to our unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements
See “Note 3 - Summary of Significant Accounting Policies” in the notes to our unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements.
The Company believes that other recent accounting pronouncement will not have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined by Item 10 (f)(1) of Regulation S-K, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”), as of March 31, 2022, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), who concluded, that because of the material weakness in our internal control over financial reporting (“ICFR”) described below, our disclosure controls and procedures were not effective as of March 31, 2022, due to the significant deficiencies in our internal control over financial reporting discussed below.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States (US GAAP). Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected in a timely manner. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Therefore, any current evaluation of controls cannot and should not be projected to future periods.
Management assessed our internal control over financial reporting as of the period ended March 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the report entitled “2013 Internal Control - Integrated Framework.” Based on management’s assessment using the COSO criteria, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2022, due to the existence of the following material weaknesses:
| ● | Lack of proper segregation of duties; |
| ● | Lack formal policies and procedures to ensure timely book close on a quarterly basis; |
| ● | Lack of detailed account analyses to ensure proper reconciliation of all key accounts; |
| ● | Lack of proper training of the accounting staff to ensure consistent application of generally accepted accounting principles in the United States as well as compliance with related financial reporting guidelines; and |
| ● | Lack of a formal documentation retention policy to ensure that supporting control evidence is property maintained. |
As part of its remediation plan, management is in the process of developing policies and procedures to strengthen its quarterly book-closing process and has engaged a qualified, experienced consultant to assist with its financial reporting process.
Changes in Internal Control over Financial Reporting
There have been no changes in our ICFR identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our current quarter ended March 31, 2022, that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the items set forth in Note 17 of Notes to Unaudited Condensed Consolidated Financial Statements, we are not a party to any legal or administrative proceedings that we believe, individually or in the aggregate, would be likely to have a material adverse effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities during the covered time period.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
_______________________
| * | Filed Herewith. |
| (1) | Incorporated by reference to the Exhibits to Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2021. |
| (2) | Incorporated by reference to the Exhibits to Information Statement on Definitive Schedule 14C filed with the Securities and Exchange Commission on July 29, 2020. |
| (3) | Incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2021. |
| (4) | Incorporated by reference to the Exhibits to Current Report on Form 8-K filed with the Securities and Exchange Commission on August 7, 2020. |
| (5) | Incorporated by reference to the Exhibits to Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2022. |
| (6) | Incorporated by reference to Exhibit 10.13 to Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 17, 2021. |
| (7) | Incorporated by reference to the Exhibits to Amendment No. 5 to Registration Statement on Form 10 filed with the Securities and Exchange Commission on July 17, 2019. |
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SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 23, 2022
| Hanjiao Group, Inc. | |
| Registrant | |
| By: /s/ Tian Xiangyang | |
|
Tian Xiangyang Chief Executive Officer |
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