MALG 8-K
Microalliance Group Inc. (MALG)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): February 1, 2021
Fountain Healthy Aging, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 333-123774 | 86-1098668 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
|
Room 601, Bldg. E, No. 1, Huabao Fubao China Street, Futian District Shenzhen City, Guangdong Province |
518000 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code +86 185 6676 1769
3445 Lawrence Ave Oceanside New York, 11572
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act (17 CFR 240.14a-12(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
JUMPSTART OUR BUSINESS STARTUPS ACT
FOUNTAIN HEALTHY AGING, INC. (“we”, “us”, “our”, “FHAI” or the “Company”) qualifies as an “emerging growth company” as defined in Section 101 of the Jumpstart our Business Startups Act (the “JOBS Act”) as we do not have more than $1,070,000,000 in annual gross revenue and did not have such amount as of December 31, 2020 our last fiscal year. We are electing to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act.
We may lose our status as an emerging growth company on the last day of our fiscal year during which (i) our annual gross revenue exceeds $1,070,000,000 or (ii) we issue more than $1,000,000,000 in non-convertible debt in a three-year period. We will lose our status as an emerging growth company if at any time we are deemed to be a large accelerated filer. We will lose our status as an emerging growth company on the last day of our fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement.
As an emerging growth company, we are exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) and Section 14A(a) and (b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such sections are provided below:
Section 404(b) of the Sarbanes-Oxley Act requires a public company’s auditor to attest to, and report on, management’s assessment of its internal controls.
Sections 14A(a) and (b) of the Exchange Act, implemented by Section 951 of the Dodd-Frank Act, require companies to hold shareholder advisory votes on executive compensation and golden parachute compensation.
As long as we qualify as an emerging growth company, we will not be required to comply with the requirements of Section 404(b) of the Sarbanes-Oxley Act and Section 14A(a) and (b) of the Exchange Act.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “pursue,” “expect,” “predict,” “project,” “goals,” “strategy,” “future,” “likely,” “forecast,” “potential,” “continue,” negatives thereof or similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding future acquisition or merger targets, business strategies, macro-economic and sector-specific trends, future cash flows, financing plans, plans and objectives of management and any other statements which are not statements of historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual future results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, inability to successfully conclude acquisitions of target companies or assets which are reasonably capable of generating positive cash flow in the near future, legal and regulatory changes in the jurisdictions in which we operate, volatility or decline in our stock price, potential fluctuation of our quarterly and annual financial and operational results, rapid adverse changes in markets, decline in demand for our goods and services, insufficient revenues to cover our operating costs and such other factors as discussed throughout this Current Report on Form 8-K.
Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
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Item 1.01 Entry into a Material Definitive Agreement.
On February 1, 2021, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”), with Wei Lian Jin Meng Group Limited, a limited liability company incorporated in the Cayman Islands (“WLJM Cayman” and together with its subsidiaries, the “WLJM Group”), and shareholders who together own shares constituting 100% of the issued and outstanding shares of WLJM Cayman (the “Sellers”). Pursuant to the terms of the Exchange Agreement, the Sellers transferred to the Company all of their shares of WLJM Cayman in exchange for the issuance of 600,000,000 shares (the “Shares”) of the Company’s common stock (the “Acquisition”). The Acquisition has been accounted for as a recapitalization of the Company, whereby WLJM Cayman is the accounting acquirer. As a result of the Acquisition, the Company is now a holding company, is engaged in providing products and services in the food and beverage industry, including producing and selling “coffee tea” products, which represent drinks made from a mixture of coffee and tea, black coffee products and other coffee products.
Immediately after completion of the Acquisition on February 2, 2020 (the “Closing Date”), the Company’s capital stock consisted of: (i) 750,000,000 shares of common stock, par value $0.00001 per share (“Common Stock”), authorized, of which 600,034,500 shares are issued and outstanding; and (ii) 100,000,000 shares of preferred stock, par value $0.00001 per share, of which all 100,000,000 shares are designated Series A Preferred Stock (“Series A Preferred Stock”), of which all 100,000,000 shares are issued and outstanding.
As a result of the Acquisition, as of the Closing Date the Company has ceased to fall under the definition of shell company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and WLJM Cayman is now a wholly owned subsidiary.
The Exchange Agreement contains a number of representations and warranties made by the Company, on the one hand, and WLJM Cayman and the Sellers on the other hand, made solely for the benefit of the other, which in certain cases are subject to specified exceptions and qualifications contained in the Exchange Agreement or in information provided pursuant to certain disclosure schedules to the Exchange Agreement. The representations and warranties are customary for transactions similar to the Acquisition.
The obligation of the parties to complete the Acquisition is subject to the fulfilment (or, in some cases, the waiver) of certain closing conditions, including but not limited to:
| ● | the approval of the Exchange Agreement and the transactions contemplated thereby by the Company’s board of directors and stockholders; | |
| ● | all necessary consents from government authorities and third parties have been obtained; and | |
| ● | no adverse effect has occurred to any party as of the Closing. |
A copy of the Exchange Agreement is incorporated herein by reference and is filed as Exhibit 2.1 to this Current Report on Form 8-K and is incorporated herein by reference, and the foregoing description of the Agreement is qualified in its entirety by reference thereto.
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Item 2.01 Completion of Acquisition or Disposition of Assets.
On the Closing Date, the Company consummated the transactions contemplated by the Exchange Agreement, pursuant to which the Company acquired 100% of the issued and outstanding equity shares of WLJM Cayman from the Sellers, in exchange for the issuance in the aggregate of 600,000,000 shares of the Company’s Common Stock to the Sellers (representing approximately 99.8% of the Company’s outstanding common stock upon issuance, and 6% of the total voting power of the Company), resulting in WLJM Cayman becoming the Company’s wholly-owned subsidiary. For federal income tax purposes, it is intended that the Acquisition qualify as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended. The acquisition was accounted for as a recapitalization effected by a share exchange, wherein WLJM Cayman is considered the acquirer for accounting and financial reporting purposes.
As a result of the acquisition of all the issued and outstanding shares of WLJM Cayman, we have now assumed the WLJM Group’s business operations as our own.
The disclosures set forth in Item 1.01 “Entry into a Material Definitive Agreement” are incorporated by reference into this Item 2.01.
FORM 10 DISCLOSURE
As described in Item 1.01 “Entry into a Material Definitive Agreement”, on February 2, 2021, the Company acquired WLJM Cayman in a reverse merger business combination transaction. As the Company was formerly a shell company prior to such acquisition and is now entering into a business combination, other than a business combination with a shell company, as those terms are defined in Rule 12b-2 under the Exchange Act, according to Item 2.01(f) of Form 8-K, the Company is required to disclose the information that would be required if the Company were filing a general form for registration of securities under the Exchange Act on Form 10.
We hereby provide below information that would be included in a Form 10 registration statement.
Description of Business
Business
Business Overview
The Company is a US holding company incorporated in Nevada on February 25, 2004, and operating through the Company’s wholly owned subsidiary Wei Lian Jin Meng Group Limited (“WLJM Cayman”), a company incorporated under the laws of the Cayman Islands on June 30, 2020. The Company’s entire business, including operations, employees, sales and marketing and research and development, are all conducted through its subsidiaries located within the People’s Republic of China (“PRC”).
The following is the organization structure of the Company along with ownership detail of all companies:
WLJM Cayman was incorporated in the Cayman Islands on June 30, 2020. It is 100% owned by Fountain Healthy Aging, Inc. Refer to Item 1.01 “Entry into a Material Definitive Agreement” of this Current Report on Form 8-K for a full description of the acquisition of WLJM Cayman by Fountain Healthy Aging, Inc.
Wei Lian Jin Meng (Hong Kong) Company Limited (“WLJM HK”), was established in the Hong Kong Special Administrative Region (“HKSAR”) of the PRC on August 5, 2020. It is 100% owned by WLJM Cayman.
Jin You Wei Meng (Shenzhen) Consulting Company Limited (“JYWM WFOE”) was established as a wholly foreign-owned enterprise on November 24, 2020, under the laws of the PRC. It is 100% owned by WLJM HK.
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) was incorporated on October 17, 2017, under the laws of the PRC. It is 100% owned by JYWM WFOE.
Dongguan Dishi Coffee Limited (“Dongguan Dishi”) was incorporated on October 25, 2018, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.
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Shenzhen Nainiang Coffee Art Museum Limited (“Shenzhen Nainiang”) was incorporated on June 20, 2019, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.
The Company, through our subsidiaries, develops, produces, markets and sells “coffee tea” products, which represent drinks made from a mixture of coffee and tea, as well as black coffee products and other coffee products. We sell our products wholesale to retail partners and corporate customers, and we also sell directly to consumers in the PRC via our e-commerce channels. We adopted the “online to offline”, or O2O sales mode (i.e. selling products online and delivering products through offline channels), committing to building the first brand of “coffee tea” culture in the PRC.
Industry and Market Overview
As of the time of filing this Current Report on form 8-K, we sell our products exclusively within the PRC. However, we intend to sell our products into global markets at a later time.
Chinese consumers are already familiar with tea, a traditional Chinese drink. Our “coffee tea” products are aimed at attracting Chinese consumers who are also interested in coffee. Our black coffee products and other coffee products are also targeting coffee consumers in China.
China’s rising urbanization and disposable income have been and are expected to continue to be the main growth engines of its beverage industry, and more and more people in China have begun to consume more coffee products in their daily lives. Given the increased demand from Chinese consumers for coffee, we expect coffee consumption to continue to grow in China, paving the way for niche markets served by our products.
China is home to by far the largest internet and mobile internet population in the world, and this population is expected to continue growing. The widespread usage of the mobile internet and prevalent adoption of mobile payments, as popularized by Alibaba’s AliPay and Tencent’s WeChat Wallet, have paved the way for the development of a technology-driven new retail model in China. Chinese companies use technology in all aspects of their business operations, from customer acquisition to purchase process to supply chain management, allowing them to achieve higher operational efficiency and lower costs.
China is the second largest market for cosmetics and health and nutritional supplements products in the world. The market sizes of cosmetics and health and nutritional supplements in China in 2019 are RMB 459.4 billion (approximately $70.68 billion) and RMB 266 billion (approximately $40.92 billion), respectively. The e-commerce channel has gradually become an important sales channel within the cosmetics and health and nutritional supplements markets in China, representing about 29.8%, and about 33.9% of the total sales of cosmetics and health and nutritional supplements in China in 2019, respectively.
Corporate Structure
The Company’s subsidiaries are summarized as follows:
| Name of the subsidiary | Place and date of incorporation | Principal activities | ||
| Wei Lian Jin Meng Group Limited | Cayman Islands, June 30, 2020 | Investment holding company | ||
| Wei Lian Jin Meng (Hong Kong) Company Limited | HKSAR, September 6, 2019 | Investment holding company | ||
| Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. | PRC, November 24, 2020 | Investment holding company | ||
| Shenzhen Wei Lian Jin Meng Electronic Commerce Limited | PRC, October 17, 2017 | Wholesale | ||
| Dongguan Dishi Coffee Limited | PRC, October 25, 2018 | Merchandizing | ||
| Shenzhen Nainiang Coffee Art Museum Limited | PRC, June 20, 2019 | Retail (in future) |
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Company Background and Timeline
FHAI was incorporated under the laws of the State of Nevada on February 25, 2004 with the original company name of Celtic Cross Ltd. For unknown reasons, the Company was later abandoned and ceased filings with the Nevada Secretary of State for more than ten years following December 2, 2008. FHAI spent approximately ten years as an inactive, dormant public company. In April 2019, the Eighth Judicial District Court in Clark County, Nevada, appointed Custodian Ventures, LLC (the “Custodian”) as the custodian of the Company. The Custodian brought the Company into active status with the State of Nevada, appointed directors and officers of the Company, and made necessary filings to bring the Company up to date with the alternative reporting standards of the OTC Markets Group. Since April 2019, the Company has not engaged in any business, and has been a shell company.
Our wholly owned subsidiary, WLJM Cayman was incorporated in the Cayman Islands on June 30, 2020. The primary business of WLJM Cayman is to own the business operations located in the PRC and carried out by Shenzhen Wei Lian and its subsidiaries, related to developing, producing, marketing and selling our coffee tea products, our black coffee products and other coffee products.
Restructuring
On February 1, 2021, we entered into a Share Exchange Agreement (the “Exchange Agreement”), with WLJM Cayman and the Sellers. Pursuant to the terms of the Exchange Agreement, the Sellers transferred to the Company all of their shares in WLJM Cayman in exchange for the issuance of 600,000,000 shares of our Common Stock.
Our Services and Products
“Coffee tea” products and black coffee products are our main products, which account for 60% of our sales revenue. We sell “coffee tea” products under the brand name “Dishi” and our black coffee products under the brand name “Angqi Stone.” We also sell some flavored coffee products. We sell our coffee tea, black coffee and other coffee products in the form of pre-packaged powder, and we have the intentions to develop bottled drinks in the future. We also sell freshly brewed coffee tea drinks and other coffee drinks through our subsidiary, Shenzhen Nainiang, which has opened 62 coffee stores across five cities in China.
Our subsidiary, Dongguan Dishi, manufactures and packages our products. One of the major ingredients of our products, a new species of Arabian original species, is sourced from the coffee plantations located in Mangshi and Baoshan, Yunnan Province within the PRC. We have our own production base – a factory with 100000 level dust-free workshop. The entire production process is natural without any addition. The annual output of our manufacturing facilities has reached RMB 2 million.
Our main products, coffee tea products, have the health advantages of both tea and coffee if consumed in moderation. Many studies have shown that coffee and/or tea can help moisten the intestines, burn fat, improve energy levels, boost the immune system, fight off inflammation and even ward off certain diseases.
From January 1, 2020 to September 30, 2020 we have sold coffee products into the Chinese market with a sales revenue of $927,889, and we intend to grow our monthly sales revenue to $300,000 per month as we continue to market and promote our products in the market in future.
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Sales and marketing
We have adopted an “online to offline” sales model. We sell our products via online channels, such as online shopping websites, and we deliver our product through physical channels offline. We own an online retail store named Nainiang Mall at https://houseweb.supperteam.com/ and we also sell products via other shopping websites such as Alibaba-owned Taobao and T-Mall, Jingdong, Pinduoduo and Douyin (the Chinese version of TikTok) as a third-party vendor.
We carry out online sales through our self-developed online mall application Paiyoute which is not only has several sections, such as direct purchase, group shopping, premium product zone, special price zone to attract different consumer groups, but also can integrate offline agents and dealers into online system and conduct overall operation, thus standardized management, intelligent settlement, logistics tracking, member management and so on through it's AI system. In addition, we plan to sell our products on several well-known third party software application platforms, such as Taobao, Tmall, Jingdong, Pinduoduo, Douyin so that the brand and sales volume of products will be further improved.
We increase franchise shops (cafes, wineries) and cooperative shops through distributors to carry out offline sales. We operate entity shops to attract customers and gives a variety of senses of vision, smell and taste that online shopping does not have which can bring a sense of enjoyment of immersing in the environment. Meanwhile, in the process of sales, we guide and recommend customers to scan the QR code to register as menber of our online mall Paiyoute, so as to enhance customers' viscosity and increase their repurchase rate. Through the interaction with customers and on-site promotion, it can promote customers' word-of-mouth and promote sales growth.
We market our products through our own marketing channel. We also market our products by leveraging Shenzhen Nainiang (which owns art galleries and coffee shops) a customer experience center, where we prepare freshly brewed coffee tea drinks and other coffee drinks to customers, and complement our distinctive drinks with a comfortable and appealing environment.
Our Competitive Strengths
Our commitment to quality is uncompromising. We source premium Arabica coffee beans from coffee plantations covering 500,000 mu (approximately 82,368 acres or 129 square miles) in Yunnan Province that are located between 15 degrees north latitude and the Tropic of Cancer—an ideal area for coffee growth. Most of our production area is between 1,000 and 2,000 meters above sea level. The terrain is mainly mountainous and sloping land with large fluctuations, fertile soil, ample sunshine, abundant rainfall, and the day and night temperature difference is large. All of these unique natural conditions make our Arabian coffee beans taste strong but not bitter, fragrant but not strong, and slightly fruity. We believe that such coffee beans are favored by mainstream Chinese coffee consumers.
We maintain good relationships with our suppliers, and as of the date of this filing, we have not experienced any material disputes or supply shortages.
We have our own dedicated production base, a coffee factory that was established in October 2018, to process the coffee beans harvested at our plantation in Yunnan Province. Processing the coffee beans includes roasting, grinding, mixing and packaging the beans into our finished products. We employ a natural production process without any additives. With our own production facilities, we can maintain control of the quality of our products and adjust the formula of our products to meet the rapidly changing tastes of our customers. We have designed stringent quality control standards and enforced comprehensive quality control measures covering supplier selection, quality inspection and testing.
We have a professional and experienced senior management team with a proven track record in this industry. By combining our management’s capability in implementing growth strategies and our in-depth knowledge in the beverage industry, our management team is confident that our company is poised to capture potential market opportunities in coffee tea segments and in coffee segments.
We have an independent and experienced research and development (R&D) team dedicated to developing new product offerings. They explore the tastes of the customers, track the market trends, and can help us launch more diversified products in the future. We encourage the reader to refer to the section titled “Intellectual Property” below for a more detailed description of our trademarks and copyrights.
Technology is at the core of our business. With our centralized technology system, we are able to simplify and standardize our operations and quickly process and fulfil customer orders. We leverage big data analytics to analyze our customer behavior and sales data, which enables us to continuously enhance our products and services, implement dynamic pricing and improve customer acquisition. We have obtained a notice of information security level protection evaluation result of level three in Shenzhen, China.
Growth Strategy
We will continue to expand our sales network to more regions and cities in China, such as Changsha, Guizhou, etc. The expansion of our sales network will enable us to serve more customers and get closer to our customers. We plan to enrich our product offerings by introducing selective new products that are either complementary or similar to our existing offerings and fulfill our target customer needs. We believe that diversifying our product offerings will increase customer purchase frequency and increase our revenue. We will continue to invest in technology, improving our technology infrastructure, promoting our system security and applying new technologies which will further improve our operational efficiency, ensure quality control and improve our customer acquisition.
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Research and Development
As Chinese consumer behaviors and preferences constantly evolve, the demands from the end customers are increasingly diversified. We make significant investments in R&D to optimize our existing products and services and to develop new coffee tea products and coffee products so that we can expand our offerings to satisfy the diversifying user demands.
Intellectual Property
We develop and protect our intellectual property portfolio by registering our trademarks, copyrights, and domain names. As of the date of this filing, we own eight registered trademarks with the Trademark Office of the PRC State Administration for Industry & Commerce, ten copyrights with the PRC State Copyright Bureau, and one domain name with the Ministry of Industry and Information Technology.
Our registered trademarks include those registered by our subsidiary, Shenzhen Wei Lian, and listed in the table immediately below:
| Trademark | English Translation | Date of Registration | Valid until | Description of Use | |
| 1 |  |
Nainiang | February 7, 2020 | February 6, 2030 | Shown on shops and coffee tea products as a logo |
| 2 | 红色微联 | Red Weilian | April 14, 2020 | April 13, 2030 | A logo of the company |
| 3 | 红企金盟 | Red Jin Meng | April 14, 2020 | April 13, 2030 | A logo of the company |
| 4 |  |
Nainiang | February 21, 2020 | February 20, 2030 | Shown on shops and coffee tea products as a logo |
| 5 |  |
Xi Xiang Ling | December 21, 2019 | December 20, 2029 | Shown on products in the future as a logo |
| 6 | 沐西施浴貂蝉 | Mu Xishi Yu Diaochan | March 21, 2020 | March 20, 2030 | Shown on products in the future |
| 7 | 昂起石 | Angqi Stone | January 28, 2019 | January 27, 2029 | For black coffee products |
| 8 | 滴石 | Dishi | January 28, 2019 | January 27, 2029 | For coffee tea products |
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Our registered copyrights include those registered by our subsidiary, Shenzhen Wei Lian, and listed in the table immediately below:
| Copyright Registration Number | Date Granted | Description of Copyright | |
| 1 | 2020SR0834419 | June 18, 2019 | computer software |
| 2 | 2020SR0834412 | June 18, 2019 | computer software |
| 3 | 2020SR0834468 | June 23, 2019 | computer software |
| 4 | 2020SR0834496 | June 17, 2019 | computer software |
| 5 | 2020SR0834489 | June 21, 2019 | computer software |
| 6 | 2020SR0834482 | June 23, 2019 | computer software |
| 7 | 2020SR0834475 | June 25, 2019 | computer software |
| 8 | 2020SR0834405 | June 20, 2019 | computer software |
| 9 | 2020SR0834398 | June 19, 2019 | computer software |
| 10 | 2020SR0860682 | June 22, 2019 | computer software |
We entered into standard employee confidentiality agreements with our technology development employees, which provides that the employees own confidentiality obligations in relation to our trade and technology secrets and we own intellectual property rights developed in-house.
Competition
In China, there are many brands of coffee products. Starbucks, for example, is a large coffee brand with a large number of chain stores, which is very popular in China and has a huge sales volume. In terms of brand effect, our competitiveness is weaker than these big brands.
However, our main product "coffee tea" is a mixture of coffee and tea, which is different from the ordinary coffee that can be seen everywhere in the market. This is our competitiveness.
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Our competitors may have more financial, technical, marketing and other resources than we do, and may be more experienced and able to devote greater resources to the development, promotion and support of their business. We believe that our ability to compete effectively depends upon many factors, including our R&D, market acceptance of our products, our marketing and selling efforts, and the strength and reputation of our brand. We also experience significant competition for highly skilled personnel, including management, sales personnel and marketing personnel. Our growth strategy depends in part on our ability to retain our existing personnel and add additional highly skilled employees.
Legal Proceedings
We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
Property
The following table summarizes the location of real property we own or lease.
| Address | Leased/Owned | |
| E Area, 6th Floor, Huabao Yihao Building, Futian Free Trade Zone, Shenzhen, China | Leased | |
| 1st Floor, C Building, Qianhong Entrepreneurial Science Park, No.1 Yucheng Road, Sha Qu, Shatou Community, Chang’an Town, Dongguan, Guangdong Province, China | Leased | |
| 8th Floor, B Building, No.57 Room, Shanan Road, Xinsha Industrial Park, Shatou South Area, Chang’an Town, Dongguan, Guangdong Province, China | Leased |
Employees
We have 58 full-time employees, including ten serving on and assisting the management, two employees in our CEO’s office, two in our technical department, six in our finance department, twelve in our sales and marketing department, seven in our general management office, two in our customer service department, five in our manufacturing department, five in our e-commerce department, five in our brand operation department and one in our foreign trade department. We are compliant with local prevailing wage, contractor licensing and insurance regulations and have good relations with our employees.
We enter into standard employment contracts with our full-time employees. In addition to salaries and benefits, we provide performance-based bonuses or commission-based compensation to certain employees. As required by PRC law, we participate in various employee social security plans that are organized by municipal and provincial governments for our employees.
We maintain a good working relationship with our employees, and as of the date of this filing, we have not experienced any material labor disputes in the past. None of our employees are represented by labor unions.
Corporation Information
Our principal executive offices are located at Room 601, Bldg. E, No. 1, Huabao Fubao China Street, Futian District, Shenzhen City, Guangdong Province, People’s Republic of China 518000. Our telephone number at this address is +86 185 6676 1769.
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Government Regulation
Food Safety Law
In accordance with the Food Safety Law of the PRC, or the Food Safety Law, as effective on June 1, 2009 and most recently amended on December 29, 2018, the PRC State Counsel implements a licensing system for food production and trading. A person who engages in food production, food selling or catering services shall obtain the license in accordance with the Food Safety Law.
The Food Safety Law sets out, as penalties for violation, various legal liabilities in the form of warnings, orders to rectify, confiscations of illegal gains, confiscations of utensils, equipment, raw materials and other articles used for illegal production and operation, fines, recalls and destructions of food in violation of laws and regulations, orders to suspend production and/or operation, revocations of production and/or operation license, and even criminal punishment. The Implementation Rules of the Food Safety Law, as effective on July 20, 2009 and amended on February 6, 2016, further specify the detailed measures to be taken and conformed to by food producers and business operators in order to ensure food safety as well as the penalties that shall be imposed should these required measures not be implemented.
Food Production Licensing
On June 1, 2010, China Food and Drug Administration promulgated the Administrative Measures for Food Production Licensing, which was amended from time to time and most recently on March 1, 2020. According to the Administrative Measures for Food Production Licensing, a food production license shall be obtained in accordance with the law to engage in food production services within China. The principle of one license for one enterprise shall apply to the licensing for food producer. Food and drug administrative authorities shall implement classified licensing for food production according to food producers’ types of operation, types of food products involved, and the degree of risk of their production projects.
The issuance date of a food production license is the date when the decision on granting the license is made, and the license is valid for five years. Food producers shall hang or place their food production license originals in prominent places of their sites. Where the licensing items which are indicated on a food production license change, the food producer shall, within ten business days after the changes take place, apply to the food and drug administrative authority which originally issued the license for alteration of the production license. Those who fail to obtain a food production license and engage in food production activities shall be punished by the local food and drug administrative authorities at or above the county level that the authorities shall confiscate their illegal income, the food illegally produced or dealt in, and the tools, equipment, raw materials, and other items used for illegal production or operation; and impose a fine of not less than RMB50,000 but not more than RMB100,000 on them if the goods value of the food illegally produced or dealt in is less than RMB10,000 or a fine of not less than 10 times but not more than 20 times the goods value if the goods value is RMB10,000 or more.
Customer Rights Protection
The PRC Customer Rights and Interests Protection Law, or Customer Protection Law, as amended on October 25, 2013 and effective on March 15, 2014, sets out the obligations of business operators and the rights and interests of the customers. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide customers with authentic information about the commodities, and guarantee the quality, function, usage and term of validity of the commodities. Failure to comply with the Customer Protection Law may subject business operators to civil liabilities such as refunding purchase prices, exchange of commodities, repairing, ceasing damages, compensation, and restoring reputation, and even subject the business operators or the responsible individuals to criminal penalties if business operators commit crimes by infringing the legitimate rights and interests of customers.
E-Commerce
The Standing Committee of the National People’s Congress of PRC enacted the PRC E-Commerce Law on August 31, 2018, which became effective on January 1, 2019. Under the PRC E-Commerce Law, e-commerce refers to operating activities of selling goods or providing services through the internet or other information networks. The PRC E-Commerce Law generally applies to: (i) platform operators, which refer to legal persons or unincorporated organizations that provide network places of business, transaction matching, information release and other services to enable the transaction parties to carry out independent transaction activities; (ii) operators on the platform, which refer to e-commerce operators that sell goods or provide services to customers through e-commerce platforms; and (iii) other e-commerce operators that sell goods or provide services through self-established websites or other network services. The PRC E-commerce Law also provides rules in relation to e-commerce contracts, dispute settlements, e-commerce development as well as legal liabilities involved in e-commerce.
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Intellectual Property Rights
Pursuant to the Trademark Law of the PRC, as amended in 2013, the right to exclusive use of a registered trademark shall be limited to trademarks which have been approved for registration and to goods for which the use of such trademark has been approved. The period of validity of a registered trademark shall be ten years, counted from the day the registration is approved. According to this law, using a trademark that is identical to or similar to a registered trademark in connection with the same or similar goods without the authorization of the owner of the registered trademark constitutes an infringement of the exclusive right to use a registered trademark. The infringer shall, in accordance with the regulations, undertake to cease the infringement, take remedial action, and pay damages, etc.
Risk Factors
Risks Related to Our Business and Industry
Limited Operating History
After the Company was restored to active status in 2019 after being abandoned for about 10 years, we have been a shell company and have limited operating history and minimal revenues or earnings from operations. We will, in all likelihood, sustain operating expenses without corresponding revenues, at least for the foreseeable future. We can make no assurances that we will be able to generate sufficient revenue to continue operations.
Our revenue may decline for any number of possible reasons and some of them are beyond our control, including decreasing customer spending, increasing competition, declining growth of China’s coffee/tea industry or China’s food and beverage sector in general, or changes in government policies or general economic conditions.
Our estimates of capital, personnel, equipment, and facilities required for our proposed operations are based on certain other existing businesses operating under projected business conditions and plans. We believe that our estimates are reasonable, but it is not possible to determine the accuracy of such estimates at this point. In formulating our business plan, we have relied on the judgment of our officers and directors and their experience in developing businesses. We can make no assurances that we will be able to obtain sufficient financing or implement successfully the business plan we have devised. Further, even with sufficient financing, there can be no assurance that we will be able to operate our business on a profitable basis. We can make no assurances that our projected business plan will be realized or that any of our assumptions will prove to be correct.
Limited Liability
Our Articles of Incorporation and Bylaws generally provide that the liability of our officers and directors will be eliminated to the fullest extent allowed under law for their acts on behalf of our Company.
Business Management
We will continue to encounter challenges in implementing our managerial, operating and financial strategies. The major challenges in managing our business include, among other things:
| ● | effectively identifying and securing locations for new stores for Nainiang art galleries and Nainiang shops and managing the daily operations of our stores. |
| ● | controlling incurred costs in a competitive environment; |
| ● | effectively managing our supply chain and ensuring our third-party suppliers continue to meet our quality and other standards and satisfy our future operations’ needs; |
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| ● | maintaining and upgrading our technology systems in a cost-effective manner; |
| ● | maintaining and enhancing the quality of our products |
| ● | managing costs of our operations, such as cost of materials, store rental and other operating costs, and sales and marketing expenses; |
| ● | attracting, training and retaining a growing workforce to support our operations; |
| ● | timely responding to changes in market opportunities and customer preferences; |
| ● | ensuring full compliance with relevant laws and regulations. |
All efforts to address the challenges of our business require significant managerial, financial and human resources. We cannot assure you that we will be able to execute managerial, operating and financial strategies. If we are not able to manage our business or execute our strategies effectively, our revenue will decline and our business and prospects may be materially and adversely affected.
Many factors that are out of our control, including macroeconomic and regulatory environment, could also adversely affect our operation. Any of these challenges listed above or described elsewhere in this Risk Factors section may render us unsuccessful in profitably operating our business and could adversely impact our business, financial condition and/or results of operations.
Uncertain Government Regulation
Our business will be subject to extensive regulation. In addition, we may be adversely affected as a result of new or revised legislation or regulations imposed by the PRC Food and Drug Administration, the SEC or other governmental regulatory authorities or self-regulatory organizations that supervise the markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.
Substantially all our assets are in the PRC, and all our revenue comes from PRC sources. Accordingly, our results of operations, financial position and prospects are subject to a significant degree to the economic, political and legal developments of the PRC.
We rely on a limited number of third-party suppliers and service providers to provide products and services to us or to our customers, and the loss or misconduct of any of these suppliers or service providers would negatively impact our business.
We have a limited number of suppliers for our raw materials and logistics service. In 2019 and 2020, we purchased our coffee beans mainly from one supplier and our tea leaves mainly from one supplier. We also cooperate with three different delivery service providers from warehouses to our customers.
Our reliance on suppliers (including suppliers of raw materials and logistics providers) and commodity markets to secure raw materials and components used in our products exposes us to volatility in the prices and availability of these materials. A disruption in deliveries from our suppliers, supplier capacity constraints, supplier production disruptions, supplier quality issues, closing or bankruptcy of our suppliers, price increases, or decreased availability of raw materials or commodities, could have a material adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, price increases, supplier capacity constraints, supplier production disruptions or the unavailability of some raw materials may have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
Furthermore, our current agreements with our suppliers generally do not prohibit them from working with our competitors. Our competitors may be more effective in providing incentives to our suppliers to prioritize on their orders in case of short supply. We cannot assure you that we would be able to find replacement suppliers on commercially reasonable terms or a timely basis.
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In addition, our reputation and operation may be harmed by illegal or unsatisfactory actions taken by suppliers and service providers that are outside of our control. In the event that we become subject to claims caused by actions taken by our suppliers or service providers, we may attempt to seek compensation from the relevant suppliers or service providers. However, such compensation may be limited. If no claim can be asserted against a supplier or service provider, or amounts that we claim cannot be fully recovered from the supplier or service provider, we may be required to bear such losses and compensation at our own costs. This could have a material and adverse effect on our business, financial condition and results of operations.
Economic Conditions
Our business will be materially affected by conditions in the financial markets and economic conditions or events in the PRC and throughout the world that are outside our control, including, without limitation, changes in interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates, and controls and national and international political circumstances (including wars, terrorist acts, or security operations). These factors may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions and/or other events. In the event of a market downturn, our businesses could be adversely affected in different ways.
China’s food and beverage market in general is affected by macro-economic factors, including changes in international, national, regional and local economic conditions, employment levels, customer demand and discretionary spending. Any deterioration of economy, decrease in disposable customer income and fear of a recession may lead to a reduction of customer demand, which could materially and adversely affect our business, financial condition and results of operations.
Quality and safety of our products
The quality and safety of our products are critical to our success. Maintaining consistent product quality depends on the effectiveness of our quality control system, which in turn depends on a number of factors, including the design of our quality control system, employee training to ensure that our employees adhere to our quality control policies and procedures and the effectiveness of monitoring our quality control system. There can be no assurance that our quality control system will always prove to be effective.
In addition, the quality of the products provided by our suppliers is subject to factors beyond our control, including the effectiveness and the efficiency of their quality control system. There can be no assurance that our suppliers may always be able to adopt appropriate quality control systems and meet our stringent quality control requirements in respect of the products they provide. Any failure of our suppliers to provide satisfactory products or services could harm our reputation and adversely impact our operations. We may be unable to receive sufficient compensation from suppliers for the losses caused by them.
If customers become ill from food-borne illnesses, tampering, adulteration, contamination, mislabeling or other food safety issues, we could be forced to temporarily close our business and/or be involved in related disputes or legal proceedings. In addition, instances of food safety issues, even those not involving us or our suppliers, could, by resulting in negative publicity about us. A decrease in customer confidence in the safety and quality of our products or any food safety issues could materially harm our business and results of operations.
Implications of Being an Emerging Growth Company
As a company with less than $1,070,000,000 billion in annual gross revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in the JOBS Act. For as long as a company is deemed to be an emerging growth company, it may take advantage of specified reduced reporting and other regulatory requirements that are generally unavailable to other public companies. These provisions include:
| - | a requirement to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis included in an initial public offering registration statement; |
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| - | an exemption to provide less than five years of selected financial data in an initial public offering registration statement; | |
| - | an exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting; | |
| - | an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; | |
| - | an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and | |
| - | reduced disclosure about our executive compensation arrangements. |
An emerging growth company is also exempt from Section 404(b) of the Sarbanes Oxley Act, which requires that the registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting. Similarly, as a Smaller Reporting Company we are exempt from Section 404(b) of the Sarbanes-Oxley Act and our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until such time as we cease being a Smaller Reporting Company.
As an emerging growth company, we are exempt from Section 14A (a) and (b) of the Exchange Act which require stockholder approval of executive compensation and golden parachutes.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We would cease to be an emerging growth company upon the earliest of:
| - | the first fiscal year following the fifth anniversary of the filing of this Form 10; | |
| - | the first fiscal year after our annual gross revenues are $2 billion or more; | |
| - | the date on which we have, during the previous three-year period, issued more than $2 billion in non-convertible debt securities; or | |
| - | as of the end of any fiscal year in which the market value of our Common Stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. |
Rising Competition May Materially Affect Our Operation and Financial Conditions
We operate in a highly competitive field. Our products are not proprietary, and therefore, we are unable to prevent competitors from copying our products and sell similar products. Competitors may succeed by developing products that are more attractive to customers that would render our products non-competitive. Any of these actions by our competitors could adversely affect our sales. In addition, our competitors may have more financial, technical, marketing and other resources than we do and may be more experienced and able to devote greater resources to the development, promotion and support of their business.
Furthermore, China’s beverage industry, especially the coffee segments, is subject to the entry of new and well-funded competitors.
An increase in competition could result in material selling price reductions or loss of our market share, which could have an adverse material impact on our operation and financial conditions.
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We may not be able to quickly identify new market opportunities, respond to the industry trends and adapt to customer preferences.
The growth of China’s beverage industry is affected by customer taste, preferences, perceptions and spending patterns. Since we have generated, and expect to continue to generate a considerable amount of our revenues from the sale of coffee tea products and black coffee products, a shift in customer preferences away from coffee, the changes of spending pattern adversely affecting consumption of coffee, or the decrease or slow-growth of coffee consumption in China would harm our business, more than if our revenues were generated from more diversified products.
We have devoted significant resources to launch and promote new products. However, our new products may not be favored by customers or commercially successful, which will make our financial results suffer.
Negative Publicity May Harm Our Reputation and Have A Material Adverse Effect On Our Business And Operating Results.
Negative publicity involving us, our products, our customers or our management may materially and adversely harm our business. We cannot assure you that we will be able to defuse negative publicity about us, our management and/or our products to the satisfaction of our investors and customers. Such negative publicity, especially when it is directly addressed against us, may also require us to engage in defensive media campaigns. This may cause us to increase our marketing expenses and divert our management’s attention and may adversely impact our business and results of operations.
The Continuing and Collaborative Efforts Of Our Senior Management And Key Employees Are Crucial To Our Success, And Our Business May Be Harmed If We Were To Lose Their Services.
We depend on the continued contributions of our senior management, especially the executive officers listed in “Management” section of this report, and other key employees, many of whom are difficult to replace. The loss of the services of any of our executive officers or other key employees could materially harm our business. Competition for qualified talent in the market is intense. Our future success is dependent on our ability to attract a significant number of qualified employees and retain existing key employees. If we are unable to do so, our business and growth may be materially and adversely affected. Our need to significantly increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs.
Intellectual Property Rights.
We rely on a combination of copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, third parties may attempt to copy or otherwise obtain and use our intellectual property or seek court declarations that they do not infringe upon our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our intellectual property. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.
In addition, we cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate intellectual property rights held by third parties. We have not but in the future may be, subject to legal proceedings and claims relating to the intellectual property rights of others. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. We may also incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these infringement claims, regardless of their merits.
Requisite Approvals, Licenses or Permits Applicable To Our Business
In accordance with the relevant laws and regulations in jurisdictions in which we operate, we are required to maintain various approvals, licenses and permits to operate our business, including but not limited to business license, food production license, environmental impact assessment filing and fire safety inspection. These approvals, licenses and permits are obtained upon satisfactory compliance with, among other things, the applicable laws and regulations.
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There can be no assurance that we will be able to obtain, renew and/or convert all of the approvals, licenses and permits required for our existing business operations upon their expiration in a timely manner or at all, which could adversely affect our business operations.
Adverse public or medical opinion about the health effects of our products may harm our business.
Our products contain caffeine, fructic acid, crude fiber, linolenic acid and other active compounds, the health effects of which are not fully understood. The excessive consumption of these compounds may result in adverse health effects and have caused increasing public awareness. For example, a number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. Unfavorable reports on the health effects of caffeine or other compounds of our products could significantly reduce the sales of our products. Also, we could become subject to litigation relating to the existence of such compounds in our products; any such litigation could be costly and could divert management attention.
We Face Risks Related to Health Epidemics and Natural Disasters.
Our business could be adversely affected by the effects of epidemics. In recent years, there have been breakouts of epidemics globally. Our business operations could be disrupted if one of our employees is suspected of having COVID-19, H1N1 flu, avian flu or another epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that the outbreak harms the global economy in general and the marketing industry in particular.
We have no business liability or disruption insurance, which could expose us to significant costs and business disruption.
We have no business liability or disruption insurance to cover our operations. Any uninsured risks may result in substantial costs and the diversion of resources, which could adversely affect our results of operations and financial condition.
Risks Associated with Doing Business in the PRC
We Derive All of Our Sales from The PRC.
Almost all of our sales are generated from China. We anticipate that sales of our products in China will continue to represent most, if not all, of our total sales in the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our products, among other things, which in turn would have a material adverse effect on our business and financial condition.
Future Inflation in China May Inhibit Our Activity to Conduct Business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
Fluctuations in Exchange Rates Could Adversely Affect Our Business and The Value Of Our Securities.
The value of the Chinese Yuan (CNY or RMB) against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions and foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the RMB has traded within a narrow range against the U.S. dollar. It is difficult to predict how long the current situation may last and when and how the RMB exchange rates may change going forward.
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Our revenues and costs are mostly denominated in RMB, while a significant portion of our financial assets are denominated in U.S. dollars. At the holding company level, we rely entirely on dividends and other fees paid to us by our subsidiaries and consolidated affiliated entities in China. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditure more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our common stock.
Risks Related to the Market for our Stock
The OTC and Share Value
Our Common Stock trades over the counter, which may deprive stockholders of the full value of their shares. Our stock is quoted via the Over-The-Counter (“OTC”) Pink Sheets under the ticker symbol “FHAI”. Therefore, our Common Stock is expected to have fewer market makers, lower trading volumes, and larger spreads between bid and asked prices than securities listed on an exchange such as the New York Stock Exchange or the NASDAQ Stock Market. These factors may result in higher price volatility and less market liquidity for our Common Stock.
Low Market Price
A low market price would severely limit the potential market for our Common Stock. Our Common Stock is expected to trade at a price substantially below $5.00 per share, subjecting trading in the stock to certain Commission rules requiring additional disclosures by broker-dealers. These rules generally apply to any non-NASDAQ equity security that has a market price share of less than $5.00 per share, subject to certain exceptions (a “penny stock”). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and institutional or wealthy investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our Common Stock.
Lack of Market and State Blue Sky Laws
Investors may have difficulty in reselling their shares due to the lack of market or state Blue Sky laws. The holders of our shares of Common Stock and persons who desire to purchase them in any trading market that might develop in the future should be aware that there may be significant state law restrictions upon the ability of investors to resell our shares. Accordingly, even if we are successful in having the shares available for trading on the OTC, investors should consider any secondary market for our securities to be a limited one. We intend to seek coverage and publication of information regarding our Company in an accepted publication which permits a “manual exemption.” This manual exemption permits a security to be distributed in a particular state without being registered if the company issuing the security has a listing for that security in a securities manual recognized by the state. However, it is not enough for the security to be listed in a recognized manual. The listing entry must contain (1) the names of issuers, officers, and directors, (2) an issuer’s balance sheet, and (3) a profit and loss statement for either the fiscal year preceding the balance sheet or for the most recent fiscal year of operations. We may not be able to secure a listing containing all of this information. Furthermore, the manual exemption is a non-issuer exemption restricted to secondary trading transactions, making it unavailable for issuers selling newly issued securities. Most of the accepted manuals are those published in Standard and Poor’s, Moody’s Investor Service, Fitch’s Investment Service, and Best’s Insurance Reports, and many states expressly recognize these manuals. A smaller number of states declare that they “recognize securities manuals” but do not specify the recognized manuals. The following states do not have any provisions and therefore do not expressly recognize the manual exemption: Alabama, Georgia, Illinois, Kentucky, Louisiana, Montana, South Dakota, Tennessee, Vermont, and Wisconsin.
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Penny Stock Regulations
We will be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our Common Stock. The Commission has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. We anticipate that our Common Stock will become a “penny stock”, and we will become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
We do not anticipate that our Common Stock will qualify for exemption from the Penny Stock Rule. In any event, even if our Common Stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock, if the Commission finds that such a restriction would be in the public interest.
Rule 144 Risks
Sales of our Common Stock under Rule 144 could reduce the price of our stock. Issued and outstanding shares of our Common Stock which Rule 144 of the Securities Act defines as restricted securities will be subject to the resale restrictions of Rule 144, should we hereinafter cease being deemed a “shell company”. In general, persons holding restricted securities, including affiliates, must hold their shares for a period of at least six months, may not sell more than 1.0% of the total issued and outstanding shares in any 90-day period, and must resell the shares in an unsolicited brokerage transaction at the market price. The availability for sale of substantial amounts of Common Stock under Rule 144 could reduce prevailing market prices for our securities.
No Audit or Compensation Committee
Because we do not have an audit or compensation committee, stockholders will have to rely on our entire Board of Directors, none of which are independent, to perform these functions. We do not have an audit or compensation committee comprised of independent directors. Indeed, we do not have any audit or compensation committee. These functions are performed by our Board of Directors as a whole. No members of our Board of Directors are independent directors. Thus, there is a potential conflict in that Board members who are also part of management will participate in discussions concerning management compensation and audit issues that may affect management decisions.
Security Laws Exposure
We are subject to compliance with securities laws, which exposes us to potential liabilities, including potential rescission rights. We may offer to sell our shares of our Common Stock to investors pursuant to certain exemptions from the registration requirements of the Securities Act, as well as those of various state securities laws. The basis for relying on such exemptions is factual; that is, the applicability of such exemptions depends upon our conduct and that of those persons contacting prospective investors and making the offering. We may not seek any legal opinion to the effect that any such offering would be exempt from registration under any federal or state law. Instead, we may elect to relay upon the operative facts as the basis for such exemption, including information provided by investor themselves.
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If any such offering did not qualify for such exemption, an investor would have the right to rescind its purchase of the securities if it so desired. It is possible that if an investor should seek rescission, such investor would succeed. A similar situation prevails under state law in those states where the securities may be offered without registration in reliance on the partial pre-emption from the registration or qualification provisions of such state statutes under the National Securities Markets Improvement Act of 1996. If investors were successful in seeking rescission, we would face severe financial demands that could adversely affect our business and operations. Additionally, if we did not in fact qualify for the exemptions upon which we have relied, we may become subject to significant fines and penalties imposed by the Commission and state securities agencies.
No Cash Dividends
Because we do not intend to pay any cash dividends on our Common Stock, our stockholders will not be able to receive a return on their shares unless they sell them. We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on shares of our Common Stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares of our Common Stock when desired.
Delayed Adoption of Accounting Standards
We have delayed the adoption of certain accounting standards through an opt-in right for emerging growth companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
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SELECTED CONSOLIDATED FINANCIAL DATA
You should read the summary financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition or Plan of Operations.” The financial data of WLJM Cayman for the two fiscal years ended December 31, 2019 and 2018, and for the nine-month periods ended September 30, 2020 and 2019, are derived from the audited consolidated financial statements and the notes appearing in Item 9.01(a) “Financial Statements of Businesses Acquired” of this Current Report on Form 8-K. The financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”). The historical results are not necessarily indicative of the results to be expected for any future period.
For the Year Ended December 31, 2019 and 2018
Consolidated Income Statement Data:
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| US$ | US$ | |||||||
| Revenue | 2,107,465 | - | ||||||
| Cost of revenue | (275,916 | ) | - | |||||
| Gross profit | 1,831,549 | - | ||||||
| Selling and marketing expenses | (200,042 | ) | - | |||||
| General and administrative expense | (1,917,263 | ) | (39,334 | ) | ||||
| Total operating expenses | (2,117,305 | ) | (39,334 | ) | ||||
| Operating loss | (285,756 | ) | (39,334 | ) | ||||
| Other expenses, net | (13,459 | ) | (4 | ) | ||||
| Loss before income taxes | (299,215 | ) | (39,338 | ) | ||||
| Income (taxes) benefits | (5,866 | ) | - | |||||
| Net loss for the year | (305,081 | ) | (39,338 | ) | ||||
| Foreign currency translation differences | 2,954 | 1,635 | ||||||
| Total comprehensive loss for the year | (302,127 | ) | (37,703 | ) | ||||
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Consolidated Balance Sheet Data:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| US$ | US$ | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 23,046 | 2,419 | ||||||
| Other receivables | 78,385 | 15,222 | ||||||
| Inventory | 69,518 | - | ||||||
| Prepayment | 129,879 | - | ||||||
| Amount due from related parties | 57,446 | 18,586 | ||||||
| Total current assets | 358,274 | 36,227 | ||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | 104,432 | 11,810 | ||||||
| Intangible assets | 76,546 | - | ||||||
| Operating lease right-of-use assets | 613,831 | 70,412 | ||||||
| Total non-current assets | 794,809 | 82,222 | ||||||
| Total assets | 1,153,083 | 118,449 | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 131,247 | - | ||||||
| Income tax payables | 5,808 | - | ||||||
| Other payables and accruals | 181,942 | 79,592 | ||||||
| Advance from customers | 458,165 | - | ||||||
| Amount due to related parties | 95,772 | - | ||||||
| Current operating lease liabilities | 243,959 | 7,077 | ||||||
| Total current liabilities | 1,116,893 | 86,669 | ||||||
| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities | 369,872 | 63,335 | ||||||
| Total non-current liabilities | 369,872 | 63,335 | ||||||
| Total liabilities | 1,486,765 | 150,004 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIT) | ||||||||
| Share capital ($0.00001 par value, 1,000,000,000 shares issued and outstanding for the year ended December 31, 2019 and 2018) | 10,000 | 10,000 | ||||||
| Additional paid in capital | (2,731 | ) | (2,731 | ) | ||||
| Foreign currency translation reserves | 4,547 | 1,593 | ||||||
| Accumulated deficit | (345,498 | ) | (40,417 | ) | ||||
| Total equity (deficit) | (333,682 | ) | (31,555 | ) | ||||
| Total liabilities and equity | 1,153,083 | 118,449 | ||||||
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For the Nine Months Ended September 30, 2020 and 2019
Consolidated Income Statement Data:
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| US$ | US$ | |||||||
| Revenue | 927,889 | 1,271,032 | ||||||
| Cost of revenue | (155,541 | ) | (177,073 | ) | ||||
| Gross profit | 772,348 | (1,093,959 | ) | |||||
| Selling and marketing expenses | (84,087 | ) | (70,696 | ) | ||||
| General and administrative expense | (1,256,113 | ) | (1,306,051 | ) | ||||
| Total operating expenses | (1,340,200 | ) | (1,376,747 | ) | ||||
| Operating loss | (567,852 | ) | (282,788 | ) | ||||
| Other expenses, net | 1,271 | (11,054 | ) | |||||
| Loss before income taxes | (566,581 | ) | (293,842 | ) | ||||
| Income (taxes) benefits | - | (9 | ) | |||||
| Net loss for the year | (566,581 | ) | (293,851 | ) | ||||
| Foreign currency translation differences | (25,516 | ) | 13,111 | |||||
| Total comprehensive loss for the year | (592,097 | ) | (280,740 | ) | ||||
Consolidated Balance Sheet Data:
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| US$ | US$ | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 100,705 | 23,046 | ||||||
| Accounts receivable | 137,268 | - | ||||||
| Other receivables | 243,285 | 78,385 | ||||||
| Inventory | 61,781 | 69,518 | ||||||
| Prepayment | 51,244 | 129,879 | ||||||
| Amount due from related parties | 73,632 | 57,446 | ||||||
| Total current assets | 667,915 | 358,274 | ||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | 88,569 | 104,432 | ||||||
| Intangible assets | - | 76,546 | ||||||
| Operating lease right-of-use assets | 406,299 | 613,831 | ||||||
| Total non-current assets | 494,868 | 794,809 | ||||||
| Total assets | 1,162,783 | 1,153,083 | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 124,003 | 131,247 | ||||||
| Income tax payables | 5,956 | 5,808 | ||||||
| Other payables and accruals | 349,128 | 181,942 | ||||||
| Advance from customers | 260,880 | 458,165 | ||||||
| Amount due to related parties | 942,296 | 95,772 | ||||||
| Current operating lease liabilities | 270,484 | 243,959 | ||||||
| Total current liabilities | 1,952,747 | 1,116,893 | ||||||
| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities | 135,815 | 369,872 | ||||||
| Total non-current liabilities | 135,815 | 369,872 | ||||||
| Total liabilities | 2,088,562 | 1,486,765 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIT) | ||||||||
| Share capital ($0.00001 par value, 1,000,000,000 shares issued and outstanding for the year ended December 31, 2019 and 2018) | 10,000 | 10,000 | ||||||
| Additional paid in capital | (2,731 | ) | (2,731 | ) | ||||
| Foreign currency translation reserves | (20,969 | ) | 4,547 | |||||
| Accumulated deficit | (912,079 | ) | (345,498 | ) | ||||
| Total equity (deficit) | (925,779 | ) | (333,682 | ) | ||||
| Total liabilities and equity | 1,162,783 | 1,153,083 | ||||||
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Management’s discussion and analysis of financial condition and results of operation
This section contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “pursue,” “expect,” “predict,” “project,” “goals,” “strategy,” “future,” “likely,” “forecast,” “potential,” “continue,” negatives thereof or similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding future acquisition or merger targets, business strategies, macro-economic and sector-specific trends, future cash flows, financing plans, plans and objectives of management and any other statements which are not statements of historical facts.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual future results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, inability to successfully conclude acquisitions of target companies or assets which are reasonably capable of generating positive cash flow in the near future, legal and regulatory changes in the jurisdictions in which we operate, volatility or decline in our stock price, potential fluctuation of our quarterly and annual financial and operational results, rapid adverse changes in markets, decline in demand for our goods and services, insufficient revenues to cover our operating costs and such other factors as discussed throughout this section.
Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. In addition, our consolidated financial statements and the financial data included in this Current Report on Form 8-K reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see “Risk Factors”.
Overview
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “FHAI” refer specifically to Fountain Healthy Aging, Inc. in this section.
The Company is a US holding company incorporated in Nevada on February 25, 2004, which now operates through the Company’s wholly owned subsidiary Wei Lian Jin Meng Group Limited. (“WLJM Cayman”), a company incorporated under the laws of the Cayman Islands on June 30, 2020.
The following is the organization structure of the WLJM Group along with ownership detail and its subsidiaries:
WLJM Cayman was incorporated in the Cayman Islands on June 30, 2020. It is 100% owned by Fountain Healthy Aging, Inc.
Wei Lian Jin Meng (Hong Kong) Company Limited (“WLJM HK”), was established in the Hong Kong Special Administrative Region (“HKSAR”) of the PRC on August 5, 2020. It is 100% owned by WLJM Cayman.
Jin You Wei Meng (Shenzhen) Consulting Company Limited (“JYWM WFOE”) was established as a wholly foreign owned enterprise on November 24, 2020, under the laws of the PRC. It is 100% owned by WLJM HK.
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) was incorporated on October 17, 2017, under the laws of the PRC. It is 100% owned by JYWM WFOE.
Dongguan Dishi Coffee Limited (“Dongguan Dishi”) was incorporated on October 25, 2018, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.
Shenzhen Nainiang Coffee Art Museum Limited (“Shenzhen Nainiang”) was incorporated on June 20, 2019, under the laws of the PRC. It is 100% owned by Shenzhen Wei Lian.
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On February 1, 2021, the Company entered into a definitive Share Exchange Agreement with Wei Lian Jin Meng Group Limited (“WLJM Cayman”) and the shareholders of WLJM Cayman (the “Sellers”), whereby we acquired all of the outstanding common stock of WLJM Cayman in exchange for the issuance of 600,000,000 shares of Common Stock to the Sellers on a pro rata basis based on their percentage ownership of WLJM Cayman. On February 2, 2021 (the “Closing Date”), WLJM Cayman became our wholly-owned subsidiary and the Sellers became the owners of approximately 99.8% of our Common Stock (controlling approximately 6% of the voting rights of our shareholders). The acquisition of WLJM Cayman by us will be accounted for as a reverse merger because on a post-merger basis, the former shareholders of WLJM Cayman held a majority of our outstanding Common Stock on a fully-diluted basis.
WLJM Cayman was incorporated in the Cayman Islands under the Cayman Islands Companies Law on June 30, 2020. The Company does not conduct any substantive operations on its own but instead conducts its business operations through its subsidiaries in in the Peoples’ Republic of China (the “PRC”). Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”), Dongguan Dishi Coffee Limited (“Dongguan Dishi”) and Shenzhen Nainiang Coffee Art Museum Limited (“Shenzhen Nainiang”) are the operating subsidiaries in the PRC engaged in trading of coffee beans and selling cups of coffee.
We are a manufacturing company developing, producing and selling “coffee tea” products, which represent drinks made from a mixture of coffee and tea, as well as black coffee products and other coffee products. We sell our products to consumers in the PRC. We adopt “online to offline” mode (i.e. selling products online and deliver products through offline channels), committing to building the first brand of “coffee tea” culture in the PRC.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with U.S. GAAP, which requires management to make certain estimates and to apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed financial statements. Actual results could differ from those estimates made by management.
We believe that of our significant accounting policies, which are described in note 2 to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We recognize revenue from coffee bean sales, net of value-added taxes, upon delivery at such time title passes to the customer.
Our revenue recognition policy is in compliance with ASU No. 2014-09, Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. We apply the following five-step model in order to determine this amount:
| (i) | identification of the services in the contract; | |
| (ii) | determination of whether the services are performance obligations, including whether they are distinct in the context of the contract; | |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; | |
| (iv) | allocation of the transaction price to the performance obligations; and | |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
We only apply the five-step model to contracts when it is probable that we will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of these performance obligations are distinct. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, our performance obligations are transferred to customers at a point in time, typically upon delivery.
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For all reporting periods, we have not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
Concentrations of Credit Risk
Financial instruments that potentially expose us to significant concentration of credit risk consist primarily of cash and cash equivalents. As of December 31, 2019, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. We did not have any customers constituting 10% or more of the net revenues in the fiscal years 2019 and 2018.
Recently Issued and Adopted Accounting Pronouncements
Recent accounting pronouncements adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU 2014-09. We adopted this ASU on January 1, 2018 and determined it had no impact on our consolidated financial statements as of December 31, 2019 and 2018.
In January 2016, the FASB issued a new pronouncement ASU 2016-01 Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
ASU 2016-01 was further amended in February 2018 by ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU 2016-01. This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issued.
ASU 2016-01 and ASU 2018-03 are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively. We adopted this ASU on January 1, 2018 and determined it had no impact on our consolidated financial statements as of December 31, 2019 and 2018.
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We early adopted this standard for the fiscal year 2018, resulted in the recognition of right-of-use assets of $613,831 and $70,412 as of December 31, 2019 and 2018, respectively; and the recognition of operating lease liabilities of $613,831 and $70,412 as of December 31, 2019 and 2018, respectively.
In November 2016, the FASB issued ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU on update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method each period presented. We adopted this ASU on January 1, 2018 and determined it had no impact on our consolidated financial statements as of December 31, 2019 and 2018.
In January 2017, the FASB issued ASU 2017-01: Business Combinations (Topic 805): Clarifying the Determination of Business. The Update requires that when substantially all of the fair value of the gross assets acquired (or dispose of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU on update (1) required that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim period within those periods. Early adoption of the amendments in this Update is allowed. The amendments in this Update should be applied prospectively on or after the effective date. No disclosure are required at transition. We adopted this pronouncement on its consolidated financial statements as of and for the year ended December 31, 2019 and 2018.
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). We are in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
We review new accounting standards as issued. We have not identified any other new standards that it believes will have a significant impact on our financial statements.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements of WLJM Cayman found at Item 9.01(a) “Financial Statements of Businesses Acquired” of this Current Report on Form 8-K for the year ended December 31, 2019 and for the nine-month period ended September 30, 2020.
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For the Year Ended December 31, 2019.
Revenue
We generated $2,107,465 in revenue for the year ended December 31, 2019 compared to $nil for the year ended December 31, 2018 We did not generate any revenues in the fiscal year 2018 was our business preparation stage that we commenced our business and started generating revenues in March 2019.
Cost of Revenue
Cost of revenue was $275,916 for the year ended December 31, 2019 compared to $nil for the year ended December 31, 2018. As we did not earn any revenue, we did not incur any cost of revenue during the fiscal year 2018.
Gross profit
Gross profit for the year ended December 31, 2019 was $1,831,549 compared with $nil for the year ended December 31, 2018. Gross profit accounted for 87% of our revenue for the year ended December 31, 2019.
Operating Expenses
By far the most significant component of our operating expenses for both the year ended December 31, 2019 and 2018 was general and administrative expenses ($1,917,263 and $39,334, respectively). The following table sets forth the main components of our general and administrative expenses for the years ended December 31, 2019 and 2018.
| For the year ended December 31, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Amount (US$) | % of Total | Amount (US$) | % of Total | |||||||||||||
| General and administrative expense: | ||||||||||||||||
| Consultancy fee | $ | 758,237 | 39.6 | % | $ | - | - | % | ||||||||
| Salary and welfare | 500,380 | 26.2 | % | 12,623 | 32.1 | % | ||||||||||
| Rental expenses | 208,949 | 10.9 | % | 17,310 | 44.0 | % | ||||||||||
| Research and development costs | 99,687 | 5.2 | % | - | - | % | ||||||||||
| Exhibition costs | 65,045 | 3.4 | % | - | - | % | ||||||||||
| Office expenses | 52,000 | 2.7 | % | 65 | 0.1 | % | ||||||||||
| Travel and accommodations | 38,833 | 2.0 | % | 99 | 0.3 | % | ||||||||||
| Entertainment | 38,786 | 2.0 | % | - | - | % | ||||||||||
| Others | 155,346 | 8.1 | % | 9,237 | 23.5 | % | ||||||||||
| Total general and administrative expenses | $ | 1,917,263 | 100 | % | $ | 39,334 | 100 | % | ||||||||
Significant increase in general and administrative expenses by $1,877,929 or 4774.3% from $39,334 for the years ended December 31, 2018 to $1,917,263 for the years ended 2019 was due to we had no business operations in 2018 and we commenced our business in March 2019 and started incurring operating expenses.
Net Loss
We had a net loss of $285,756 for the year ended December 31, 2019 compared to a net loss of $39,334 for the year ended December 31, 2018, an increase of $246,422 or 626.5%. The increase was primarily attributable to the fact that we commenced our business in the fiscal year 2019 and we incurred expenses amounting to $672,094 on consultancy services in connection with the reverse acquisition transaction.
Liquidity and Capital Resources
| Working capital: | 2019 | 2018 | ||||||
| Total current assets | $ | 358,274 | $ | 36,227 | ||||
| Total current liabilities | 1,116,893 | 86,669 | ||||||
| Working capital deficiency | $ | (758,619 | ) | $ | (50,442 | ) | ||
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As of December 31, 2019, we had cash and cash equivalents of $23,046. To date, we have financed our operations primarily through advance from customers and borrowings from related parties. The following table provides detailed information about our net cash flows for the year ended December 31, 2019 and 2018:
| Cash flows: | 2019 | 2018 | ||||||
| Net cash provided by (used in) operating activities | $ | 211,725 | $ | (3,229 | ) | |||
| Net cash used in investing activities | (190,895 | ) | (4,465 | ) | ||||
| Net cash provided by financing activities | - | 7,269 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (203 | ) | 162 | |||||
| Net increase (decrease) in cash and cash equivalents | 20,627 | (263 | ) | |||||
| Cash and cash equivalents at the beginning of year | 2,419 | 2,682 | ||||||
| Cash and cash equivalents at the end of year | $ | 23,046 | $ | 2,419 | ||||
Operating Activities
Net cash used in operating activities was $190,895 for the year ended December 31, 2019, as compared to net cash provided by operating activities of $2,804 for the year ended December 31, 2018. The increase in net cash used in operating activities was mainly attributable to we commenced our business in the fiscal year 2019 that more expenses were incurred for the operation during the year ended December 31, 2019.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2019 was $190,895, as compared to $4,465 for the year ended December 31, 2018. The increase in net cash used in investing activities was mainly attributable to the acquisition of leasehold improvements, equipment and intangible assets.
Financing Activities
Net cash provided by financing for the year ended December 31, 2019 was $nil, as compared to $7,269 for the year ended December 31, 2018. The increase of net cash provided by financing activities was mainly attributable to the capital contributions from our existing stockholders of the Company to finance our operations.
Capital Expenditures
Capital expenditures for the year ended December 31, 2019 and 2018 were $197,078 and $12,242, respectively. The increase in capital expenditures was due to the acquisition of leasehold improvements, equipment and intangible assets. We anticipate continue increasing our capital expenditures in the 2020 fiscal year.
Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as of December 31, 2019:
| Total | Less than 1 year | 1-5 years | More than 5 years | |||||||||||||
| Operating lease | $ | 645,935 | $ | 265,154 | $ | 380,781 | $ | - | ||||||||
| Consultancy service | 484,821 | 444,821 | 40,000 | - | ||||||||||||
| 1,130,756 | 709,975 | 420,781 | - | |||||||||||||
For the years ended December 31, 2019 and 2018, we entered into various operating lease agreement commencing in the fiscal year 2019 and 2018, and expiring on variance dates through September 2023. The average monthly lease expense is approximately $22,388. The outstanding lease commitment as of December 31, 2019 was $645,935.
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For the year ended December 31, 2019, we entered into a non-cancelable consultancy service agreement with a third-party for the provision of services related to the US listing with the contract amount of $1,200,000. The outstanding commitment as of December 31, 2019 was $484,821.
For the Nine Months Ended September 30, 2020.
Revenue
We generated $927,889 in revenue for the nine months ended September 30, 2020 compared to $1,271,032 for the nine months ended September 30, 2019. The COVID-19 pandemic has developed rapidly in 2020. The resulting impact of the virus on the operations and measures taken by the Chinese government to contain the virus have negatively affected our results in 2020, which lead to a decline in revenues of $343,143 or 30.0% compared with the same nine-month period in 2019.
Cost of Revenue
Cost of revenue was $155,541 for the nine months ended September 30, 2020 compared to $177,073 for the nine months ended September 30, 2019. The decrease of cost of revenue by $21,532 or 12.2% was a result of the negative impact from the COVID-19 pandemic. The cost of revenue consists of the cost of raw materials and cost of manufactured goods sold to customers, including labor cost, rental expense, research and development costs, etc. The decrease in cost of raw materials is relatively in line with the decrease of revenue, whereas the decrease in cost of manufactured goods to customers is significantly lower than the decrease of revenue because of the fixed costs in nature.
Gross profit
Gross profit for the nine months ended September 30, 2020 was $772,348 compared with $1,093,959 for the nine months ended September 30, 2019. Gross profit accounted for 83.2% of our revenue for the nine months ended September 30, 2020.
Operating Expenses
By far the most significant component of our operating expenses for both the nine months ended September 30, 2020 and 2019 was general and administrative expenses ($1,256,113 and $1,306,051, respectively). The following table sets forth the main components of our general and administrative expenses for the nine months ended September 30, 2020 and 2019.
| For the nine months ended September 30, | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Amount (US$) | % of Total | Amount (US$) | % of Total | |||||||||||||
| General and administrative expense: | ||||||||||||||||
| Consultancy fee | $ | 447,375 | 35.6 | % | $ | 584,898 | 44.8 | % | ||||||||
| Salary and welfare | 269,339 | 21.4 | % | 332,402 | 25.5 | % | ||||||||||
| Rental expenses | 196,005 | 15.6 | % | 164,579 | 12.6 | % | ||||||||||
| Research and development costs | 49,986 | 4.0 | % | 38,334 | 2.9 | % | ||||||||||
| Exhibition costs | 30,140 | 2.4 | % | 61,472 | 4.7 | % | ||||||||||
| Office expenses | 6,493 | 0.5 | % | 45,406 | 3.5 | % | ||||||||||
| Travel and accommodations | 17,560 | 1.4 | % | 6,708 | 0.5 | % | ||||||||||
| Entertainment | 10,833 | 0.9 | % | 13,347 | 1.0 | % | ||||||||||
| Impairment losses on long-lived assets | 76,199 | 6.1 | % | - | - | % | ||||||||||
| Others | 152,183 | 12.1 | % | 58,905 | 4.5 | % | ||||||||||
| Total general and administrative expenses | $ | 1,256,113 | 100 | % | $ | 1,306,051 | 100 | % | ||||||||
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The decrease in general and administrative expenses by $49,938 or 3.8% from $1,306,051 for the nine months ended September 30, 2019 to $1,256,113 for the nine months ended 2020 was due to the negative impact from the COVID-19 pandemic. The decrease is not in line and significantly lower than the decrease of revenue was due to the fixed costs in nature.
Net Loss
We had a net loss of $566,581 for the nine months ended September 30, 2020 compared to a net loss of $293,851 for the nine months ended September 30, 2019, an increase of $272,730 or 92.8%. The increase was primarily attributable to the fact that our revenue dropped by 30.0% whereas our costs were steadily incurred during the COVID-19 pandemic.
Liquidity and Capital Resources
| Working capital: | As of September 30, 2020 | As of December 31, 2019 | ||||||
| Total current assets | $ | 667,915 | $ | 358,274 | ||||
| Total current liabilities | 1,952,747 | 1,116,893 | ||||||
| Working capital deficiency | $ | (1,284,832 | ) | $ | (758,619 | ) | ||
As of September 30, 2020, we had cash and cash equivalents of $100,705. To date, we have financed our operations primarily through advance from customers and borrowings from related parties. The following table provides detailed information about our net cash flows for the nine months ended September 30, 2020 and 2019:
| For the nine months ended September 30, | ||||||||
| Cash flows: | 2020 | 2019 | ||||||
| Net cash used in operating activities | $ | 74,823 | $ | 158,434 | ||||
| Net cash used in investing activities | - | (140,096 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 2,836 | (835 | ) | |||||
| Net increase in cash and cash equivalents | 77,659 | 17,503 | ||||||
| Cash and cash equivalents at the beginning of year | 23,046 | 2,419 | ||||||
| Cash and cash equivalents at the end of year | $ | 100,705 | $ | 19,922 | ||||
Operating Activities
Net cash used in operating activities was $74,823 for the nine months ended September 30, 2020, as compared to $158,434 for the nine months ended September 30, 2019. The decrease in net cash used in operating activities was mainly attributable to the increase in accounts receivables by $133,260 in the nine-month period 2020 as compared to $nil in the same period 2019.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2020 was $nil, as compared to $140,096 for the nine months ended September 30, 2019. The decrease in net cash used in investing activities was mainly attributable to no acquisition of leasehold improvements, equipment and intangible assets incurred during the nine-month period 2020.
Capital Expenditures
Capital expenditures for the nine months ended September 30, 2020 and 2019 were $nil and $140,096, respectively. The decrease in capital expenditures was due to no acquisition of leasehold improvements, equipment and intangible assets. We will evaluate and assess the COVID-19 pandemic impact to our business to determine the plan for increasing our capital expenditures in the 2021 fiscal year.
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Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as of September 30, 2020:
| Total | Less than 1 year | 1-5 years | More than 5 years | |||||||||||||
| Operating lease | $ | 455,551 | $ | 293,891 | $ | 161,660 | $ | - | ||||||||
| Consultancy service | 120,000 | 120,000 | - | - | ||||||||||||
| 575,551 | 413,891 | 161,660 | - | |||||||||||||
We entered into various operating lease agreement commencing in the fiscal year 2019 and 2018, and expiring on variance dates through September 2023. The average monthly lease expense is approximately $22,388. The outstanding lease commitment as of September 30, 2020 was $455,551.
During the fiscal year 2019, we entered into a non-cancelable consultancy service agreement with a third-party for the provision of services related to the US listing with the contract amount of $1,200,000. The outstanding commitment as of September 30, 2020 was $120,000.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Going Concern Consideration
We incurred a net loss of $305,081 and $39,338 during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, and 2018, we had net current liability of $758,619 and $50,442, respectively, and a deficit on total equity of $333,692 and $31,555, respectively.
We incurred a net loss of $566,581 and $293,851 during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had net current liability of $1,284,832 and a deficit on total equity of $925,779.
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the shareholders of the Company. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, the shareholders of the Company indicated the intent and ability to provide additional equity financing.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Properties
Our mailing address is Room 601, Bldg. E, No. 1, Huabao Fubao China Street, Futian District, Shenzhen City, Guangdong Province, People’s Republic of China 518000.
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Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial ownership of our common stock as of the Closing Date (after giving effect to the Acquisition) by (i) each person (or group of affiliated persons) who is known by us to own more than five percent of the outstanding shares of our common stock, (ii) each director, executive officer and director nominee, and (iii) all of our directors, executive officers and director nominees as a group. As of the Closing Date, we had 600,034,500 shares of common stock issued and outstanding and 100,000,000 shares of Series A Preferred Stock issued and outstanding.
Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Unless otherwise noted, the principal address of each of the stockholders, directors and officers listed below is Room 601, Bldg. E, No. 1, Huabao Fubao China Street, Futian District, Shenzhen City, Guangdong Province, People’s Republic of China 518000.
All share ownership figures include shares of our common stock issuable upon securities convertible or exchangeable into shares of our common stock within sixty (60) days of the Closing Date, which are deemed outstanding and beneficially owned by such person for purposes of computing his or her percentage ownership, but not for purposes of computing the percentage ownership of any other person.
| Name and Address of Beneficial Owner, Officers and Directors | Amount and Nature of Beneficial Ownership | Percent of Class(1) | ||||||
| ZHU Hong, Chief Executive Officer, Chief Financial Officer, Secretary and Director(2) | 120,000,000 | 20 | % | |||||
| Total Held by Officers and Directors as a Group (1 person): | 120,000,000 | 20 | % | |||||
| Five Percent Shareholders | ||||||||
| Sunshine Technology Limited(3) | 240,000,000 | 40 | % | |||||
| Sunshine Power Limited(4) | 234,000,000 | 39 | % | |||||
| Sunshine Beauty Limited(5) | 120,000,000 | 20 | % | |||||
| (1) | Based on 600,034,500 shares of common stock outstanding on the Closing Date. Includes, where applicable, shares of common stock issuable upon the exercise of warrants and conversion of debt held by such person that may be exercised within 60 days after the Closing Date. Unless otherwise indicated, we believe that all persons named in the table above have sole voting power and/or investment power with respect to all shares of common stock beneficially, warrants and convertible debt owned by them. |
| (2) | Our CEO, Ms. Zhu Hong, beneficially owns 120,000,000 shares of common stock through Sunshine Beauty Limited. She also owns all 100,000,000 shares of Series A Preferred Stock, which enjoy 100 votes per share, but which are not convertible into Common Stock. |
| (3) | Sunshine Technology Limited is a British Virgin Islands company wholly owned by Ye Aiyun. |
| (4) | Sunshine Power Limited is a British Virgin Islands company wholly owned by Zhu Jianyong. Zhu Jianyong is the father of our CEO, Ms. Zhu Hong. |
| (5) | Sunchine Beauty Limited is a British Virgin Islands company wholly owned by our CEO, Ms. Zhu Hong. |
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Description of Securities
Common Stock
We have 750,000,000 authorized shares of common stock, $0.00001 par value per share, of which 600,034,500 shares of common stock are issued and outstanding. Each holder of shares of common stock is entitled to one vote per share at stockholders’ meetings. Our Articles of Incorporation do not provide for cumulative voting for the election of directors. Holders of shares of common stock are entitled to receive, pro rata, such dividends as may be declared by the Board of Directors out of funds legally available therefor, and are also entitled to share, pro rata, in any other distributions to the stockholders. Upon any liquidation, dissolution or winding-up, holders of shares of common stock are entitled to share rateably in all assets remaining after payment of liabilities. Holders of shares of common stock do not have any preemptive rights or other rights to subscribe for additional shares. The outstanding shares of common stock are paid for, fully paid and non-assessable.
Series A Preferred Stock
We have 100,000,000 authorized shares of preferred stock, $0.00001 par value per share, of which 100,000,000 shares are designated Series A Preferred Stock, of which 100,000,000 shares are issued and outstanding and held by our CEO, Ms. Zhu Hong. The company designated the Series A Preferred Stock in a Certificate of Designation filed with the Nevada Secretary of State on September 16, 2019. Each holder of shares of Series A Preferred Stock is entitled to 100 votes per share at stockholders’ meetings. The Series A Preferred Stock is not convertible into shares of common stock and are not redeemable. The Series A Preferred Stock is entitled to receive dividends on a pari passu basis with the common stock and enjoys a liquidation preference senior to the common stock. The outstanding shares of Series A Preferred Stock are paid for, fully paid and non-assessable.
Market Price of and Dividends on Common Equity and Other Shareholder Matters.
There is no change in the market for our securities as a result of the Acquisition. Our common stock, par value $0.00001, is quoted via the OTC Pink Sheets under the ticker symbol “FHAI”. There is no active trading market in our securities.
The quotation of our common share does not assure a meaningful, consistent and liquid trading market currently exist. We cannot predict whether a more active market for our common share will develop in the future. In absence of an active trading market,
| (1) | Investors may have difficulty buying or selling or obtaining market quotation, | |
| (2) | Market visibility of our common share may be limited which may have a depressive effect on the market price for our common share. |
As of February 2, 2021, there were twelve holders of record of our Common Stock.
To our knowledge, we have never paid any dividends and we plan to retain earnings, if any, for use in the development of the business. Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
Indemnification of Directors and Officers
Our officers and directors are indemnified as provided by the Nevada Revised Statutes and our bylaws.
Under the NRS, director immunity from liability to a company or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a company’s articles of incorporation that is not the case with our articles of incorporation. Excepted from that immunity are:
| (1) | a willful failure to deal fairly with the company or its shareholders in connection with a matter in which the director has a material conflict of interest; | |
| (2) | a violation of criminal law (unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful); | |
| (3) | a transaction from which the director derived an improper personal profit; and | |
| (4) | willful misconduct. |
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Our Articles of Incorporation contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Nevada law. Consequently, our directors and officers will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors or officers, except liability for any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law.
Our Articles of Incorporation and Bylaws provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Nevada law. Our Bylaws also provide that we may advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his, her or its actions in that capacity regardless of whether we would otherwise be permitted to indemnify him, her or it under Nevada law.
We believe that these provisions in our Articles of Incorporation and Bylaws are necessary to attract and retain qualified persons as directors and officers. This description of the limitation of liability and indemnification provisions of our Articles of Incorporation and Bylaws is qualified in its entirety by reference to these documents, each of which is included as an exhibit to this Report.
Indemnification against Public Policy
Insofar as indemnification by us for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling the company pursuant to provisions of our Articles of Incorporation and Bylaws, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification by such director, officer or controlling person of us in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The effect of indemnification may be to limit the rights of the Company and the shareholders (through shareholders’ derivative suits on behalf of the Company) to recover monetary damages and expenses against a director for breach of fiduciary duty.
Legal Proceedings
In the normal course of business, we are subject to claims and litigation. We are not a party to any material legal proceedings nor are we aware of any circumstance that may reasonably lead a third party to initiate legal proceedings against us.
Directors, Executive Officers, and Corporate Governance
Set forth below are the names and ages of our current directors and executive officers and their principal occupations at present and for at least the past five years.
| Name | Age | Positions and Offices to be Held | Date Appointed Director | |||
| Zhu Hong | 27 | President, CEO, Sole Director, CFO, Treasurer, Secretary | October 4, 2019 |
Our directors are appointed for an indefinite term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board. All officers and directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of Directors. Our Board of Directors appoints officers from time to time and each Executive Officer serves at the discretion of our Board of Directors.
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The following is a brief description of the background on our officers and directors.
Ms. ZHU Hong, age 27, has been the Chief Executive Officer and a Director of the Company since October 4, 2019. Ms. Zhu also served as our President, Treasurer, Chief Financial Officer and Secretary since October 4, 2019. Ms. Zhu graduated from Huangshan Ruiyuan foreign language school in 2012. From 2012 till 2014, Ms. Zhu Participated in International trading of leather goods in family business. She was responsible for chose product selection, price negotiation and sales. From 2015 to 2016, she is involved in assistant for Jilin yunshang Health Food Co., Ltd in order to assist the president in his work, including advice, implementation, coordination, assistant management. In early 2017, she quitted her job and started marketing research for six months, and then entered the coffee industry and established Shenzhen Weilian Jinmeng E-Commerce Technology Co., Ltd. in October of that year. With sufficient experience in planning and management work, Ms. Zhu has been appointed as a Chief Executive Officer, President, Chief Financial Officer, Secretary, Treasurer and the sole Director of the Company in October 2019.
There are no family relationships between any of the executive officers and directors.
We believe that all of our executive officers and directors are qualified to serve on our Board of Directors or their respective offices based upon their business and management experience.
Term of Office
Our sole director holds her position until the next annual meeting of shareholders and until her successor is elected and qualified by our shareholders, or until earlier death, retirement, resignation or removal.
Family Relationships
There are no family relationships between the Company and any of our current and proposed directors or executive officers.
Corporate Governance
Our board of directors has not established any committees, including an audit committee, a compensation committee or a nominating committee, or any committee performing a similar function. The functions of those committees are being undertaken by our board. Because we do not have any independent directors, our board believes that the establishment of committees of our board would not provide any benefits to our company and could be considered more form than substance.
We do not have a policy regarding the consideration of any director candidates that may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our officers and directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our officers and directors have not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our board of directors.
Given our relative size and lack of directors’ and officers’ insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all current members of our board will participate in the consideration of director nominees.
As with most small companies until such time as we further develop our business, achieve a stronger revenue base and have sufficient working capital to purchase directors’ and officers’ insurance, we do not have any immediate prospects to attract independent directors. When we are able to expand our board to include one or more independent directors, we intend to establish an audit committee of our board of directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our board of directors include “independent” directors, nor are we required to establish or maintain an audit committee or other committee of our board.
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Communications with the Board of Directors
Stockholders with questions about the Company are encouraged to contact the Company by sending communications to the attention of the Chief Executive Officer at Room 601, Bldg. E, No. 1, Huabao Fubao China Street, Futian District, Shenzhen City, Guangdong Province, People’s Republic of China 518000. Stockholders may communicate with the Board of Directors by sending their communications to the Board of Directors, c/o the Chief Executive Officer at the same address.
Director Compensation
Our current sole director is an employee of the Company. She has not received and will not receive compensation for his service outside the compensation set forth in the Summary Compensation Table below.
If our board consists of any non-employee directors in the future, we may compensate our non-employee directors for their service in the future. We also intend to allow our non-employee directors to participate in any equity compensation plans that we adopt in the future.
Director Independence
None of our directors qualified as an “independent director” under the rules of NASDAQ, Marketplace Rule 4200(a).
Audit Committee
We do not presently have an audit committee. Our Board of Directors currently acts as our nominating committee.
Nominating Committee
We do not presently have a nominating committee. Our Board of Directors currently acts as our nominating committee.
Procedures for Nominating Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board during the quarter ended December 31, 2019.
Involvement in Certain Legal Proceedings
During the past ten years, to our knowledge, no current or incoming director, executive officer, promoter or control person of the Company has been involved in the following:
(1) A petition under the Federal bankruptcy laws or any state insolvency law which was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) ;
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(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
i. Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
ii. Engaging in any type of business practice; or
iii. Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
(4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;
(5) Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
(6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
(7) Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
i. Any Federal or State securities or commodities law or regulation; Or
ii. Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease and desist order, or removal or prohibition order; Or
iii. Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; Or
(8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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Executive Compensation
The following table sets forth information concerning the total compensation paid or accrued by us during the two fiscal years ended December 31, 2018 and 2019 to (i) all individuals that served as our principal executive officer or acted in a similar capacity for us at any time during the two fiscal years ended December 31, 2018 and 2019 and (ii) all individuals that served as executive officers of ours at any time during the two fiscal years ended December 31, 2018 and 2019 that received annual compensation during the two fiscal year ended December 31, 2018 and 2019 in excess of $100,000. None of our executive officers received annual compensation during the two fiscal years ended December 31, 2018 and 2019 in excess of $100,000.
Summary Compensation Table
| Name & Principal Position | Fiscal Year ended July 31, | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||
| ZHU Hong (1), | 2018 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| CEO, CFO | 2019 | 38,227 | 0 | 0 | 0 | 0 | 0 | 0 | 38,227 | |||||||||||||||||||||||||
| David Lazar (2), | 2018 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| CEO, CFO | 2019 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||
| (1) | ZHU Hong has served as our Chief Executive Officer from October 4, 2019 through the present. ZHU Hong has also served as our Chief Financial Officer from October 4, 2019 through the present. |
| (2) | David Lazar served as our Chief Executive Officer and Chief Financial Officer from April 11, 2019 to October 4, 2019. |
We do not currently pay any other compensation to our executive officers except for an annual cash compensation of US$38,227 to Ms. ZHU Hong.
Employment Agreements with Executive Officers
At this time, we do not have any written employment agreement or other formal compensation agreements with our officers and director. Compensation arrangements are the subject of ongoing development and we will make appropriate additional disclosures as they are further developed and formalized.
Outstanding Equity Awards at December 31, 2019
At this time, we do not have any outstanding equity awards and do not have any equity incentive, option or similar plans.
Policy Regarding Transactions with Related Persons
We do not have a formal, written policy for the review, approval or ratification of transactions between us and any director or executive officer, nominee for director, 5% stockholder or member of the immediate family of any such person that are required to be disclosed under Item 404(a) of Regulation S-K.
Certain Relationships and Related Transactions, Director Independence
SEC rules require us to disclose any transaction or currently proposed transaction in which we were a participant and in which any related person has or will have a direct or indirect material interest involving the lesser of $120,000 or 1% of the average of our total assets as of the end of last two completed fiscal years. A related person is any executive officer, director, nominee for director, or holder of 5% or more of our Common Stock, or an immediate family member of any of those persons.
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Transactions with related persons, promoters and certain control persons
Related Party Transactions
As at December 31, 2019 and December 31, 2018, the Company had balances due from related parties of $57,446 and $18,586, respectively. The balances due to related parties were $95,722 and $18,586. As at December 31, 2019 and December 31, 2018, the Company had the following transactions with related parties. These receivables and payables are due on demand, are non-interest bearing, and have no maturity date.
| For the years ended December 31, | ||||||||
| Cash advance from related parties | 2019 | 2018 | ||||||
| Zhu Jian Yong | 1,623 | - | ||||||
| Total | $ | 1,623 | $ | - | ||||
| For the years ended December 31, | ||||||||
| Cash advance to related parties | 2019 | 2018 | ||||||
| Zhu Hong | 1,858,057 | 56,404 | ||||||
| Ye Aiyun | 57,446 | - | ||||||
| Total | $ | 1,915,503 | $ | 56,404 | ||||
| For the years ended December 31, | ||||||||
| Cash repayment from related parties | 2019 | 2018 | ||||||
| Zhu Hong | 1,505,893 | 8,572 | ||||||
| Total | $ | 1,505,893 | $ | 8,572 | ||||
| For the years ended December 31, | ||||||||
| Assets purchased on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 45,806 | 8,444 | ||||||
| Total | $ | 45,806 | $ | 8,444 | ||||
| For the years ended December 31, | ||||||||
| Expense paid on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 360,737 | 16,619 | ||||||
| Total | $ | 360,737 | $ | 16,619 | ||||
| For the years ended December 31, | ||||||||
| Advance from customers received on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 498,775 | - | ||||||
| Total | $ | 498,775 | $ | - | ||||
| For the years ended December 31, | ||||||||
| Advance from customers refunded on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 557,861 | - | ||||||
| Total | $ | 557,861 | $ | - | ||||
As at September 30, 2020, the Company had balance due from related parties of $73,632. The balance due to related parties was $942,296. As at September 30, 2020 and 2019, the Company had the following transactions with related parties. These receivables and payables are due on demand, are non-interest bearing, and have no maturity date.
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| For the nine months ended September 30, | ||||||||
| Cash advance from related parties | 2020 | 2019 | ||||||
| Zhu Jian Yong | 29,494 | 1,581 | ||||||
| Total | $ | 29.494 | $ | - | ||||
| For the nine months ended September 30, | ||||||||
| Cash advance to related parties | 2020 | 2019 | ||||||
| Zhu Hong | 31,903 | 1,504,947 | ||||||
| Shenzhen Nainiang Wine Limited | 14,726 | - | ||||||
| Total | $ | 46,629 | $ | 1,504,947 | ||||
| For the nine months ended September 30, | ||||||||
| Cash repayment from related parties | 2020 | 2019 | ||||||
| Zhu Hong | 830,554 | 1,092,098 | ||||||
| Total | $ | 830,554 | $ | 1,092,098 | ||||
| For the nine months ended September 30, | ||||||||
| Assets purchased on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | - | 44,239 | ||||||
| Total | $ | - | $ | 44,239 | ||||
| For the nine months ended September 30, | ||||||||
| Expense paid on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | 16,964 | 332,790 | ||||||
| Shenzhen Weilian Jin Meng Culture Spreading Limited | 399 | - | ||||||
| Total | $ | 17,363 | $ | 332,790 | ||||
| For the nine months ended September 30, | ||||||||
| Advance from customers received on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | 758 | 192,150 | ||||||
| Total | $ | 758 | $ | 192,150 | ||||
| For the nine months ended September 30, | ||||||||
| Advance from customers refunded on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | - | 538,783 | ||||||
| Total | $ | - | $ | 538,783 | ||||
Recent Sales of Unregistered Securities
On or about April 24, 2019, we issued 205,000,000 shares of our Common Stock to Custodian Ventures, LLC at $0.001 per share, which purchase price was tendered from Custodian Ventures, LLC by cash it advanced on behalf of and for the benefit of the Company and a promissory note issued by Custodian Ventures, LLC in favor of the Company in the principal amount of $173,950.
On or about September 24, 2019, we redeemed from Custodian Ventures, LLC 105,000,000 shares of our Common Stock, for $105,000, which was paid by reduction in the balance due under certain promissory issued by Custodian Ventures, LLC to the Company.
On or about September 24, 2019, we redeemed from Custodian Ventures, LLC 105,000,000 shares of our Common Stock and issued to Custodian Ventures, LLC 105,000,000 shares of our Series A Preferred Stock as consideration.
40
On October 4, 2019, as a result of a private transaction, 100,000,000 shares of our Series A Preferred Stock (the “Shares”) were transferred from Custodian Ventures, LLC to ZHU Hong, making ZHU Hong become a 99.0% holder of the voting rights of the Company at the time. The consideration paid for the Shares, which represented 49.5% of the issued and outstanding share capital of the Company on a fully-diluted basis, was $175,000. The source of the cash consideration for the Shares was personal funds of the purchaser.
On February 2, 2021, we consummated the Acquisition, and the Company acquired all the issued and outstanding capital stock of WLJM Cayman in exchange for the issuance to the shareholders of WLJM Cayman of an aggregate of 600,000,000 restricted shares of our common stock, which were issued on February 2, 2021.
Item 3.02 Unregistered Sales of Equity Securities.
The disclosure in Item 1.01 and Item 2.01 of this Current Report on Form 8-K is incorporated by reference into this Item 3.02.
Item 5.01 Changes in Control of Registrant
The disclosure in Items 1.01 and 2.01 of this Current Report on Form 8-K is incorporated by reference into this Item 5.01. Following the closing of the Acquisition, the Company issued 600,000,000 shares of the Company’s common stock to the Sellers, which immediately after closing represented approximately 99.8% of the Company’s outstanding common stock. The 600,000,000 shares would be issued to the Sellers pro-rata based on each Seller’s ownership percentage of WLJM Cayman prior to the Acquisition. The stockholders of the Company, by written consent dated February 2, 2021, approved the Acquisition. There are no arrangements known to the Company which may at a subsequent date result in a change of control of the Company.
Item 5.06 Change in Shell Company Status
Prior to the Acquisition, we were a “shell company” (as such term is defined in Rule 12b-2 under the Exchange Act). As a result of the Acquisition, we have ceased to be a shell company. The information contained in this Current Report on Form 8-K constitutes the current “Form 10 information” necessary to satisfy the conditions contained in Rule 144(i)(2) under the Securities Act.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited financial statements of WLJM Cayman December 31, 2019 and audited financial statements of WLJM Cayman for the fiscal year ended December 31, 2018 are set forth below beginning on page F-1.
41
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2019 AND 2018
F-1
WEI LIAN JIN MENG GROUP LIMITED
TABLE OF CONTENTS
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Weilian Jin Meng Group Limited :
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Weilian Jin Meng Group Limited (“the Company”) as of December 31, 2019 and 2018, and the related consolidated statements of loss and comprehensive loss, stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial positions of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the period then ended, in conformity with accounting principles generally accepted in the United States.
Going concern uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company incurred losses from operations, has net current liabilities and accumulated deficits that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Emphasis of Matter
The Company has significant transactions with related parties, which are described in Note 12 to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis, as the requisite conditions of competitive, free market dealings may not exist.
/s/ Audit Alliance LLP
We have served as the Company’s auditor since 2020.
Singapore
February 2, 2021
F-3
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF DECEMBER 31, 2019 AND 2018
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| US$ | US$ | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 23,046 | 2,419 | ||||||
| Other receivables | 78,385 | 15,222 | ||||||
| Inventory | 69,518 | - | ||||||
| Prepayment | 129,879 | - | ||||||
| Amount due from related parties | 57,446 | 18,586 | ||||||
| Total current assets | 358,274 | 36,227 | ||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | 104,432 | 11,810 | ||||||
| Intangible assets | 76,546 | - | ||||||
| Operating lease right-of-use assets | 613,831 | 70,412 | ||||||
| Total non-current assets | 794,809 | 82,222 | ||||||
| Total assets | 1,153,083 | 118,449 | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 131,247 | - | ||||||
| Income tax payables | 5,808 | - | ||||||
| Other payables and accruals | 181,942 | 79,592 | ||||||
| Advance from customers | 458,165 | - | ||||||
| Amount due to related parties | 95,772 | - | ||||||
| Current operating lease liabilities | 243,959 | 7,077 | ||||||
| Total current liabilities | 1,116,893 | 86,669 | ||||||
| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities | 369,872 | 63,335 | ||||||
| Total non-current liabilities | 369,872 | 63,335 | ||||||
| Total liabilities | 1,486,765 | 150,004 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIT) | ||||||||
| Share capital ($0.00001 par value, 1,000,000,000 shares issued and outstanding for the year ended December 31, 2019 and 2018) | 10,000 | 10,000 | ||||||
| Additional paid in capital | (2,731 | ) | (2,731 | ) | ||||
| Foreign currency translation reserves | 4,547 | 1,593 | ||||||
| Accumulated deficit | (345,498 | ) | (40,417 | ) | ||||
| Total deficit | (333,682 | ) | (31,555 | ) | ||||
| Total liabilities and equity | 1,153,083 | 118,449 | ||||||
The accompanying notes are an integral part of the financial statements.
F-4
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| US$ | US$ | |||||||
| Revenue | 2,107,465 | - | ||||||
| Cost of revenue | (275,916 | ) | - | |||||
| Gross profit | 1,831,549 | - | ||||||
| Selling and marketing expenses | (200,042 | ) | - | |||||
| General and administrative expense | (1,917,263 | ) | (39,334 | ) | ||||
| Total operating expenses | (2,117,305 | ) | (39,334 | ) | ||||
| Operating loss | (285,756 | ) | (39,334 | ) | ||||
| Other expenses, net | (13,459 | ) | (4 | ) | ||||
| Loss before income taxes | (299,215 | ) | (39,338 | ) | ||||
| Income (taxes) benefits | (5,866 | ) | - | |||||
| Net loss for the year | (305,081 | ) | (39,338 | ) | ||||
| Foreign currency translation differences | 2,954 | 1,635 | ||||||
| Total comprehensive loss for the year | (302,127 | ) | (37,703 | ) | ||||
The accompanying notes are an integral part of the financial statements.
F-5
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| Additional | Foreign Currency | Accumulated Deficit | ||||||||||||||||||||||
Share | paid in Capital | Translation Reserve | Unrestricted | Statutory Reserve | Total | |||||||||||||||||||
| US$ | US$ | US$ | US$ | US$ | US$ | |||||||||||||||||||
| Balance at January 1, 2018 | 10,000 | (10,000 | ) | (42 | ) | (1,079 | ) | - | (1,121 | ) | ||||||||||||||
| Capital injection | - | 7,269 | - | - | - | 7,269 | ||||||||||||||||||
| Loss for the year | - | - | - | (39,338 | ) | - | (39,338 | ) | ||||||||||||||||
| Other comprehensive income | - | - | 1,635 | - | - | 1,635 | ||||||||||||||||||
| Balance at December 31, 2018 | 10,000 | (2,731 | ) | 1,593 | (40,417 | ) | - | (31,555 | ) | |||||||||||||||
| Loss for the year | - | - | - | (311,975 | ) | 6,894 | (305,081 | ) | ||||||||||||||||
| Other comprehensive income | - | - | 2,954 | - | - | 2,954 | ||||||||||||||||||
| Balance at December 31, 2019 | 10,000 | (2,731 | ) | 4,547 | (352,392 | ) | 6,894 | (333,682 | ) | |||||||||||||||
The accompanying notes are an integral part of the financial statements.
F-6
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| US$ | US$ | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | (305,081 | ) | (39,338 | ) | ||||
| Adjustments for: | ||||||||
| Depreciation and amortization | 28,002 | 607 | ||||||
| Changes in: | ||||||||
| Other receivables | (63,970 | ) | (15,856 | ) | ||||
| Inventory | (70,109 | ) | - | |||||
| Prepayment | (130,983 | ) | - | |||||
| Accounts payable | 132,362 | - | ||||||
| Income tax payables | 5,857 | - | ||||||
| Other payables and accruals | 104,279 | 82,570 | ||||||
| Advance from customers | 462,058 | - | ||||||
| Amount due from (to) related parties | 49,310 | (31,212 | ) | |||||
| Net cash used in operating activities | 211,725 | (3,229 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Additions to leasehold improvements and equipment | (110,911 | ) | (4,465 | ) | ||||
| Additions to intangible assets | (79,984 | ) | - | |||||
| Net cash provided by investing activities | (190,895 | ) | (4,465 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Capital injection | - | 7,269 | ||||||
| Net cash provided by financing activities | - | 7,269 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (203 | ) | 162 | |||||
| Net increase in cash and cash equivalents | 20,627 | (263 | ) | |||||
| Cash and cash equivalents at the beginning of year | 2,419 | 2,682 | ||||||
| Cash and cash equivalents at the end of year | 23,046 | 2,419 | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 302,396 | 17,547 | ||||||
| Income taxes paid | 5,866 | - | ||||||
The accompanying notes are an integral part of the financial statements.
F-7
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
| 1. | DESCRIPTION OF BUSINESS |
WLJM Cayman was incorporated in the Cayman Islands under the Cayman Islands Companies Law on June 30, 2020. The Company does not conduct any substantive operations on its own but instead conducts its business operations through its subsidiaries in in the Peoples’ Republic of China (the “PRC”).
Wei Lian Jin Meng (Hong Kong) Co., Ltd. (“WLJM HK”) was incorporated in Hong Kong under the Hong Kong Companies’ Ordinance (Chapter 622), on August 5, 2020. Wei Lian Jin Meng (Hong Kong) Co., Ltd. is a 100% owned subsidiary of WLJM Cayman.
Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. (“JYWM WFOE”) was incorporated in the Peoples’ Republic of China (the “PRC”) on November 24, 2020. JYWM WFOE is a 100% owned subsidiary of WLJM HK.
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) was incorporated in the Peoples’ Republic of China (the “PRC”) on October 17, 2017. Shenzhen Wei Lian is a 100% owned subsidiary of Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. Shenzhen Wei Lian wholesales coffee beans to retail partners and corporate customers.
Dongguan Dishi Coffee Limited (“Dongguan Dishi”) was incorporated in the Peoples’ Republic of China (the “PRC”) on October 25, 2018. Dongguan Dishi is a 100% owned subsidiary of Shenzhen Wei Lian. Dongguan Dishi merchandizes coffee beans for Shenzhen Wei Lian.
Shenzhen Nainiang Coffee Art Museum Limited (“Shenzhen Nainiang”) was incorporated in the Peoples’ Republic of China (the “PRC”) on June 20, 2019. Shenzhen Nainiang is a 100% owned subsidiary of Shenzhen Wei Lian. Shenzhen Nainiang had not generated any revenues in the fiscal year 2019. Shenzhen Nainiang plans to operate on self-own coffee stores or to cooperate with selective retail partners to manage the coffee stores. Shenzhen Nainiang will sell cups of freshly brewed coffee in the coffee stores. The Company was evaluating the number of stores to be opened subsequent to September 30, 2020, given the Covid-19 situation.
The reorganization of WLJM Cayman and its subsidiaries (collectively referred to as the “Company) was completed on December 24, 2020. Pursuant to the reorganization, WLJM Cayman became the holding company of the companies, which were under the common control of the controlling shareholder before and after the reorganization. Accordingly, the Company’s financial statements have been prepared on a consolidated basis by applying the predecessor value method as if the reorganization had been completed at the beginning of the earliest reporting period.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Basis of Presentation |
The accompanying financial statements include the balances and results of operations of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchanges Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. (“US GAAP”).
The accompanying financial statements are presented on the basis that the Company is a going concern. The going concern assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
F-8
The Company incurred net loss of $305,081 and $39,338 during the year ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the Company had net current liability of $758,619 and a deficit on equity of $333,682.
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the shareholders of the Company. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, the shareholders of the Company indicated the intent and ability to provide additional equity financing.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| (b) | Basis of Consolidation |
Pursuant to the reorganization, Wei Lian Jin Meng Group Limited became the holding company of the companies, which were under the common control of the controlling shareholders before and after the reorganization. Accordingly, the Company’s financial statements have been prepared on a consolidated basis by applying the predecessor value method as if the reorganization had been completed at the beginning of the earliest reporting period.
The consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Company for the relevant periods include the results and cash flows of all companies now comprising the Company from the earliest date presented or since the date when the subsidiaries and/or businesses first came under the common control of the controlling shareholders, wherever the period is shorter.
The consolidated statements of financial position of the Company as of December 31, 2019 and 2018 have been prepared to present the assets and liabilities of the subsidiaries using the existing book values from the controlling shareholders’ perspective. No adjustments are made to reflect fair values, or to recognize any new assets or liabilities as a result of the reorganization.
All intra-group and inter-company transactions and balances have been eliminated on consolidation.
| (c) | Use of estimates |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent liabilities at the balance sheet date, and revenue and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the valuation allowance for deferred tax assets, economic lives and impairment of leasehold improvements and equipment, allowance for doubtful accounts and etc.. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
F-9
| (d) | Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. All cash and cash equivalents relate to cash on hand and cash at bank at December 31, 2019 and 2018.
The Renminbi is not freely convertible into foreign currencies. Under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the Company is permitted to exchange Renminbi for foreign currencies through banks that are authorized to conduct foreign exchange business.
| (e) | Leasehold Improvement and Equipment |
An item of leasehold improvement and equipment is stated at cost less any accumulated depreciation and any accumulated allowance for decrease in value (if any).
The cost of an item of leasehold improvement and equipment comprises its purchase price, import duties and non-refundable purchase taxes (after deducting trade discounts and rebates) and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the initial estimate of costs of dismantling and removing the item, and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period.
The cost of replacing part of leasehold improvement and equipment is included in the carrying amount of the asset when it is probable that future economic benefits will flow to the Company and the carrying amount of those replaced parts is derecognized. Repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
Depreciation is calculated on the straight-line basis to write off the cost of each asset to its residual value over the estimated useful life as follows:
| Leasehold improvement | Shorter of the lease term or estimated useful life |
| Equipment | 5 years |
| Machinery | 10 years |
| Computer equipment and software | 3 years |
| Motor vehicle | 4 years |
The assets’ residual value, useful lives, and depreciation method are regularly reviewed.
F-10
| (f) | Impairment of long-lived assets |
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Whenever there is an indication showing a permanent decrease in the amount of leasehold improvement and equipment; such as an evidence of obsolescence or physical damage of an asset, significant changes in the manner in which an asset is used or is expected to be used, the Company shall recognize loss on decrease in value of leasehold improvement and equipment in the statement of income where the carrying amount of asset is higher than the recoverable amount. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. The Company did not record any impairment losses on long-lived assets during the years ended December 31, 2019 and 2018.
| (g) | Revenue Recognition |
The Company recognizes revenue from coffee bean sales, net of value-added taxes, upon delivery at such time title passes to the customer. Customers are required to pay in advance before making sales orders and the advance is initially recorded as advance from customers.
The Company’s revenue recognition policy is in compliance with ASU No. 2014-09, Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount:
| (i) | identification of the services in the contract; | |
| (ii) | determination of whether the services are performance obligations, including whether they are distinct in the context of the contract; | |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; | |
| (iv) | allocation of the transaction price to the performance obligations; and | |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
F-11
| (h) | Research and Development Costs |
Research and development costs are expensed as incurred. Research and development costs included in general and administrative expenses for the years ended December 31, 2019 and 2018 was $99,687 and $nil, respectively.
| (i) | Operating leases |
The Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes, to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
| (j) | Foreign Currency Translation |
The Company’s reporting currency is the U.S. dollar and the functional currency is the Chinese Renminbi (“RMB”). All assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of equity.
Transactions in currencies other than the functional currencies during the year are converted into the applicable functional currencies at the applicable rates of exchange prevailing at the dates of the transactions. Exchange gains and losses are recognized in the statements of operations.
The exchange rates utilized as follows:
| 2019 | 2018 | |||||||
| Year-end RMB exchange rate | 6.96 | 6.88 | ||||||
| Average annual RMB exchange rate | 6.90 | 6.60 | ||||||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
| (k) | 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 the RMB into other 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. All the Company’s cash and cash equivalents are in RMB.
F-12
| (l) | Fair Value |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when valuing the asset or liability. Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within 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
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 assets or liabilities.
| (m) | Fair Value of financial instruments |
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivables, other receivables, prepayments, accounts payable, other payables and advance from customers. The carrying amounts of these balances approximate their fair values due to the short-term maturities of these instruments.
| (n) | Inventories |
Inventories primarily consist of packing materials and finished goods, which are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the period in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the period the impairment or loss occurs. No allowance for obsolete finished goods for the year ended December 31, 2019 and 2018.
F-13
| (o) | Income Taxes |
Income tax expense comprises current and deferred taxation and is recognized in profit or loss except to the extent that it relates to items recognized directly in other comprehensive income or equity, in which case it is recognized directly in other comprehensive income or equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable with respect to previous periods.
The Company accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities, net of operating loss carry forwards and credits, by applying enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in the statements of operations in the period of change.
The Company accounts for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when the Company believes that it is more likely than not that the tax position will be sustained on examination by the tax authorities based on the technical merits of the position. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expenses.
| (p) | Comprehensive income |
Comprehensive income includes net income and foreign currency translation adjustments. Comprehensive income is reported in the statements of comprehensive income.
| (q) | Concentration of credit risk |
Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of December 31, 2019, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The Company did not have any customers constituting 10% or more of the net revenues in the fiscal years 2019 and 2018.
| (r) | Recent accounting pronouncements |
Recent accounting pronouncements adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU 2014-09. The Company adopted this ASU on January 1, 2018 and determined it had no impact on its consolidated financial statements as of December 31, 2019 and 2018.
F-14
In January 2016, the FASB issued a new pronouncement ASU 2016-01 Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
ASU 2016-01 was further amended in February 2018 by ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU 2016-01. This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issued.
ASU 2016-01 and ASU 2018-03 are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively. The Company adopted this ASU on January 1, 2018 and determined it had no impact on its consolidated financial statements as of December 31, 2019 and 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company early adopted this standard for the fiscal year 2018, resulted in the recognition of right-of-use assets of $613,831 and $70,412 as of December 31, 2019 and 2018, respectively; and the recognition of operating lease liabilities of $613,831 and $70,412 as of December 31, 2019 and 2018, respectively.
In November 2016, the FASB issued ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this ASU on update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this Update should be applied using a retrospective transition method each period presented. The Company adopted this ASU on January 1, 2018 and determined it had no impact on its consolidated financial statements as of December 31, 2019 and 2018.
In January 2017, the FASB issued ASU 2017-01: Business Combinations (Topic 805): Clarifying the Determination of Business. The Update requires that when substantially all of the fair value of the gross assets acquired (or dispose of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU on update (1) required that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim period within those periods. Early adoption of the amendments in this Update is allowed. The amendments in this Update should be applied prospectively on or after the effective date. No disclosure are required at transition. The Company adopted this pronouncement on its consolidated financial statements as of and for the year ended December 31, 2019 and 2018.
F-15
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For smaller public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
| 3. | OTHER RECEIVABLES |
Other receivables mainly consist of refundable rental deposits and cash advance to a third party for holding an exhibition for marketing and promotion purpose. The balances are unsecured, non-interest bearing and repayable on demand.
| 4. | INVENTORY |
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Raw materials (1) | $ | 36,849 | $ | - | ||||
| Finished goods | 32,669 | - | ||||||
| $ | 69,518 | $ | - | |||||
| (1) | Raw materials mainly consist of unprocessed coffee beans and packaging materials |
| 5. | PREPAYMENT |
Prepayment mainly consists of (i) prepaid consultancy fee amounting to $43,085 (RMB 300,000) for services in connection to the reverse merger transaction to a third party; and (ii) prepaid research and development expenses amounting to $50,265 (RMB350,000) to a third party for developing a new product.
| 6. | LEASEHOLD IMPROVEMENT AND EQUIPMENT, NET |
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Leasehold improvement | $ | 60,186 | $ | - | ||||
| Equipment | 15,614 | 12,032 | ||||||
| Machinery | 30,531 | 116 | ||||||
| Computer equipment and software | 16,311 | 244 | ||||||
| Motor vehicle | 6,793 | - | ||||||
| $ | 129,435 | $ | 12,393 | |||||
| Less: accumulated depreciation | (25,003 | ) | (583 | ) | ||||
| $ | 104,432 | $ | 11,810 | |||||
Depreciation expense for the years ended December 31, 2019 and 2018 was $24,635 and $607, respectively
| 7. | INTANGIBLE ASSETS |
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| APP Platform | $ | 79,885 | $ | - | ||||
| Less: accumulated amortization | (3,339 | ) | - | |||||
| $ | 76,546 | $ | - | |||||
Amortization expense for the years ended December 31, 2019 and 2018 was $3,368 and $nil, respectively
F-16
| 8. | OTHER PAYABLES AND ACCRUALS |
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Accrued payroll and welfare payable | $ | 72,808 | $ | 1,076 | ||||
| VAT and other taxes payable | 58,435 | - | ||||||
| Others (1) | 50,699 | 78,516 | ||||||
| $ | 181,942 | $ | 79,592 | |||||
| (1) | Others mainly consist of an advance of $72,692 (RMB500,000) from one customer in 2018 fiscal year who subsequently asked termination of the cooperative agreement and demand for full refund during the year ended December 31, 2019. The outstanding refundable balance with this customer was $33,031 (RMB230,000) as of December 31, 2019. |
| 9. | ADVANCE FROM CUSTOMERS |
The Company requires retail partners to sign cooperative agreement and to pay in advance for the supply of goods. Such advance is appropriated against future sales orders. These advances are interest free, unsecured and short-term in nature,
| 10. | INCOME TAXES |
WLJM Cayman was incorporated in the Cayman Islands. Under the current tax laws of the Cayman Islands, the Company and its subsidiaries are not subject to tax on their income or capital gains. In addition, upon of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
WLJM HK was incorporated in Hong Kong and is subject to an income tax rate of 16.5% for taxable income generated from operations in Hong Kong.
JYWM WFOE, Shenzhen Wei Lian, Dongguan Dishi and Shenzhen Nainiang were incorporated in the PRC and they are subject to profits tax rate at 25% for income generated and operation in the country.
The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company’s ability to generate taxable income during the carry forward period.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
The Company did not record deferred tax assets as of December 31, 2019 and 2018.
F-17
Income tax expense (benefits)
| For the year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Current tax expense | $ | 5,866 | $ | - | ||||
| Deferred tax benefits | - | - | ||||||
| $ | 5,866 | $ | - | |||||
A reconciliation of the effective tax rates from 25% statutory tax rates for the years ended December 31, 2019 and 2018 is as follows:
| For the year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Loss before tax | $ | (299,215 | ) | $ | (39,338 | ) | ||
| Tax benefit calculated at statutory tax rate | 25 | % | 25 | % | ||||
| Computed expected benefits | (74,804 | ) | (9,835 | ) | ||||
| Tax losses not recognized | 80,670 | 9,835 | ||||||
| $ | 5,866 | $ | - | |||||
| 11. | LEASES |
The adoption of the new lease guidance did not have a material impact on the Company’s results of operations or liquidity, but resulted in the recognition of operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The company has leases for the office, factory and warehouse in the PRC, under operating leases expiring on various dates through September 2023, which is classified as operating leases. There are no residual value guarantees and no restrictions or covenants imposed by the leases. Rent expense for the years ended December 31, 2019 and 2018 were $208,949 and $17,310, respectively. Cash paid for the operating leases was included in the operating cash flows. The Company early adopted this standard in the fiscal year 2018. As of December 31, 2019, the Company has $613,831 of right-of-use assets, $243,959 in current operating lease liabilities and $369,872 in non-current operating lease liabilities. As of December 31, 2018, the Company has $70,412 of right-of-use assets, $7,077 in current operating lease liabilities and $63,335 in non-current operating lease liabilities.
Significant assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to the Company over terms similar to the lease terms.
The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:
| 2019 | ||||
| Within 1 year | $ | 265,154 | ||
| After 1 year but within 5 years | 380,781 | |||
| Total lease payments | $ | 645,935 | ||
| Less: imputed interest | (32,104 | ) | ||
| Total lease obligations | 613,831 | |||
| Less: current obligations | (243,959 | ) | ||
| Long-term lease obligations | $ | 369,872 | ||
F-18
Other information:
| For the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow from operating leases | $ | 208,949 | $ | 17,310 | ||||
| Right-of-use assets obtained in exchange for operating lease liabilities | 302,396 | 17,547 | ||||||
| Remaining lease term for operating leases (years) | 2.88 | 3.88 | ||||||
| Weighted average discount rate for operating leases | 4.75 | % | 4.75 | % | ||||
| 12. | RELATED PARTIES TRANSACTIONS |
The Company had the following balances with related parties:
| (a) | Amount due from related parties |
| As of December 31, | ||||||||||
| Relationship | 2019 | 2018 | ||||||||
| Zhu Hong | Shareholder of the Company | - | 18,586 | |||||||
| Ye Aiyun | Shareholder of the Company | 57,446 | - | |||||||
| Total | $ | 57,446 | $ | 18,586 | ||||||
Amount due from related parties represents cash advance to Ye Aiyun, shareholder of the Company, amounting to $57,446 (RMB400,000) during the fiscal year 2019. The balance is unsecured, non-interest bearing and repayable on demand.
| (b) | Amount due to related parties |
| As of December 31, | ||||||||||
| Relationship | 2019 | 2018 | ||||||||
| Zhu Hong | Shareholder of the Company | 94,149 | 18,586 | |||||||
| Zhu Jian Yong | Shareholder of the Company | 1,623 | - | |||||||
| Total | $ | 95,772 | $ | 18,586 | ||||||
The balances represent cash advances to related parties, which were offset with the Company’s assets and expenses paid on behalf by the related parties. The balances with a related party are unsecured, non-interest bearing and repayable on demand.
F-19
| (c) | Transactions |
| For the years ended December 31, | ||||||||
| Cash advance from related parties | 2019 | 2018 | ||||||
| Zhu Jian Yong | 1,623 | - | ||||||
| Total | $ | 1,623 | $ | - | ||||
| For the years ended December 31, | ||||||||
| Cash advance to related parties | 2019 | 2018 | ||||||
| Zhu Hong | 1,858,057 | 56,404 | ||||||
| Ye Aiyun | 57,446 | - | ||||||
| Total | $ | 1,915,503 | $ | 56,404 | ||||
| For the years ended December 31, | ||||||||
| Cash repayment from related parties | 2019 | 2018 | ||||||
| Zhu Hong | 1,505,893 | 8,572 | ||||||
| Total | $ | 1,505,893 | $ | 8,572 | ||||
| For the years ended December 31, | ||||||||
| Assets purchased on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 45,806 | 8,444 | ||||||
| Total | $ | 45,806 | $ | 8,444 | ||||
| For the years ended December 31, | ||||||||
| Expense paid on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 360,737 | 16,619 | ||||||
| Total | $ | 360,737 | $ | 16,619 | ||||
| For the years ended December 31, | ||||||||
| Advance from customers received on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 498,775 | - | ||||||
| Total | $ | 498,775 | $ | - | ||||
| For the years ended December 31, | ||||||||
| Advance from customers refunded on behalf by related parties | 2019 | 2018 | ||||||
| Zhu Hong | 557,861 | - | ||||||
| Total | $ | 557,861 | $ | - | ||||
F-20
| 13. | RESERVES |
| (a) | Legal reserve |
Pursuant to the laws applicable to the PRC’s Foreign Investment Enterprises, the Company must make appropriations from after-tax profit to non-distributable reserve funds. Subject to certain cumulative limits, the general reserve requires annual appropriations of 10% of after-tax profits as determined under the PRC laws and regulations at each year-end until the balance reaches 50% of the PRC entity registered capital; the other reserve appropriations are at the Company’s discretion. These reserves can only be used for specific purposes of enterprise expansion and are not distributable as cash dividends. During the years ended December 31, 2019 and 2018, the Company accrued $6,894 and $nil of the legal reserve, respectively.
| (b) | Currency translation reserve |
The currency translation reserve represents translation differences arising from translation of foreign currency financial statements into the Company’s reporting currency.
| 14. | COMMITMENTS AND CONTINGENCIES |
Commitment of consultancy fee consist of a non-cancelable consultancy service agreement entered into with a third-party for the provision of services related to the US listing with the contract amount of $1,200,000. The outstanding committed contract amount is $484,821. As of December 31, 2019, the Company prepaid $43,085 consultancy fee (Note 5). The terms of the agreement are for various milestones stages to complete within two years through 2021. Future commitments within one year as of December 31, 2019 was $364,821. Future commitments more than one year as of December 31, 2019 was $120,000.
Except the above commitments and the operating lease commitment as disclosed at Note 6, there are no material commitments.
| 15. | SUBSEQUENT EVENTS |
The outbreak of coronavirus (COVID-19) in January 2020 has adversely affected the businesses significantly. Management is evaluating the impact and developing actions plan to minimize the effect of the COVID-19 pandemic and to recover business as soon as possible.
There is no other subsequent events have occurred that would require recognition or disclosure in the financial statements.
F-21
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
F-22
WEI LIAN JIN MENG GROUP LIMITED
TABLE OF CONTENTS
F-23
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except share data or otherwise stated)
AS OF SEPTEMBER 30, 2020 (UNAUDITED) AND DECEMBER 30, 2019 (AUDITED)
| September 30, 2020 | December 31, 2019 | |||||||
| US$ | US$ | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 100,705 | 23,046 | ||||||
| Accounts receivable | 137,268 | - | ||||||
| Other receivables | 243,285 | 78,385 | ||||||
| Inventory | 61,781 | 69,518 | ||||||
| Prepayment | 51,244 | 129,879 | ||||||
| Amount due from related parties | 73,632 | 57,446 | ||||||
| Total current assets | 667,915 | 358,274 | ||||||
| Non-current assets: | ||||||||
| Leasehold improvements and equipment, net | 88,569 | 104,432 | ||||||
| Intangible assets | - | 76,546 | ||||||
| Operating lease right-of-use assets | 406,299 | 613,831 | ||||||
| Total non-current assets | 494,868 | 794,809 | ||||||
| Total assets | 1,162,783 | 1,153,083 | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 124,003 | 131,247 | ||||||
| Income tax payables | 5,956 | 5,808 | ||||||
| Other payables and accruals | 349,128 | 181,942 | ||||||
| Advance from customers | 260,880 | 458,165 | ||||||
| Amount due to related parties | 942,296 | 95,772 | ||||||
| Current operating lease liabilities | 270,484 | 243,959 | ||||||
| Total current liabilities | 1,952,747 | 1,116,893 | ||||||
| Non-current liabilities: | ||||||||
| Non-current operating lease liabilities | 135,815 | 369,872 | ||||||
| Total non-current liabilities | 135,815 | 369,872 | ||||||
| Total liabilities | 2,088,562 | 1,486,765 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| EQUITY (DEFICIT) | ||||||||
| Share capital ($0.00001 par value, 1,000,000,000 shares issued and outstanding for the nine months ended September 30, 2020 and the year ended December 31, 2019) | 10,000 | 10,000 | ||||||
| Additional paid in capital | (2,731 | ) | (2,731 | ) | ||||
| Foreign currency translation reserves | (20,969 | ) | 4,547 | |||||
| Accumulated deficit | (912,079 | ) | (345,498 | ) | ||||
| Total deficit | (925,779 | ) | (333,682 | ) | ||||
| Total liabilities and equity | 1,162,783 | 1,153,083 | ||||||
The accompanying notes are an integral part of the financial statements.
F-24
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
| For the nine months ended September 31, | ||||||||
| 2020 | 2019 | |||||||
| US$ | US$ | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenue | 927,889 | 1,271,032 | ||||||
| Cost of revenue | (155,541 | ) | (177,073 | ) | ||||
| Gross profit | 772,348 | 1,093,959 | ||||||
| Selling and marketing expenses | (84,087 | ) | (70,696 | ) | ||||
| General and administrative expense | (1,256,113 | ) | (1,306,051 | ) | ||||
| Total operating expenses | (1,340,200 | ) | (1,376,747 | ) | ||||
| Operating loss | (567,852 | ) | (282,788 | ) | ||||
| Other expenses, net | 1,271 | (11,054 | ) | |||||
| Loss before income taxes | (566,581 | ) | (293,842 | ) | ||||
| Income taxes | - | (9 | ) | |||||
| Net loss for the year | (566,581 | ) | (293,851 | ) | ||||
| Foreign currency translation differences | (25,516 | ) | 13,111 | |||||
| Total comprehensive loss for the year | (592,097 | ) | (280,740 | ) | ||||
The accompanying notes are an integral part of the financial statements.
F-25
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(In U.S. Dollars, except share data or otherwise stated)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
| Additional | Foreign Currency | Accumulated Deficit | ||||||||||||||||||||||
Share | paid in Capital | Translation Reserve | Unrestricted | Statutory Reserve | Total | |||||||||||||||||||
| US$ | US$ | US$ | US$ | US$ | US$ | |||||||||||||||||||
| Balance at January 1, 2019 (audited) | 10,000 | (2,731 | ) | 1,593 | (40,417 | ) | - | (31,555 | ) | |||||||||||||||
| Loss for the nine months | - | - | - | (293,851 | ) | - | (293,851 | ) | ||||||||||||||||
| Other comprehensive income | - | - | 13,111 | - | - | 13,111 | ||||||||||||||||||
| Balance at September 30, 2019 (unaudited) | 10,000 | (2,731 | ) | 14,704 | (334,268 | ) | - | (312,295 | ) | |||||||||||||||
| Balance at January 1, 2020 (audited) | 10,000 | (2,731 | ) | 4,547 | (352,392 | ) | 6,894 | (333,682 | ) | |||||||||||||||
| Loss for the nine months | - | - | - | (566,581 | ) | - | (566,581 | ) | ||||||||||||||||
| Other comprehensive income | - | - | (25,516 | ) | - | - | (25,516 | ) | ||||||||||||||||
| Balance at September 30, 2020 (unaudited) | 10,000 | (2,731 | ) | (20,969 | ) | (918,973 | ) | 6,894 | (925,779 | ) | ||||||||||||||
The accompanying notes are an integral part of the financial statements.
F-26
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars, except share data or otherwise stated)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| US$ | US$ | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | (566,581 | ) | (293,851 | ) | ||||
| Adjustments for: | ||||||||
| Depreciation and amortization | 17,976 | 10,211 | ||||||
| Impairment of intangible assets | 76,199 | - | ||||||
| Changes in: | ||||||||
| Accounts receivables | (133,260 | ) | - | |||||
| Other receivables | (158,153 | ) | (79,569 | ) | ||||
| Inventory | 9,225 | (37,063 | ) | |||||
| Prepayment | 79,544 | (51,334 | ) | |||||
| Accounts payable | (10,269 | ) | 110,292 | |||||
| Other payables and accruals | 157,817 | 117,650 | ||||||
| Advance from customers | (202,827 | ) | 892 | |||||
| Amount due from (to) related parties | 805,152 | 381,206 | ||||||
| Net cash used in operating activities | 74,823 | 158,434 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to leasehold improvements and equipment | - | (109,522 | ) | |||||
| Additions to intangible assets | - | (30,574 | ) | |||||
| Net cash provided by investing activities | - | (140,096 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 2,836 | (835 | ) | |||||
| Net increase in cash and cash equivalents | 77,659 | 17,503 | ||||||
| Cash and cash equivalents at the beginning of year | 23,046 | 2,419 | ||||||
| Cash and cash equivalents at the end of the nine-month period | 100,705 | 19,922 | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | 291,480 | 276,869 | ||||||
| Income taxes paid | - | 9 | ||||||
The accompanying notes are an integral part of the financial statements.
F-27
WEI LIAN JIN MENG GROUP LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDTED)
| 1. | DESCRIPTION OF BUSINESS |
WLJM Cayman was incorporated in the Cayman Islands under the Cayman Islands Companies Law on June 30, 2020. The Company does not conduct any substantive operations on its own but instead conducts its business operations through its subsidiaries in in the Peoples’ Republic of China (the “PRC”).
Wei Lian Jin Meng (Hong Kong) Co., Ltd. (“WLJM HK”) was incorporated in Hong Kong under the Hong Kong Companies’ Ordinance (Chapter 622), on August 5, 2020. Wei Lian Jin Meng (Hong Kong) Co., Ltd. is a 100% owned subsidiary of WLJM Cayman.
Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. (“JYWM WFOE”) was incorporated in the Peoples’ Republic of China (the “PRC”) on November 24, 2020. JYWM WFOE is a 100% owned subsidiary of WLJM HK.
Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) was incorporated in the Peoples’ Republic of China (the “PRC”) on October 17, 2017. Shenzhen Wei Lian is a 100% owned subsidiary of JYWM WFOE. Shenzhen Wei Lian wholesales coffee beans to retail partners and corporate customers.
Dongguan Dishi Coffee Limited (“Dongguan Dishi”) was incorporated in the Peoples’ Republic of China (the “PRC”) on October 25, 2018. Dongguan Dishi is a 100% owned subsidiary of Shenzhen Wei Lian. Dongguan Dishi merchandizes coffee beans for Shenzhen Wei Lian.
Shenzhen Nainiang Coffee Art Museum Limited (“Shenzhen Nainiang”) was incorporated in the Peoples’ Republic of China (the “PRC”) on June 20, 2019. Shenzhen Nainiang is a 100% owned subsidiary of Shenzhen Wei Lian. Shenzhen Nainiang had not generated any revenues in the fiscal year 2019. Shenzhen Nainiang plans to operate on self-own coffee stores or to cooperate with selective retail partners to manage the coffee stores. Shenzhen Nainiang will sell cups of freshly brewed coffee in the coffee stores. The Company was evaluating the number of stores to be opened subsequent to September 30, 2020, given the Covid-19 situation.
The reorganization of WLJM Cayman and its subsidiaries (collectively referred to as the “Company) was completed on December 24, 2020. Pursuant to the reorganization, WLJM Cayman became the holding company of the companies, which were under the common control of the controlling shareholder before and after the reorganization. Accordingly, the Company’s financial statements have been prepared on a consolidated basis by applying the predecessor value method as if the reorganization had been completed at the beginning of the earliest reporting period.
F-28
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Basis of Presentation |
The accompanying financial statements include the balances and results of operations of the Company have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchanges Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. (“US GAAP”).
The accompanying financial statements are presented on the basis that the Company is a going concern. The going concern assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred net loss of $566,581 and $293,851 during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the Company had net current liability of $1,284,832 and a deficit on equity of $925,779.
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the shareholders of the Company. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, the shareholders of the Company indicated the intent and ability to provide additional equity financing.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| (b) | Basis of Consolidation |
Pursuant to the reorganization, WLJM Cayman became the holding company of the companies, which were under the common control of the controlling shareholders before and after the reorganization. Accordingly, the Company’s financial statements have been prepared on a consolidated basis by applying the predecessor value method as if the reorganization had been completed at the beginning of the earliest reporting period.
The consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Company for the relevant periods include the results and cash flows of all companies now comprising the Company from the earliest date presented or since the date when the subsidiaries and/or businesses first came under the common control of the controlling shareholders, wherever the period is shorter.
The consolidated statements of financial position of the Company as of September 30, 2020 and December 31, 2019 have been prepared to present the assets and liabilities of the subsidiaries using the existing book values from the controlling shareholders’ perspective. No adjustments are made to reflect fair values, or to recognize any new assets or liabilities as a result of the reorganization.
All intra-group and inter-company transactions and balances have been eliminated on consolidation.
F-29
| (c) | Use of estimates |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent liabilities at the balance sheet date, and revenue and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include the valuation allowance for deferred tax assets, economic lives and impairment of leasehold improvements and equipment, allowance for doubtful accounts and etc.. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.
| (d) | Cash and Cash Equivalents |
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. All cash and cash equivalents relate to cash on hand and cash at bank at September 30, 2020 and December 31, 2019.
The Renminbi is not freely convertible into foreign currencies. Under the PRC Foreign Exchange Control Regulations and Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, the Company is permitted to exchange Renminbi for foreign currencies through banks that are authorized to conduct foreign exchange business.
| (e) | Accounts Receivable |
Accounts receivable are recognized and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful accounts receivable is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. No allowance for doubtful accounts was made for the nine months ended September 30, 2020.
No customers had an accounts receivable balance greater than 10% of total accounts receivable at September 30, 2020.
| (f) | Leasehold Improvement and Equipment |
An item of leasehold improvement and equipment is stated at cost less any accumulated depreciation and any accumulated allowance for decrease in value (if any).
The cost of an item of leasehold improvement and equipment comprises its purchase price, import duties and non-refundable purchase taxes (after deducting trade discounts and rebates) and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the initial estimate of costs of dismantling and removing the item, and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period.
The cost of replacing part of leasehold improvement and equipment is included in the carrying amount of the asset when it is probable that future economic benefits will flow to the Company and the carrying amount of those replaced parts is derecognized. Repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.
F-30
Depreciation is calculated on the straight-line basis to write off the cost of each asset to its residual value over the estimated useful life as follows:
| Leasehold improvement | Shorter of the lease term or estimated useful life |
| Equipment | 5 years |
| Machinery | 10 years |
| Computer equipment and software | 3 years |
| Motor vehicle | 4 years |
The assets’ residual value, useful lives, and depreciation method are regularly reviewed.
| (g) | Impairment of long-lived assets |
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Whenever there is an indication showing a permanent decrease in the amount of leasehold improvement and equipment; such as an evidence of obsolescence or physical damage of an asset, significant changes in the manner in which an asset is used or is expected to be used, the Company shall recognize loss on decrease in value of leasehold improvement and equipment in the statement of income where the carrying amount of asset is higher than the recoverable amount. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. The Company recorded an impairment loss on intangible assets of $76,199 and $nil during the nine months ended September 30, 2020 and 2019, respectively.
| (h) | Revenue Recognition |
The Company recognizes revenue from coffee bean sales, net of value-added taxes, upon delivery at such time title passes to the customer. Customers are required to pay in advance before making sales orders and the advance is initially recorded as advance from customers.
The Company’s revenue recognition policy is in compliance with ASU No. 2014-09, Revenue from Contracts with Customers that revenue is recognized when a customer obtains control of promised goods and is recognized in an amount that reflects the consideration that the Company expects to receive in exchange for those goods. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount:
| (i) | identification of the services in the contract; | |
| (ii) | determination of whether the services are performance obligations, including whether they are distinct in the context of the contract; | |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; | |
| (iv) | allocation of the transaction price to the performance obligations; and | |
| (v) | recognition of revenue when (or as) the Company satisfies each performance obligation. |
F-31
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time, typically upon delivery.
For all reporting periods, the Company has not disclosed the value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or less, which is an optional exemption that is permitted under the adopted rules.
| (i) | Research and Development Costs |
Research and development costs are expensed as incurred. Research and development costs included in general and administrative expenses for the nine months ended September 30, 2020 and 2019 was $49,986 and $38,334, respectively.
| (j) | Operating leases |
The Company determines if an arrangement contains a lease at inception. The Company elected the practical expedient, for all asset classes, to account for each lease component of a contract and its associated non-lease components as a single lease component, rather than allocating a standalone value to each component of a lease. For purposes of calculating operating lease obligations under the standard, the Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company’s leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. The discount rate used to measure a lease obligation is usually the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
| (k) | Foreign Currency Translation |
The Company’s reporting currency is the U.S. dollar and the functional currency is the Chinese Renminbi (“RMB”). All assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of equity.
F-32
Transactions in currencies other than the functional currencies during the year are converted into the applicable functional currencies at the applicable rates of exchange prevailing at the dates of the transactions. Exchange gains and losses are recognized in the statements of operations.
The exchange rates utilized as follows:
| 2020 | 2019 | |||||||
| Period-end/ Year-end RMB exchange rate | 6.79 | 6.96 | ||||||
| Average nine-month period RMB exchange rate | 6.99 | 6.86 | ||||||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
| (l) | 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 the RMB into other 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. All the Company’s cash and cash equivalents are in RMB.
| (m) | Fair Value |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when valuing the asset or liability. Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within 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
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 assets or liabilities.
F-33
| (n) | Fair Value of financial instruments |
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivables, other receivables, prepayments, accounts payable, other payables and advance from customers. The carrying amounts of these balances approximate their fair values due to the short-term maturities of these instruments.
| (o) | Inventories |
Inventories primarily consist of packing materials and finished goods, which are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the period in which the revenue is recognized. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the period the impairment or loss occurs. No allowance for obsolete finished goods for the nine months ended September 30, 2020 and 2019.
| (p) | Income Taxes |
Income tax expense comprises current and deferred taxation and is recognized in profit or loss except to the extent that it relates to items recognized directly in other comprehensive income or equity, in which case it is recognized directly in other comprehensive income or equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable with respect to previous periods.
The Company accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities, net of operating loss carry forwards and credits, by applying enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in the statements of operations in the period of change.
The Company accounts for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when the Company believes that it is more likely than not that the tax position will be sustained on examination by the tax authorities based on the technical merits of the position. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expenses.
| (q) | Comprehensive income |
Comprehensive income includes net income and foreign currency translation adjustments. Comprehensive income is reported in the statements of comprehensive income.
| (r) | Concentration of credit risk |
Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of September 30, 2020 and December 31, 2019, substantially all of the Company’s cash and cash equivalents were deposited with financial institutions with high-credit ratings and quality. The Company did not have any customers constituting 10% or more of the net revenues in the nine-month period 2020 and 2019.
F-34
| (s) | Recent accounting pronouncements |
Recent accounting pronouncements adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration that a company expects to be entitled to in exchange for the goods or services. To achieve this principle, a company must apply five steps including identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when (or as) the company satisfies the performance obligations. Additional quantitative and qualitative disclosure to enhance the understanding about the nature, amount, timing, and uncertainty of revenue and cash flows is also required. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the following two aspects of ASU 2014-09: identifying performance obligations and licensing implementation guidance. The effective date of ASU 2016-10 is the same as the effective date of ASU 2014-09.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company early adopted this standard for the fiscal year 2018, resulted in the recognition of right-of-use assets of $406,299 and $613,831 as of September 30, 2020 and December 31, 2019, respectively; and the recognition of operating lease liabilities of $406,299 and $613,831 as of September 30, 2020 and December 31, 2019, respectively.
Recently issued accounting pronouncements not yet adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For smaller public business entities, the amendments in this Update are effective for fiscal years beginning after January 1, 2023, including interim periods within those fiscal years. All entities may adopt the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.
F-35
The Company reviews new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
| 3. | OTHER RECEIVABLES |
As of September 30, 2020, other receivables mainly consist of employees advance to be spent for company purposes and refundable rental deposits. The balances are unsecured, non-interest bearing and repayable on demand.
| 4. | INVENTORY |
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| Raw materials (1) | $ | 43,259 | $ | 36,849 | ||||
| Finished goods | 18,522 | 32,669 | ||||||
| $ | 61,781 | $ | 69,518 | |||||
| (1) | Raw materials mainly consist of unprocessed coffee beans and packaging materials |
| 5. | PREPAYMENT |
As of September 30, 2020, prepayment mainly consists of administrative expenses paid in advance being subsequently received.
| 6. | LEASEHOLD IMPROVEMENT AND EQUIPMENT, NET |
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| Leasehold improvement | $ | 61,715 | $ | 60,186 | ||||
| Equipment | 16,011 | 15,614 | ||||||
| Machinery | 31,307 | 30,531 | ||||||
| Computer equipment and software | 19,570 | 16,311 | ||||||
| Motor vehicle | 6,966 | 6,793 | ||||||
| $ | 135,569 | $ | 129,435 | |||||
| Less: accumulated depreciation | (47,000 | ) | (25,003 | ) | ||||
| $ | 88,569 | $ | 104,432 | |||||
Depreciation expense for the nine months ended September 30, 2020 and 2019 was $17,976 and $10,211, respectively
| 7. | INTANGIBLE ASSETS |
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| APP Platform | $ | - | $ | 79,885 | ||||
| Less: accumulated amortization | - | (3,339 | ) | |||||
| $ | - | $ | 76,546 | |||||
Amortization expense for the nine months ended September 30, 2020 and 2019 was $nil and $1,759, respectively. The Company recorded an impairment loss on intangible assets of $76,199 to write off the APP Platform during the nine months ended September 30, 2020.
F-36
| 8. | OTHER PAYABLES AND ACCRUALS |
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| Accrued payroll and welfare payable | $ | 178,710 | $ | 72,808 | ||||
| VAT and other taxes payable | 89,297 | 58,435 | ||||||
| Others (1) | 81,121 | 50,699 | ||||||
| $ | 349,128 | $ | 181,942 | |||||
| (1) | Others mainly consist of payables for rental expenses of $19,686 (RMB133,679) and consultancy fee of $29,452 (RMB200,000). |
| 9. | ADVANCE FROM CUSTOMERS |
The Company requires retail partners to sign cooperative agreement and to pay in advance for the supply of goods. Such advance is appropriated against future sales orders. These advances are interest free, unsecured and short-term in nature,
| 10. | INCOME TAXES |
WLJM Cayman was incorporated in the Cayman Islands. Under the current tax laws of the Cayman Islands, the Company and its subsidiaries are not subject to tax on their income or capital gains. In addition, upon of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
WLJM HK was incorporated in Hong Kong and is subject to an income tax rate of 16.5% for taxable income generated from operations in Hong Kong.
JYWM WFOE, Shenzhen Wei Lian, Dongguan Dishi and Shenzhen Nainiang were incorporated in the PRC and they are subject to profits tax rate at 25% for income generated and operation in the country.
The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company’s ability to generate taxable income during the carry forward period.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
The Company did not record deferred tax assets as of September 30, 2020 and December 31, 2019.
Income tax expense (benefits)
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Current tax expense | $ | - | $ | 9 | ||||
| Deferred tax benefits | - | - | ||||||
| $ | - | $ | 9 | |||||
F-37
A reconciliation of the effective tax rates from 25% statutory tax rates for the nine months ended September 30, 2020 and 2019is as follows:
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Loss before tax | $ | (566,581 | ) | $ | (293,851 | ) | ||
| Tax benefit calculated at statutory tax rate | 25 | % | 25 | % | ||||
| Computed expected benefits | (141,645 | ) | (73,463 | ) | ||||
| Tax losses not recognized | 141,645 | 73,454 | ||||||
| $ | - | $ | 9 | |||||
| 11. | LEASES |
The adoption of the new lease guidance did not have a material impact on the Company’s results of operations or liquidity, but resulted in the recognition of operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The company has leases for the office, factory and warehouse in the PRC, under operating leases expiring on various dates through September 2023, which is classified as operating leases. There are no residual value guarantees and no restrictions or covenants imposed by the leases. Rent expense for the nine months ended September 30, 2020 and 2019 were $196,005 and $164,579, respectively. Cash paid for the operating leases was included in the operating cash flows. The Company early adopted this standard in the fiscal year 2018. As of September 30, 2020, the Company has $406,299 of right-of-use assets, $270,484 in current operating lease liabilities and $135,815 in non-current operating lease liabilities. As of September 30, 2019, the Company has $621,752 of right-of-use assets, $202,908 in current operating lease liabilities and $418,844 in non-current operating lease liabilities.
Significant assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to the Company over terms similar to the lease terms.
The Company’s future minimum payments under long-term non-cancelable operating leases are as follows:
| 2020 | ||||
| Within 1 year | $ | 293,891 | ||
| After 1 year but within 5 years | 161,660 | |||
| Total lease payments | $ | 455,551 | ||
| Less: imputed interest | (49,252 | ) | ||
| Total lease obligations | 406,299 | |||
| Less: current obligations | (270,484 | ) | ||
| Long-term lease obligations | $ | 135,815 | ||
Other information:
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow from operating leases | $ | 196,005 | $ | 164,579 | ||||
| Right-of-use assets obtained in exchange for operating lease liabilities | 291,480 | 276,869 | ||||||
| Remaining lease term for operating leases (years) | 3 | 4 | ||||||
| Weighted average discount rate for operating leases | 4.75 | % | 4.75 | % | ||||
F-38
| 12. | RELATED PARTIES TRANSACTIONS |
The Company had the following balances with related parties:
| (a) | Amount due from related parties |
| Relationship | As of September 30, 2020 | As of December 31, 2019 | ||||||||
| Ye Aiyun | Shareholder of the Company | 58,906 | 57,446 | |||||||
| Shenzhen Nainiang Wine Limited | Zhu Hong is the shareholder | 14,726 | - | |||||||
| Total | $ | 73,632 | $ | 57,446 | ||||||
Amount due from related parties represents cash advance to Ye Aiyun, shareholder of the Company, amounting to $57,446 (RMB400,000) during the fiscal year 2019. The balance is unsecured, non-interest bearing and repayable on demand.
| (b) | Amount due to related parties |
| Relationship | As of September 30, 2020 | As of December 31, 2019 | ||||||||
| Zhu Hong | Shareholder of the Company | 910,780 | 94,149 | |||||||
| Zhu Jian Yong | Shareholder of the Company | 31,117 | 1,623 | |||||||
| Shenzhen Weilian Jin Meng Culture Spreading Limited | Zhu Hong is the shareholder | 399 | - | |||||||
| Total | $ | 942,296 | $ | 95,772 | ||||||
The balances represent cash advances to related parties, which were offset with the Company’s assets and expenses paid on behalf by the related parties. The balances with a related party are unsecured, non-interest bearing and repayable on demand.
F-39
| (c) | Transactions |
| For the nine months ended September 30, | ||||||||
| Cash advance from related parties | 2020 | 2019 | ||||||
| Zhu Jian Yong | 29,494 | 1,581 | ||||||
| Total | $ | 29.494 | $ | - | ||||
| For the nine months ended September 30, | ||||||||
| Cash advance to related parties | 2020 | 2019 | ||||||
| Zhu Hong | 31,903 | 1,504,947 | ||||||
| Shenzhen Nainiang Wine Limited | 14,726 | - | ||||||
| Total | $ | 46,629 | $ | 1,504,947 | ||||
| For the nine months ended September 30, | ||||||||
| Cash repayment from related parties | 2020 | 2019 | ||||||
| Zhu Hong | 830,554 | 1,092,098 | ||||||
| Total | $ | 830,554 | $ | 1,092,098 | ||||
| For the nine months ended September 30, | ||||||||
| Assets purchased on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | - | 44,239 | ||||||
| Total | $ | - | $ | 44,239 | ||||
| For the nine months ended September 30, | ||||||||
| Expense paid on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | 16,964 | 332,790 | ||||||
| Shenzhen Weilian Jin Meng Culture Spreading Limited | 399 | - | ||||||
| Total | $ | 17,363 | $ | 332,790 | ||||
| For the nine months ended September 30, | ||||||||
| Advance from customers received on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | 758 | 192,150 | ||||||
| Total | $ | 758 | $ | 192,150 | ||||
| For the nine months ended September 30, | ||||||||
| Advance from customers refunded on behalf by related parties | 2020 | 2019 | ||||||
| Zhu Hong | - | 538,783 | ||||||
| Total | $ | - | $ | 538,783 | ||||
| 13. | RESERVES |
| (a) | Legal reserve |
Pursuant to the laws applicable to the PRC’s Foreign Investment Enterprises, the Company must make appropriations from after-tax profit to non-distributable reserve funds. Subject to certain cumulative limits, the general reserve requires annual appropriations of 10% of after-tax profits as determined under the PRC laws and regulations at each year-end until the balance reaches 50% of the PRC entity registered capital; the other reserve appropriations are at the Company’s discretion. These reserves can only be used for specific purposes of enterprise expansion and are not distributable as cash dividends. The Company did not accrue the legal reserve during the nine months ended September 30, 2020 and 2019.
F-40
| (b) | Currency translation reserve |
The currency translation reserve represents translation differences arising from translation of foreign currency financial statements into the Company’s reporting currency.
| 14. | COMMITMENTS AND CONTINGENCIES |
Commitment of consultancy fee consist of a non-cancelable consultancy service agreement entered into with a third-party for the provision of services related to the US listing with the contract amount of $1,200,000. The outstanding committed contract amount is $120,000. The terms of the agreement are for various milestones stages to complete within two years through 2021. Future commitments within one year as of September 30, 2020 was $120,000. No future commitments more than one year as of September 30, 2020.
Except the above commitments and the operating lease commitment as disclosed at Note 6, there are no material commitments.
| 15. | SUBSEQUENT EVENTS |
The outbreak of coronavirus (COVID-19) in January 2020 has adversely affected the businesses significantly. Management is evaluating the impact and developing actions plan to minimize the effect of the COVID-19 pandemic and to recover business as soon as possible.
There is no other subsequent events have occurred that would require recognition or disclosure in the financial statements.
F-41
(b) Pro Forma Financial Information.
The pro forma financial information required by this Item 9.01(b) are set forth below beginning on page F-43.
F-42
FOUNTAIN HEALTHY AGING, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2019
AND
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2020
F-43
FOUNTAIN HEALTHY AGING, INC.
TABLE OF CONTENTS
F-44
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2019
| FHAI | WLJM Group | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||
| ASSETS | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and cash equivalents | $ | - | $ | 23,046 | $ | $ | 23,046 | |||||||||||
| Other receivables | - | 78,385 | 78,385 | |||||||||||||||
| Inventory | - | 69,518 | 69,518 | |||||||||||||||
| Prepayment | - | 129,879 | 129,879 | |||||||||||||||
| Amount due from related parties | - | 57,446 | 57,446 | |||||||||||||||
| Total current assets | - | 358,274 | 358,274 | |||||||||||||||
| Non-current assets: | ||||||||||||||||||
| Leasehold improvements and equipment, net | - | 104,432 | 104,432 | |||||||||||||||
| Intangible assets | 76,546 | 76,546 | ||||||||||||||||
| Operating lease right-of-use assets | - | 613,831 | 613,831 | |||||||||||||||
| Total non-current assets | - | 794,809 | 794,809 | |||||||||||||||
| Total assets | $ | - | $ | 1,153,083 | $ | $ | 1,153,083 | |||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||
| Current liabilities: | ||||||||||||||||||
| Accounts payable | $ | - | $ | 131,247 | $ | $ | 131,247 | |||||||||||
| Income tax payables | - | 5,808 | 5,808 | |||||||||||||||
| Other payables and accruals | 3,587 | 181,942 | 185,529 | |||||||||||||||
| Advance from customers | - | 458,165 | 458,165 | |||||||||||||||
| Loan payable – related party | 11,828 | - | 11,828 | |||||||||||||||
| Amount due to related parties | - | 95,772 | 95,772 | |||||||||||||||
| Current operating lease liabilities | - | 243,959 | 243,959 | |||||||||||||||
| Total current liabilities | 15,415 | 1,116,893 | 1,132,308 | |||||||||||||||
| Non-current liabilities: | ||||||||||||||||||
| Non-current operating lease liabilities | - | 369,872 | 369,872 | |||||||||||||||
| Total non-current liabilities | - | 369,872 | 369,872 | |||||||||||||||
| Total liabilities | $ | 15,415 | $ | 1,486,765 | $ | $ | 1,502,180 | |||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||||
| EQUITY (DEFICIT) | ||||||||||||||||||
| Share capital: | ||||||||||||||||||
| Series A Preferred stock | $ | 1,000 | $ | - | $ | - | (a) | $ | 1,000 | |||||||||
| Common stock | - | 10,000 | (4,000 | ) | (a) | 6,000 | ||||||||||||
| Additional paid in capital | 758,256 | (2,731 | ) | (770,671 | ) | (a) | (15,146 | ) | ||||||||||
| Foreign currency translation reserve | - | 4,547 | 4,547 | |||||||||||||||
| Accumulated deficit | (774,671 | ) | (345,498 | ) | 774,671 | (a) | (345,498 | ) | ||||||||||
| Total deficit | (15,415 | ) | (333,682 | ) | (349,097 | ) | ||||||||||||
| Total liabilities and equity | $ | - | $ | 1,153,083 | $ | $ | 1,153,083 | |||||||||||
See accompanying notes to unaudited pro forma combined financial statements.
F-45
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2020
| FHAI | WLJM Group | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||
| ASSETS | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and cash equivalents | $ | - | $ | 100,705 | $ | $ | 100,705 | |||||||||||
| Accounts receivable | - | 137,268 | 137,268 | |||||||||||||||
| Other receivables | - | 243,285 | 243,285 | |||||||||||||||
| Inventory | - | 61,781 | 61,781 | |||||||||||||||
| Prepayment | - | 51,244 | 51,244 | |||||||||||||||
| Amount due from related parties | - | 73,632 | 73,632 | |||||||||||||||
| Total current assets | - | 667,915 | 667,915 | |||||||||||||||
| Non-current assets: | ||||||||||||||||||
| Leasehold improvements and equipment, net | - | 88,569 | 88,569 | |||||||||||||||
| Operating lease right-of-use assets | - | 406,299 | 406,299 | |||||||||||||||
| Total non-current assets | - | 494,868 | 494,868 | |||||||||||||||
| Total assets | $ | - | $ | 1,162,783 | $ | $ | 1,162,783 | |||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||||
| Current liabilities: | ||||||||||||||||||
| Accounts payable | $ | - | $ | 124,003 | $ | $ | 124,003 | |||||||||||
| Income tax payables | - | 5,956 | 5,956 | |||||||||||||||
| Other payables and accruals | 8,438 | 349,128 | 357,566 | |||||||||||||||
| Advance from customers | - | 260,880 | 260,880 | |||||||||||||||
| Amount due to related parties | 3,500 | 942,296 | 945,796 | |||||||||||||||
| Current operating lease liabilities | 11,828 | 270,484 | 282,312 | |||||||||||||||
| Total current liabilities | 23,766 | 1,952,747 | 1,976,513 | |||||||||||||||
| Non-current liabilities: | ||||||||||||||||||
| Non-current operating lease liabilities | - | 135,815 | 135,815 | |||||||||||||||
| Total non-current liabilities | - | 135,815 | 135,815 | |||||||||||||||
| Total liabilities | $ | 23,766 | $ | 2,088,562 | $ | $ | 2,112,328 | |||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||||
| EQUITY (DEFICIT) | ||||||||||||||||||
| Share capital: | ||||||||||||||||||
| Series A Preferred stock | $ | 1,000 | $ | - | $ | - | (a) | $ | 1,000 | |||||||||
| Common stock | - | 10,000 | (4,000 | ) | (a) | 6,000 | ||||||||||||
| Additional paid in capital | 758,256 | (2,731 | ) | (779,022 | ) | (a) | (23,497 | ) | ||||||||||
| Foreign currency translation reserve | - | (20,969 | ) | (20,969 | ) | |||||||||||||
| Accumulated deficit | (783,022 | ) | (912,079 | ) | 783,022 | (a) | (912,079 | ) | ||||||||||
| Total deficit | (23,766 | ) | (925,779 | ) | (949,545 | ) | ||||||||||||
| Total liabilities and equity | $ | - | $ | 1,162,783 | $ | $ | 1,162,783 | |||||||||||
See accompanying notes to unaudited pro forma combined financial statements.
F-46
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
| FHAI | WLJM Group | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||
| Revenue | $ | - | $ | 2,107,465 | $ | $ | 2,107,465 | |||||||||||
| Cost of revenue | - | (275,916 | ) | (275,916 | ) | |||||||||||||
| Gross profit | - | 1,831,549 | 1,831,549 | |||||||||||||||
| Selling and marketing | - | (200,042 | ) | (200,042 | ) | |||||||||||||
| General and administrative | (46,465 | ) | (1,917,263 | ) | (1,963,728 | ) | ||||||||||||
| Total operating expenses | (46,465 | ) | (2,117,305 | ) | (2,163,770 | ) | ||||||||||||
| Operating loss | (46,465 | ) | (285,756 | ) | (332,221 | ) | ||||||||||||
| Other expenses, net | - | (13,459 | ) | (13,459 | ) | |||||||||||||
| Loss before income taxes | (46,465 | ) | (299,215 | ) | (345,680 | ) | ||||||||||||
| Income taxes | - | (5,866 | ) | (5,866 | ) | |||||||||||||
| Net loss for the year | (46,465 | ) | (305,081 | ) | (351,546 | ) | ||||||||||||
| Foreign currency translation differences | - | 2,954 | 2,954 | |||||||||||||||
| Total comprehensive loss for the year | (46,465 | ) | (302,127 | ) | (348,592 | ) | ||||||||||||
| Loss per share: | ||||||||||||||||||
| Basic loss per share | (0.00 | ) | (0.00 | ) | ||||||||||||||
| Diluted loss per share | (0.00 | ) | (0.00 | ) | ||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||
| Basic | 101,391,465 | 701,391,465 | ||||||||||||||||
| Diluted | 201,391,465 | 801,391,465 | ||||||||||||||||
See accompanying notes to unaudited pro forma combined financial statements.
F-47
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
| FHAI | WLJM Group | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||
| Revenue | $ | - | $ | 927,889 | $ | $ | 927,889 | |||||||||||
| Cost of revenue | - | (155,541 | ) | (155,541 | ) | |||||||||||||
| Gross profit | - | 772,348 | 772,348 | |||||||||||||||
| Selling and marketing | - | (84,087 | ) | (84,087 | ) | |||||||||||||
| General and administrative | (8,351 | ) | (1,256,113 | ) | (1,264,464 | ) | ||||||||||||
| Total operating expenses | (8,351 | ) | (1,340,200 | ) | (1,348,551 | ) | ||||||||||||
| Operating loss | (8,351 | ) | (567,852 | ) | (576,203 | ) | ||||||||||||
| Other expenses, net | - | 1,271 | 1,271 | |||||||||||||||
| Loss before income taxes | (8,351 | ) | (566,581 | ) | (574,932 | ) | ||||||||||||
| Income taxes | - | - | - | |||||||||||||||
| Net loss for the year | (8,351 | ) | (566,581 | ) | (574,932 | ) | ||||||||||||
| Foreign currency translation differences | - | (25,516 | ) | (25,516 | ) | |||||||||||||
| Total comprehensive loss for the year | (8,351 | ) | (592,097 | ) | (600,448 | ) | ||||||||||||
| Loss per share: | ||||||||||||||||||
| Basic loss per share | (0.25 | ) | (0.00 | ) | ||||||||||||||
| Diluted loss per share | (0.00 | ) | (0.00 | ) | ||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||
| Basic | 33,983 | 600,033,983 | ||||||||||||||||
| Diluted | 100,033,983 | 700,033,983 | ||||||||||||||||
See accompanying notes to unaudited pro forma combined financial statements.
F-48
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
| 1. | Organization and Principal Activities |
Fountain Healthy Aging, Inc. (the “Company” or “we”) was incorporated under the laws of the State of Nevada on February 25, 2004 with the original company name of Celtic Cross Ltd., initially for the purpose of acquiring timeshare entities and additional like entities. For unknown reasons, the Company was later abandoned and ceased filings with the Nevada Secretary of State for more than ten years following December 2, 2008. Thereafter, on April 2019, the district court in Nevada appointed Custodian Ventures, LLC (“Custodian”) as the custodian of the Company upon an application for appointment of custodian filed by the Custodian. The Custodian brought the Company into active status with the State of Nevada, appointed directors and officers of the Company, and took control of the Company. Since April 2019, the Company has not engaged in any business, and has been a shell company.
On February 1, 2021, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”), with Wei Lian Jin Meng Group Limited, a limited liability company incorporated in the Cayman Islands (“WLJM Cayman” and together with its subsidiaries, the “WLJM Group”), and shareholders who together own shares constituting 100% of the issued and outstanding shares of WLJM Cayman (the “Sellers”). Pursuant to the terms of the Exchange Agreement, the Sellers transferred to the Company all of their shares of WLJM Cayman in exchange for the issuance of 600,000,000 shares (the “Shares”) of the Company’s common stock (the “Acquisition”). The Acquisition has been accounted for as a recapitalization of the Company, whereby WLJM Cayman is the accounting acquirer. As a result of the Acquisition, the Company is now a holding company, is engaged in providing products and services in the food and beverage industry, including producing and selling “coffee tea” products, which represent drinks made from a mixture of coffee and tea, black coffee products and other coffee products.
Immediately after completion of the Acquisition on February 2, 2020 (the “Closing Date”), the Company’s capital stock consisted of: (i) 750,000,000 shares of common stock, par value $0.00001 per share (“Common Stock”), authorized, of which 600,034,500 shares are issued and outstanding; and (ii) 100,000,000 shares of preferred stock, par value $0.00001 per share, of which all 100,000,000 shares are designated Series A Preferred Stock (“Series A Preferred Stock”), of which all 100,000,000 shares are issued and outstanding.
As a result of the Acquisition, as of the Closing Date the Company has ceased to fall under the definition of shell company as defined in Rule 12b-2 under the Exchange Act of 1934, as amended (the “Exchange Act”) and WLJM Cayman is now a wholly owned subsidiary. A copy of the Exchange Agreement is incorporated herein by reference and is filed as Exhibit 2.1 to this Current Report on Form 8-K.
For accounting purposes, the Share Exchange was treated as a reverse acquisition with WLJM Cayman as the acquirer and the Company as the acquired party. When we refer in this report to business and financial information for periods prior to the consummation of the Share Exchange, we are referring to the business and financial information of WLJM Group unless the context suggests otherwise.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of presentation
These pro forma combined financial statements, accompanying notes, and related disclosures have been prepared on an as-if basis assuming that the reverse takeover transaction between the Company and WLJM Cayman has been in effect since the beginning of the period present in the results of operations by combining the historical financial statements of the entities and eliminating any intercompany balances. Goodwill would not be recognized in this transaction, and the carrying values of the Company and WLJM Cayman are their respective historical values. Actual results combined results may have differed from those presented herein.
F-49
These financial statements have been prepared using the accrual basis of accounting in accordance with the generally accepted accounting principles (“GAAP”) in the United States. The Company’s fiscal year end is December 31 and the financial statements are presented in US dollars
Basis of Pro Forma combined financial statements
These pro forma combined financial statements include the accounts of the Company and the entities listed below. All intercompany accounts and transactions have been eliminated.
| Entity | Date of incorporation | Place of incorporation | Percentage of legal ownership by the Company | |||
| Wei Lian Jin Meng Group Limited (“WLJM Cayman”) | June 30, 2020 | Cayman Islands | 100% | |||
| Wei Lian Jin Meng (Hong Kong) Co., Ltd (“WLJM HK”) | August 5, 2020 | Hong Kong | 100% | |||
| Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. (“JYWM WFOE”) | November 24, 2020 | PRC | 100% | |||
| Shenzhen Wei Lian Jin Meng Electronic Commerce Limited (“Shenzhen Wei Lian”) | October 17, 2017 | PRC | 100% | |||
| Dongguan Dishi Coffee Limited (“Dongguan Dishi”) | October 25, 2018 | PRC | 100% | |||
| Shenzhen Nainiang Coffee Art Museum Limited (“Shenzhen Nainiang”) | June 20, 2019 | PRC | 100% |
Use of estimates
The preparation of the financial statements 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.
Foreign currency translation and re-measurement
The Company translates its foreign operations to the U.S. dollar in accordance with ASC 830, “Foreign Currency Matters”.
The reporting currency for the Company and its subsidiaries is the US dollar. The Company and WLJM HK’s functional currency is the U.S. dollar; JYWM WFOE, Shenzhen Wei Lian, Dongguan Dishi and Shenzhen Nainiang use the Chinese Renminbi (“RMB”) as their functional currency.
All assets and liabilities are translated at exchange rates at the balance sheet date and revenue and expenses are translated at the average yearly exchange rates and equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of equity.
F-50
Transactions in currencies other than the functional currencies during the year are converted into the applicable functional currencies at the applicable rates of exchange prevailing at the dates of the transactions. Exchange gains and losses are recognized in the consolidated statements of operations.
The exchange rates utilized as follows:
| September 30, 2020 | December 31, 2019 | |||||||
| Period-end/ Year-end RMB exchange rate | 6.79 | 6.96 | ||||||
| Average period/ annual RMB exchange rate | 6.99 | 6.86 | ||||||
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
| 3. | PRO FORMA ADJUSTMENTS |
The pro forma adjustments are based on management preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:
| (a) | Represents (1) 600,000,000 newly-issued shares of Common Stock of the Registrant, and (2) removing the Registrant’s accumulated deficit and adjusting equity for recapitalization. |
| 4. | EARNINGS PER SHARE |
The following table illustrates the calculation of pro forma loss per share:
Nine months September 30, | Year December 31, | |||||||
| Pro forma net loss | $ | (574,932 | ) | $ | (351,546 | ) | ||
| Weighted-average pro forma shares outstanding: | ||||||||
| Basic | 600,034,500 | 701,391,466 | ||||||
| Diluted | 700,034,500 | 801,391,466 | ||||||
| Loss per share | ||||||||
| Basic | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Diluted | (0.00 | ) | (0.00 | ) | ||||
| 5. | GOING CONCERN |
The accompanying financial statements are presented on the basis that the Company is a going concern. The going concern assumption contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred net loss of $574,932 and $351,546 during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the Company had net current liability of $1,308,598 and a deficit on equity of $949,545.
The ability to continue as a going concern is dependent upon the Company’s profit generating operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they become due. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance operations primarily through cash flow from revenue and capital contributions from the shareholders of the Company. In the event that the Company requires additional funding to finance the growth of the Company’s current and expected future operations as well as to achieve our strategic objectives, the shareholders of the Company indicated the intent and ability to provide additional equity financing.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on the Company’s ability to meet obligations as they become due and to obtain additional equity or alternative financing required to fund operations until sufficient sources of recurring revenues can be generated. There can be no assurance that the Company will be successful in its plans described above or in attracting equity or alternative financing on acceptable terms, or if at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
F-51
| (d) | Exhibits. |
| * | Incorporated by reference to the Registration Statement on Form SB-2, filed on December 15, 2005. |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| FOUNTAIN HEALTHY AGING, INC. | ||
| By: | /s/ Zhu Hong | |
| Name: | Zhu Hong | |
| Title: | Chief Executive Officer | |
| Dated: | February 2, 2021 | |
43
Exhibit 2.1
SHARE EXCHANGE AGREEMENT
by and among
FOUNTAIN HEALTHY AGING, INC.,
as the Purchaser,
WEI LIAN JIN MENG GROUP LIMITED,
as the Company
and
The SHAREHOLDERS OF THE COMPANY NAMED HEREIN,
as the Sellers
Dated as of February 1, 2021
| Table of Contents | ||
| ARTICLE I. | ||
| THE SHARE EXCHANGE | ||
| 1.1 | Purchase and Sale of Shares | 1 |
| 1.2 | Consideration | 1 |
| 1.3 | Company Shareholder Consent | 2 |
| ARTICLE II. | ||
| CLOSING | ||
| 2.1 | Closing | 2 |
| ARTICLE III. | ||
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER |
||
| 3.1 | Due Organization and Good Standing | 2 |
| 3.2 | Authorization; Binding Agreement | 2 |
| 3.3 | Governmental Approvals | 3 |
| 3.4 | No Conflict With Other Instruments | 3 |
| 3.5 | Capitalization | 3 |
| 3.6 | Public Company Filings and Purchaser Financials | 4 |
| 3.7 | Absence of Certain Changes | 5 |
| 3.8 | Compliance with Laws | 5 |
| 3.9 | Actions; Orders; Permits | 5 |
| 3.10 | Taxes and Returns | 5 |
| 3.11 | Properties | 5 |
| 3.12 | Material Contracts | 6 |
| 3.13 | Transactions with Affiliates | 6 |
| 3.14 | Finders and Brokers | 6 |
| 3.15 | Ownership of Exchange Shares | 6 |
| 3.16 | Independent Investigation | 6 |
| ARTICLE IV. | ||
| REPRESENTATIONS AND WARRANTIES OF THE COMPANY | ||
| 4.1 | Due Organization and Good Standing | 7 |
| 4.2 | Authorization; Binding Agreement | 7 |
| 4.3 | Capitalization | 7 |
| 4.4 | Subsidiaries | 8 |
| 4.5 | Governmental Approvals | 9 |
| 4.6 | No Conflict With Other Instruments | 9 |
| 4.7 | Financial Statements | 9 |
| 4.8 | Absence of Certain Changes | 10 |
| 4.9 | Compliance with Laws | 10 |
| 4.10 | Company Permits | 10 |
| 4.11 | Litigation | 11 |
| 4.12 | Material Contracts | 11 |
| 4.13 | Intellectual Property | 13 |
| 4.14 | Taxes and Returns | 14 |
| 4.15 | Real Property | 15 |
| 4.16 | Personal Property | 16 |
-i-
| 4.17 | Title to and Sufficiency of Assets | 16 |
| 4.18 | Employee Matters | 16 |
| 4.19 | Benefit Plans | 17 |
| 4.20 | Environmental Matters | 17 |
| 4.21 | Transactions with Related Persons | 18 |
| 4.22 | Insurance | 19 |
| 4.23 | Top Customers and Suppliers | 19 |
| 4.24 | Books and Records | 19 |
| 4.25 | Accounts Receivable | 19 |
| 4.26 | Certain Business Practices | 20 |
| 4.27 | Investment Company Act | 20 |
| 4.28 | Finders and Investment Bankers | 20 |
| 4.29 | Independent Investigation | 20 |
| 4.30 | Information Supplied | 21 |
| 4.31 | Disclosure | 21 |
| ARTICLE V. | ||
| REPRESENTATIONS AND WARRANTIES OF THE SELLERS | ||
| 5.1 | Due Organization and Good Standing | 21 |
| 5.2 | Authorization; Binding Agreement | 21 |
| 5.3 | Ownership | 21 |
| 5.4 | Governmental Approvals | 22 |
| 5.5 | Non-Contravention | 22 |
| 5.6 | No Litigation | 22 |
| 5.7 | Investment Representations | 22 |
| 5.8 | Lock-Up Provisions | 23 |
| 5.9 | Finders and Investment Bankers | 23 |
| 5.10 | Independent Investigation | 24 |
| 5.11 | Information Supplied | 24 |
| 5.12 | Disclosure | 24 |
| ARTICLE VI. | ||
| COVENANTS | ||
| 6.1 | Access and Information | 24 |
| 6.2 | Conduct of Business of the Company | 25 |
| 6.3 | Conduct of Business of the Purchaser | 27 |
| 6.4 | Annual and Interim Financial Statements | 29 |
| 6.5 | Purchaser Public Filings | 29 |
| 6.6 | No Solicitation | 29 |
| 6.7 | No Trading | 30 |
| 6.8 | Notification of Certain Matters | 30 |
| 6.9 | Efforts | 31 |
| 6.10 | Further Assurances | 31 |
| 6.11 | Stockholder Approval | 31 |
| 6.12 | Public Announcements; SEC Filings | 32 |
| 6.13 | Confidential Information | 32 |
| 6.14 | Litigation Support | 33 |
| 6.15 | Documents and Information | 33 |
| 6.16 | Supplemental Disclosure Schedules | 33 |
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| ARTICLE VII. | ||
| SURVIVAL | ||
| 7.1 | Survival | 34 |
| ARTICLE VIII. | ||
| CLOSING CONDITIONS | ||
| 8.1 | Conditions to Each Party’s Obligations | 35 |
| 8.2 | Conditions to Obligations of the Company and the Sellers | 35 |
| 8.3 | Conditions to Obligations of the Purchaser | 36 |
| 8.4 | Frustration of Conditions | 37 |
| ARTICLE IX. | ||
| TERMINATION AND EXPENSES | ||
| 9.1 | Termination | 37 |
| 9.2 | Effect of Termination | 38 |
| 9.3 | Fees and Expenses | 39 |
| ARTICLE X. | ||
| RELEASES | ||
| 10.1 | Release and Covenant Not to Sue | 39 |
| ARTICLE XI. | ||
| MISCELLANEOUS | ||
| 11.1 | Notices | 39 |
| 11.2 | Binding Effect; Assignment | 39 |
| 11.3 | Third Parties | 40 |
| 11.4 | Arbitration | 40 |
| 11.5 | Governing Law; Jurisdiction | 40 |
| 11.6 | WAIVER OF JURY TRIAL | 41 |
| 11.7 | Specific Performance | 41 |
| 11.8 | Severability | 41 |
| 11.9 | Amendment | 41 |
| 11.10 | Waiver | 41 |
| 11.11 | Entire Agreement | 42 |
| 11.12 | Interpretation | 42 |
| 11.13 | Counterparts | 42 |
| ARTICLE XII. | ||
| DEFINITIONS | ||
| 12.1 | Certain Definitions | 43 |
INDEX OF ANNEXES AND EXHIBITS
Purchaser Disclosure Schedules
Company Disclosure Schedules
| Annex | Description |
| Annex I | List of Sellers |
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SHARE EXCHANGE AGREEMENT
This Share Exchange Agreement (this “Agreement”) is made and entered into as of February 1, 2021 by and among (i) Fountain Healthy Aging, Inc., a corporation incorporated in the State of Nevada (the “Purchaser”), (ii) Wei Lian Jin Meng Group Limited, an exempted company incorporated in the Cayman Islands (the “Company”) and (iii) each of the shareholders of the Company named on Annex I hereto (collectively, the “Sellers”). The Purchaser, the Company and the Sellers are sometimes referred to herein individually as a “Party” and, collectively, as the “Parties”. Capitalized terms, unless otherwise defined, shall have the meanings ascribed to such terms in Article XII hereof.
RECITALS
WHEREAS, the Purchaser is a publicly-held corporation organized under the laws of the State of Nevada;
WHEREAS, the Company is a privately-held exempted company organized under the laws of the Cayman Islands;
WHEREAS, the Sellers collectively own all of the issued and outstanding shares of the Company representing a 100% interest in the Company;
WHEREAS, the Purchaser agrees to acquire 100% of the issued and outstanding shares of the Company from the Sellers in exchange for the issuance of 600,000,000 shares of the Purchaser’s common stock, par value $0.00001 per share (the “Common Stock”), which shall represent approximately 99.8% of the issued and outstanding shares of the Purchaser’s Common Stock (the “Exchange”) and on the Closing Date (as defined below), the Sellers will become stockholders of the Purchaser; and
WHEREAS, for Federal income tax purposes, it is intended that the Exchange qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the premises set forth above, which are incorporated in this Agreement as if fully set forth below, and the representations, warranties, covenants and agreements contained in this Agreement, and intending to be legally bound hereby, the Parties agree as follows:
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I.
THE SHARE EXCHANGE
1.1 Purchase and Sale of Shares. At the Closing and subject to and upon the terms and conditions of this Agreement, the Sellers shall sell, transfer, convey, assign and deliver to the Purchaser, and the Purchaser shall purchase, acquire and accept from the Sellers, all of the issued and outstanding shares (being 1,000,000,000 shares of US$0.00001 par value each) of the Company (collectively, the “Purchased Shares”), free and clear of all Liens (other than potential restrictions on resale under applicable securities Laws).
1.2 Consideration. At the Closing and subject to and upon the terms and conditions of this Agreement, in full payment for the Purchased Shares, the Purchaser shall issue and deliver to the Sellers an aggregate of six hundred million (600,000,000) shares of Common Stock (the “Exchange Shares”). Each Seller shall receive its pro rata share of the Exchange Shares based on the percentage of Purchased Shares owned by such Seller as compared to the total number of Purchased Shares owned by all Sellers (such Seller’s “Pro Rata Share”). Each Seller’s Pro Rata Share is set forth in Annex I.
1.3 Company Shareholder Consent. Each Seller, as a shareholder of the Company, hereby approves, authorizes and consents to the Company’s execution and delivery of this Agreement, the performance by the Company of its obligations hereunder and the consummation by the Company of the transactions contemplated hereby. Each Seller acknowledges and agrees that the consents set forth herein are intended and shall constitute such consent of the Sellers as may be required (and shall, if applicable, operate as a written shareholder resolution of the Company) pursuant to the Company Charter, any other agreement in respect of the Company to which any Seller is a party and all applicable Laws.
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II.
closing
2.1 Closing. The closing of the transactions contemplated by this Agreement (“Closing”) shall occur at a mutually agreeable time and place within five business days after all the closing conditions to this Agreement have been satisfied or waived, or at such other date, time or place as the Purchaser and the Company may agree (the date of such Closing, the “Closing Date”).
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III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Except as set forth in the disclosure schedules delivered by the Purchaser to the Company on the date hereof (the “Purchaser Disclosure Schedules”), the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, or in the Public Company Reports (as defined below), the Purchaser represents and warrants to the Company, as follows:
3.1 Due Organization and Good Standing. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Nevada. The Purchaser has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Purchaser is duly qualified or licensed and in good standing to conduct business in each jurisdiction in which the character of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except for any deviations from any of the foregoing that would not reasonably be expected to have a Material Adverse Effect on the Purchaser. The Purchaser has heretofore made available to the Company accurate and complete copies of the Purchaser Charter, as currently in effect.
3.2 Authorization; Binding Agreement. The Purchaser has all requisite corporate power and authority to execute and deliver this Agreement, to perform the Purchaser’s obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby (a) have been duly and validly authorized by the board of directors of the Purchaser, and (b) no other corporate proceedings, other than as set forth elsewhere in the Agreement, on the part of the Purchaser are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Purchaser and, assuming the due authorization, execution and delivery of this Agreement by the other Parties hereto, constitutes the valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, except to the extent that enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting the enforcement of creditors’ rights generally or by any applicable statute of limitation or by any valid defense of set-off or counterclaim, and the fact that equitable remedies or relief (including the remedy of specific performance) are subject to the discretion of the court from which such relief may be sought (collectively, the “Enforceability Exceptions”).
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3.3 Governmental Approvals. No Consent of or with any Governmental Authority, on the part of the Purchaser is required to be obtained or made in connection with the execution, delivery or performance by the Purchaser of this Agreement or the consummation by the Purchaser of the transactions contemplated hereby, other than (a) such filings as may be required in any jurisdiction where the Purchaser is qualified or authorized to conduct business as a foreign corporation in order to maintain such qualification or authorization, (b) such filings as contemplated by this Agreement, (c) any filings required with the OTC Markets Group with respect to the transactions contemplated by this Agreement, (d) applicable requirements, if any, of the Securities Act, the Exchange Act, and/or any state “blue sky” securities Laws, and the rules and regulations thereunder, and (e) where the failure to obtain or make such Consents or to make such filings or notifications, would not reasonably be expected to have a Material Adverse Effect on the Purchaser.
3.4 No Conflict With Other Instruments. The execution and delivery by the Purchaser of this Agreement, the consummation by the Purchaser of the transactions contemplated hereby, and compliance by the Purchaser with any of the provisions hereof will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Purchaser is a party or to which any of its assets, properties or operations are subject, except to the extent that such breach would not reasonably be expected to have a Material Adverse Effect on the Purchaser.
3.5 Capitalization.
(a) The Purchaser is authorized to issue (i) 750,000,000 shares of Common Stock, par value $0.00001 per share, of which 34,500 are issued and outstanding prior to the Closing, and (ii) 100,000,000 shares of preferred stock, par value $0.00001 per share, of which 100,000,000 are designated Series A Preferred Stock, of which 100,000,000 are issued and outstanding prior to the Closing. All outstanding shares of Common Stock are duly authorized, validly issued, fully paid and non-assessable and not subject to or issued in violation of any purchase option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the NRS, the Purchaser Charter or any Contract to which the Purchaser is a party. None of the outstanding Common Stock has been issued in violation of any applicable securities Laws.
(b) Prior to giving effect to the transactions contemplated by this Agreement, except as set forth in the Public Company Reports, the Purchaser does not have any Subsidiaries or own any equity interests in any other Person.
(c) Except as set forth in the Public Company Reports, there are no (i) outstanding options, warrants, puts, calls, convertible securities, preemptive or similar rights, (ii) bonds, debentures, notes or other Indebtedness having general voting rights or that are convertible or exchangeable into securities having such rights or (iii) subscriptions or other rights, agreements, arrangements, Contracts or commitments of any character (A) relating to the issued or unissued shares of the Purchaser, or (B) obligating the Purchaser to issue, transfer, deliver or sell or cause to be issued, transferred, delivered, sold or repurchased any options or shares or securities convertible into or exchangeable for such shares, or (C) obligating the Purchaser to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment for such capital shares. Other than as expressly set forth in this Agreement or in the Public Company Reports, there are no outstanding obligations of the Purchaser to repurchase, redeem or otherwise acquire any shares of the Purchaser or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Person, and there are no stockholders agreements, voting trusts or other agreements or understandings to which the Purchaser is a party with respect to the voting of any shares of the Purchaser.
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(d) All Indebtedness of the Purchaser is disclosed in the Public Company Reports or has been otherwise disclosed to the Company and the Sellers. No Indebtedness of the Purchaser contains any restriction upon: (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by the Purchaser or (iii) the ability of the Purchaser to grant any Lien on its properties or assets.
(e) Since January 1, 2020, and except as contemplated by this Agreement or disclosed in the Public Company Reports, the Purchaser has not declared or paid any distribution or dividend in respect of its shares and has not repurchased, redeemed or otherwise acquired any of its shares, and the Purchaser’s board of directors has not authorized any of the foregoing.
3.6 Public Company Filings and Purchaser Financials.
(a) The Purchaser has not, since October 1, 2019, filed any forms, reports, schedules, statements, registrations statements, prospectuses or other documents required to be filed or furnished by the Purchaser with the SEC under the Securities Act and/or the Exchange Act, or with the OTC Markets Group under the rules of the OTC Markets Group. The Purchaser has delivered to the Company, where requested, all of the following: (i) the Purchaser’s Annual Reports for each fiscal year of the Purchaser beginning with the year ended December 31, 2018, (ii) the Purchaser’s Quarterly Reports for each fiscal quarter following the Annual Report for the year ended December 31, 2019, and (iii) all other forms, reports, registration statements, prospectuses and other documents (other than preliminary materials) filed by the Purchaser with the SEC and the OTC Markets Group since the beginning of the first fiscal year referred to in clause (i) above (the forms, reports, registration statements, prospectuses and other documents referred to in clauses (i), (ii) and (iii) above, whether or not available through EDGAR, are, collectively, the “Public Company Reports”). The Public Company Reports (y) were prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (z) did not, as of their respective effective dates (in the case of Public Company Reports that are registration statements filed pursuant to the requirements of the Securities Act) and at the time they were filed with the SEC or the OTC Markets Group (in the case of all other Public Company Reports) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. As used in this Section 3.6, the term “file” shall be broadly construed to include any manner permitted by SEC or OTC Markets Group rules and regulations in which a document or information is furnished, supplied or otherwise made available to the SEC or the OTC Markets Group. As of the date of this Agreement, (A) the Common Stock is quoted on the Pink Sheets maintained by the OTC Markets Group, (B) the Purchaser has not received any written deficiency notice from the OTC Markets Group relating to the continued quoting requirements of the Common Stock, (C) there are no Actions pending or, to the Knowledge of the Purchaser, threatened against the Purchaser with respect to any intention by such entity to suspend, prohibit or terminate the quoting of the Common Stock on the Pink Sheets, and (D) the Common Stock is in compliance with all of the applicable listing and corporate governance rules of the OTC Markets Group.
(b) The financial statements and notes contained or incorporated by reference in the Public Company Reports or otherwise provided to the Company and the Sellers (the “Purchaser Financials”), fairly present in all material respects the financial position and the results of operations, changes in stockholders’ equity, and cash flows of the Purchaser at the respective dates of and for the periods referred to in such financial statements, all in accordance with (i) GAAP methodologies applied on a consistent basis throughout the periods involved and (ii) Regulation S-X or Regulation S-K, as applicable (except as may be indicated in the notes thereto and for the omission of notes and audit adjustments in the case of unaudited quarterly financial statements to the extent permitted by Regulation S-X or Regulation S-K, as applicable).
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(c) Except as and to the extent reflected or reserved against in the Purchaser Financials, the Purchaser has not incurred any Liabilities or obligations of the type required to be reflected on a balance sheet in accordance with GAAP that are not adequately reflected or reserved on or provided for in the Purchaser Financials, other than Liabilities of the type required to be reflected on a balance sheet in accordance with GAAP that have been incurred in the ordinary course of business and which would not reasonably be expected to have a Material Adverse Effect on the Purchaser.
3.7 Absence of Certain Changes. As of the date of this Agreement, the Purchaser has, since September 30, 2020, not been subject to a Material Adverse Effect.
3.8 Compliance with Laws. The Purchaser is in compliance with all Laws applicable to it and the conduct of its business except for such noncompliance which would not reasonably be expected to have a Material Adverse Effect on the Purchaser, and the Purchaser has not received written notice alleging any violation of applicable Law in any material respect by the Purchaser.
3.9 Actions; Orders; Permits. There is no pending or, to the Knowledge of the Purchaser, threatened Action to which the Purchaser is subject which would reasonably be expected to have a Material Adverse Effect on the Purchaser. There is no material Action that the Purchaser has pending against any other Person. The Purchaser is not subject to any material Orders of any Governmental Authority, nor are any such Orders pending. The Purchaser holds all Permits necessary to lawfully conduct its business as presently conducted, and to own, lease and operate its assets and properties, all of which are in full force and effect, except where the failure to hold such Permit or for such Permit to be in full force and effect would not reasonably be expected to have a Material Adverse Effect on the Purchaser.
3.10 Taxes and Returns.
(a) The Purchaser has or will have timely filed, or caused to be timely filed, all Tax Returns by it, which Tax Returns are true, accurate, correct and complete, and has paid, collected or withheld, or caused to be paid, collected or withheld, all Taxes required to be paid, collected or withheld, other than such Taxes for which adequate reserves in the Purchaser Financials have been established in accordance with GAAP. There are no audits, examinations, investigations or other proceedings pending against the Purchaser in respect of any Tax, and the Purchaser has not been notified in writing of any proposed Tax claims or assessments against the Purchaser (other than, in each case, claims or assessments for which adequate reserves in the Purchaser Financials have been established in accordance with GAAP or are immaterial in amount). There are no Liens with respect to any Taxes upon any of the Purchaser’s assets, other than Permitted Liens. The Purchaser has no outstanding waivers or extensions of any applicable statute of limitations to assess any material amount of Taxes. There are no outstanding requests by the Purchaser for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any Tax Return.
(b) Since September 30, 2019, the Purchaser has not (i) changed any Tax accounting methods, policies or procedures except as required by a change in Law, (ii) made, revoked, or amended any material Tax election, (iii) filed any amended Tax Returns or claim for refund or (iv) entered into any closing agreement affecting or otherwise settled or compromised any material Tax Liability or refund.
3.11 Properties. Except as set forth in the Public Company Reports, the Purchaser does not own, license or otherwise have any right, title or interest in any material Intellectual Property and does not own or lease any material real property or Personal Property.
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3.12 Material Contracts.
(a) Except as set forth in the Public Company Reports, other than this Agreement, there are no Contracts to which the Purchaser is a party or by which any of its properties or assets may be bound, subject or affected, which (i) creates or imposes a Liability greater than $50,000, (ii) may not be cancelled by the Purchaser on less than sixty days’ prior notice without payment of a material penalty or termination fee or (iii) prohibits, prevents, restricts or impairs in any material respect any business practice of the Purchaser as its business as is currently conducted, any acquisition of material property by the Purchaser, or restricts in any material respect the ability of the Purchaser from engaging in business as currently conducted by it or from competing with any other Person (each, a “Purchaser Material Contract”). All Purchaser Material Contracts have been made available to the Company other than those that are exhibits to the Public Company Reports.
(b) With respect to each Purchaser Material Contract: (i) the Purchaser Material Contract was entered into at arms’ length and in the ordinary course of business; (ii) the Purchaser Material Contract is legal, valid, binding and enforceable in all material respects against the Purchaser and, to the Knowledge of the Purchaser, the other parties thereto, and is in full force and effect (except as such enforcement may be limited by the Enforceability Exceptions); (iii) the Purchaser is not in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default in any material respect by the Purchaser, or permit termination or acceleration by the other party, under such Purchaser Material Contract; and (iv) to the Knowledge of the Purchaser, no other party to any Purchaser Material Contract is in breach or default in any material respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default by such other party, or permit termination or acceleration by the Purchaser under any Purchaser Material Contract.
3.13 Transactions with Affiliates. The Public Company Reports set forth the Contracts and arrangements that are in existence as of the date of this Agreement under which there are any existing or future Liabilities or obligations between the Purchaser and any (a) present or former director, officer or employee or Affiliate of the Purchaser, or any family member of any of the foregoing, or (b) record or beneficial owner of more than five percent of the outstanding Common Stock as of the date hereof.
3.14 Finders and Brokers. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission from the Purchaser, the Target Companies or any of their respective Affiliates in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Purchaser.
3.15 Ownership of Exchange Shares. All Exchange Shares issued and delivered in accordance with Article I to the Sellers shall be, upon issuance and delivery of such Exchange Shares, fully paid and non-assessable, free and clear of all Liens, other than restrictions arising from applicable securities Laws, this Agreement and any Liens incurred by Sellers, and the issuance and sale of such Exchange Shares pursuant hereto will not be subject to or give rise to any preemptive rights or rights of first refusal.
3.16 Independent Investigation. The Purchaser has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Target Companies, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of the Target Companies for such purpose. The Purchaser acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of the Company and the Sellers set forth in Article IV and Article V (including the related portions of the Company Disclosure Schedules and any Supplemental Disclosure Schedules provided by the Company or the Sellers); and (b) none of the Company, the Sellers or their respective Representatives have made any representation or warranty as to the Target Companies, the Sellers or this Agreement, except as expressly set forth in Article IV and Article V (including the related portions of the Company Disclosure Schedules and Supplemental Disclosure Schedules provided by the Company or the Sellers).
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IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedules delivered by the Company to the Purchaser on the date hereof (the “Company Disclosure Schedules”), the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, the Company hereby represents and warrants to the Purchaser as follows:
4.1 Due Organization and Good Standing. The Company is an exempt company duly organized on June 30, 2020 (the “Company Incorporation Date”), validly existing and in good standing under the Laws of The Cayman Islands and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each Subsidiary of the Company is a corporation or other entity duly formed, validly existing and in good standing under the Laws of its jurisdiction of organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Each Target Company is duly qualified or licensed and in good standing in the jurisdiction in which it is incorporated or registered and in each other jurisdiction where it does business or operates to the extent that the character of the property owned, or leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary. The Company has provided to the Purchaser accurate and complete copies of its Organizational Documents and the Organizational Documents of each of its Subsidiaries, each as amended to date and as currently in effect. No Target Company is in violation of any provision of its Organizational Documents.
4.2 Authorization; Binding Agreement. The Company has all requisite corporate power and authority to execute and deliver this Agreement, to perform the Company’s obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, (a) have been duly and validly authorized by the Company’s board of directors and the Company’s shareholders to the extent required by the Company’s Organizational Documents, the Cayman Islands Act, any other applicable Law or any Contract to which the Company or any of its shareholders is a party or by which it or its securities are bound and (b) no other proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Company and assuming the due authorization, execution and delivery of this Agreement, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions.
4.3 Capitalization.
(a) The Company is authorized to issue 1,000,000,000 Company Ordinary Shares, 1,000,000,000 of which shares are issued and outstanding. Prior to giving effect to the transactions contemplated by this Agreement, the Sellers are the legal (registered) and beneficial owners of all of the issued and outstanding shares and other equity interests in or of the Company, with each Seller owning the shares and any other equity interests in the Company set forth on Annex I, all of which shares and other equity interests are owned free and clear of any Liens. The Purchased Shares to be delivered by the Sellers to the Purchaser at the Closing constitute all of the issued and outstanding shares and other equity interests in or of the Company. All of the outstanding shares and other equity interests in or of the Company have been duly authorized, are fully paid and non-assessable and not in violation of any purchase option, right of first refusal, preemptive right, subscription right or any similar right under any provision of the Cayman Islands Act, any other applicable Law, the Company Charter or any Contract to which the Company is a party or by which it or its securities are bound. The Company holds no shares or other equity interests in or of the Company in its treasury. None of the outstanding shares or other equity interests in or of the Company were issued in violation of any applicable securities Laws.
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(b) There are no options, warrants or other rights to subscribe for or purchase any shares or other equity interests in or of the Company or securities convertible into or exchangeable for, or that otherwise confer on the holder any right to acquire any shares or other equity interests in or of the Company, or preemptive rights or rights of first refusal or first offer, nor are there any Contracts, commitments, arrangements or restrictions to which the Company or any of its shareholders is a party or bound relating to any equity securities of the Company, whether or not outstanding. There are no outstanding or authorized equity appreciation, phantom equity or similar rights with respect to the Company. There are no voting trusts, proxies, shareholder agreements or any other agreements or understandings with respect to the voting of the Company’s shares or other equity interests. There are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any shares or other equity interests or securities in or of the Company, nor has the Company granted any registration rights to any Person with respect to the Company’s equity securities. All of the Company’s securities have been granted, offered, sold and issued in compliance with all applicable securities Laws. As a result of the consummation of the transactions contemplated by this Agreement, no shares or other equity interests in or of the Company are issuable and no rights in connection with any interests, warrants, rights, options or other securities of the Company accelerate or otherwise become triggered (whether as to vesting, exercisability, convertibility or otherwise).
(c) Since the Company Incorporation Date, the Company has not declared or paid any distribution or dividend in respect of its shares or other equity interests and has not repurchased, redeemed or otherwise acquired any shares or other equity interests in or of the Company, and the board of directors of the Company has not authorized any of the foregoing.
4.4 Subsidiaries. Schedule 4.4 sets forth the name of each Subsidiary of the Company, and with respect to each Subsidiary (a) its jurisdiction of organization, (b) its authorized shares or other equity interests (if applicable), (c) the number of issued and outstanding shares or other equity interests and the record holders and beneficial owners thereof and (d) its Tax election to be treated as a corporate or a disregarded entity under the Code and any state or applicable non-U.S. Tax laws, if any. All of the outstanding equity securities of each Subsidiary of the Company are duly authorized and validly issued, fully paid and non-assessable (if applicable), and were offered, sold and delivered in compliance with all applicable securities Laws, and owned by the Company or one of its Subsidiaries free and clear of all Liens (other than those, if any, imposed by such Subsidiary’s Organizational Documents). There are no Contracts to which the Company or any of its Affiliates is a party or bound with respect to the voting (including voting trusts or proxies) of the shares or other equity interests of any Subsidiary of the Company other than the Organizational Documents of any such Subsidiary. There are no outstanding or authorized options, warrants, rights, agreements, subscriptions, convertible securities or commitments to which any Subsidiary of the Company is a party or which are binding upon any Subsidiary of the Company providing for the issuance or redemption of any shares or other equity interests in or of any Subsidiary of the Company. There are no outstanding equity appreciation, phantom equity, profit participation or similar rights granted by any Subsidiary of the Company. No Subsidiary of the Company has any limitation on its ability to make any distributions or dividends to its equity holders, whether by Contract, Order or applicable Law. Except for the equity interests of the Subsidiaries listed on Schedule 4.4, the Company does not own or have any rights to acquire, directly or indirectly, any shares or other equity interests of any Person. None of the Company or its Subsidiaries is a participant in any joint venture, partnership or similar arrangement. There are no outstanding material contractual obligations of the Company or its Subsidiaries to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other Person (other than loans to customers in the ordinary course of business).
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4.5 Governmental Approvals. No Consent of or with any Governmental Authority on the part of any Target Company is required to be obtained or made in connection with the execution, delivery or performance by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby other than such filings as contemplated by this Agreement.
4.6 No Conflict With Other Instruments. The execution and delivery by the Company of this Agreement, the consummation by the Company of the transactions contemplated hereby, and compliance by the Company with any of the provisions hereof will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or to which any of its assets, properties or operations are subject, except to the extent that such breach would not reasonably be expected to have a Material Adverse Effect on the Company.
4.7 Financial Statements.
(a) As used herein, the term “Company Financials” means the (i) consolidated financial statements of the Target Companies (including, in each case, any related notes thereto), consisting of the consolidated balance sheets of the Target Companies as of December 31, 2019 and December 31, 2018, and the related consolidated audited income statements, changes in shareholder equity and statements of cash flows for the years then ended and (ii) the unaudited financial statements, consisting of the consolidated balance sheet of the Target Companies as of September 30, 2020 (the “Interim Balance Sheet Date”) and the related consolidated income statement, changes in shareholder equity and statement of cash flows for the three (3) months then ended. The Company Financials (i) accurately reflect the books and records of the Target Companies as of the times and for the periods referred to therein, (ii) were prepared in accordance with GAAP, consistently applied throughout and among the periods involved (except that the unaudited statements exclude the footnote disclosures and other presentation items required for GAAP and exclude year-end adjustments which will not be material in amount), and (iii) fairly present in all material respects the financial position of the Target Companies as of the respective dates thereof and the results of the operations and cash flows of the Target Companies for the periods indicated.
(b) Each Target Company maintains accurate books and records reflecting its assets and Liabilities and maintains proper and adequate internal accounting controls that provide reasonable assurance that (i) such Target Company does not maintain any off-the-book accounts and that such Target Company’s assets are used only in accordance with the Target Company’s management directives, (ii) transactions are executed with management’s authorization, (iii) transactions are recorded as necessary to permit preparation of the financial statements of such Target Company and to maintain accountability for such Target Company’s assets, (iv) access to such Target Company’s assets is permitted only in accordance with management’s authorization, (v) the reporting of such Target Company’s assets is compared with existing assets at regular intervals and verified for actual amounts and (vi) accounts, notes and other receivables are recorded accurately, and proper and adequate procedures are implemented to effect the collection of accounts, notes and other receivables on a current and timely basis. No Target Company has been subject to or involved in any material fraud that involves management or other employees who have a significant role in the internal controls over financial reporting of the Company and its Subsidiaries. Since October 17, 2017, no Target Company or its Representatives has received any written complaint, allegation, assertion or claim regarding the accounting or auditing practices, procedures, methodologies or methods of any Target Company or its internal accounting controls, including any material written complaint, allegation, assertion or claim that any Target Company has engaged in questionable accounting or auditing practices.
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(c) No Target Company has ever been subject to the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act.
(d) All material Indebtedness of the Target Companies is disclosed in the financial statements and related notes previously delivered to the Purchaser. No Indebtedness of any Target Company contains any restriction upon (i) the prepayment of any of such Indebtedness, (ii) the incurrence of Indebtedness by any Target Company, or (iii) the ability of the Target Companies to grant any Lien on their respective properties or assets.
(e) No Target Company is subject to any Liabilities or obligations (whether or not required to be reflected on a balance sheet prepared in accordance with GAAP), except for those that are either (i) adequately reflected or reserved on or provided for in the consolidated balance sheet of the Company and its Subsidiaries as of the Interim Balance Sheet Date contained in the Company Financials or (ii) not material and that were incurred after the Interim Balance Sheet Date in the ordinary course of business consistent with past practice (other than Liabilities for breach of any Contract or violation of any Law).
(f) All financial projections with respect to the Target Companies that were delivered by or on behalf of the Company to the Purchaser or its Representatives were prepared in good faith using assumptions that the Company believes to be reasonable.
4.8 Absence of Certain Changes. Since January 1, 2020, each Target Company has (a) conducted its business only in the ordinary course of business consistent with past practice, (b) not been subject to a Material Adverse Effect and (c) has not taken any action or committed or agreed to take any action that would be prohibited by Section 6.2(b) if such action were taken on or after the date hereof without the consent of the Purchaser.
4.9 Compliance with Laws. Except for such noncompliance which would not reasonably be expected to have a Material Adverse Effect on the Purchaser, no Target Company is or has been in material conflict or non-compliance with, or in material default or violation of, nor has any Target Company received, since October 17, 2017, any written or, to the Knowledge of the Company, oral notice of any material conflict or non-compliance with, or material default or violation of, any applicable Laws by which it or any of its properties, assets, employees, business or operations are or were bound or affected.
4.10 Company Permits. Each Target Company (and its employees who are legally required to be licensed by a Governmental Authority in order to perform his or her duties with respect to his or her employment with any Target Company), holds all Permits necessary to lawfully conduct in all material respects its business as presently conducted and as currently contemplated to be conducted, and to own, lease and operate its assets and properties (collectively, the “Company Permits”). The Company has made available to the Purchaser true, correct and complete copies of all material Company Permits. All of the Company Permits are in full force and effect, and no suspension or cancellation of any of the Company Permits is pending or, to the Company’s Knowledge, threatened. No Target Company is in violation in any material respect of the terms of any Company Permit.
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4.11 Litigation. There is no (a) Action of any nature pending or, to the Company’s Knowledge, threatened, nor is there any reasonable basis for any Action to be made, or (b) Order pending now or rendered by a Governmental Authority since January 1, 2020, in either case of (a) or (b) by or against any Target Company, its current or former directors, officers or equity holders (provided, that any litigation involving the directors, officers or equity holders of a Target Company must be related to the Target Company’s business, equity securities or assets), its business, equity securities or assets. Since October 17, 2017, none of the current or former officers, senior management or directors of any Target Company have been charged with, indicted for, arrested for, or convicted of any felony or any crime involving fraud.
4.12 Material Contracts.
(a) Schedule 4.12(a) sets forth a true, correct and complete list of, and the Company has made available to the Purchaser (including written summaries of oral Contracts), true, correct and complete copies of, each Contract to which any Target Company is a party or by which any Target Company, or any of its properties or assets are bound or affected (each contract required to be set forth on Schedule 4.12(a), a “Company Material Contract”) that:
(i) contains covenants that limit the ability of any Target Company (A) to compete in any line of business or with any Person or in any geographic area or to sell, or provide any service or product or solicit any Person, including any non-competition covenants, employee and customer non-solicit covenants, exclusivity restrictions, rights of first refusal or most-favored pricing clauses or (B) to purchase or acquire an interest in any other Person;
(ii) involves any joint venture, profit-sharing, partnership, limited liability company or other similar agreement or arrangement relating to the formation, creation, operation, management or control of any partnership or joint venture;
(iii) involves any exchange traded, over the counter or other swap, cap, floor, collar, futures contract, forward contract, option or other derivative financial instrument or Contract, based on any commodity, security, instrument, asset, rate or index of any kind or nature whatsoever, whether tangible or intangible, including currencies, interest rates, foreign currency and indices;
(iv) evidences Indebtedness (whether incurred, assumed, guaranteed or secured by any asset) of any Target Company having an outstanding principal amount in excess of $20,000;
(v) involves the acquisition or disposition, directly or indirectly (by merger or otherwise), of assets with an aggregate value in excess of $20,000 (other than in the ordinary course of business consistent with past practice) or shares or other equity interests in or of another Person;
(vi) relates to any merger, consolidation or other business combination with any other Person or the acquisition or disposition of any other entity or its business or material assets or the sale of any Target Company, its business or material assets;
(vii) by its terms, individually or with all related Contracts, calls for aggregate payments or receipts by the Target Companies under such Contract or Contracts of more than $20,000 in the aggregate;
(viii) obligates the Target Companies to provide continuing indemnification or a guarantee of obligations of a third party after the date hereof in excess of $20,000;
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(ix) is between any Target Company and any Top Customer or Top Supplier (both as defined below) (other than in the ordinary course of business);
(x) is between any Target Company and any directors, officers or employees of a Target Company (other than at-will employment arrangements with employees entered into in the ordinary course of business consistent with past practice), including all non-competition, severance and indemnification agreements, or any Related Person;
(xi) obligates the Target Companies to make any capital commitment or expenditure in excess of $20,000 (including pursuant to any joint venture);
(xii) relates to a material settlement entered into within three (3) years prior to the date of this Agreement or under which any Target Company has outstanding obligations (other than customary confidentiality obligations or in the ordinary course of business);
(xiii) provides another Person (other than another Target Company or any manager, director or officer of any Target Company) with a power of attorney;
(xiv) relates to the development, ownership, licensing or use of any Intellectual Property by, to or from any Target Company, other than Off-the-Shelf Software Agreements (as defined below); or
(xv) is otherwise material to any Target Company and not described in clauses (i) through (xiv) above.
(b) With respect to each Company Material Contract: (i) such Company Material Contract is valid and binding and enforceable in all respects against the Target Company party thereto (subject to the Enforceability Exceptions) and, to the Knowledge of the Company, each other party thereto, and is in full force and effect; (ii) neither the execution of this Agreement nor the consummation of the transactions contemplated by this Agreement will affect the validity or enforceability of any Company Material Contract; (iii) no Target Company is in breach or default in any respect, and no event has occurred that with the passage of time or giving of notice or both would constitute a breach or default by any Target Company, or permit termination or acceleration by the other party thereto, under such Company Material Contract; (iv) to the Knowledge of the Company, no other party to such Company Material Contract is in breach or default in any respect, and no event has occurred that with the passage of time or giving of notice or both would constitute such a breach or default by such other party, or permit termination or acceleration by any Target Company, under such Company Material Contract; (v) no Target Company has received written or, to the Knowledge of the Company, oral notice of an intention by any party to any such Company Material Contract that provides for a continuing obligation by any party thereto to terminate such Company Material Contract or amend the terms thereof, other than modifications in the ordinary course of business that do not adversely affect any Target Company; and (vi) no Target Company has waived any rights under any such Company Material Contract.
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4.13 Intellectual Property.
(a) Schedule 4.13(a)(i) sets forth: (i) all Patents, Trademarks, Internet Assets and Copyrights owned or licensed by a Target Company or otherwise used or held for use by a Target Company in which a Target Company is the owner, applicant or assignee (“Company Registered IP”), specifying as to each item, as applicable: (A) the nature of the item, including the title, (B) the owner of the item, (C) the jurisdictions in which the item is issued or registered or in which an application for issuance or registration has been filed and (D) the issuance, registration or application numbers and dates; and (ii) all material unregistered Intellectual Property owned or purported to be owned by a Target Company. Schedule 4.13(a)(ii) sets forth all licenses, sublicenses and other agreements or permissions (“Company IP Licenses”) (other than “shrink wrap,” “click wrap,” and “off the shelf” software agreements and other agreements for Software commercially available on reasonable terms to the public generally with license, maintenance, support and other fees of less than $2,000 per year (collectively, “Off-the-Shelf Software Agreements”), which are not required to be listed, although such licenses are “Company IP Licenses” as that term is used herein), under which a Target Company is a licensee or otherwise is authorized to use or practice any Intellectual Property, and describes (A) the applicable Intellectual Property licensed, sublicensed or used and (B) any royalties, license fees or other compensation due from a Target Company, if any. Each Target Company owns, free and clear of all Liens (other than Permitted Liens), has valid and enforceable rights in, and has the unrestricted right to use, sell, license, transfer or assign, all Intellectual Property currently used, licensed or held for use by such Target Company, and previously used or licensed by such Target Company, except for the Intellectual Property that is the subject of the Company IP Licenses. For each Patent and Patent application in the Company Registered IP, the Target Companies have obtained valid assignments of inventions from each inventor. Except as set forth on Schedule 4.13(a)(iii), all Company Registered IP is owned exclusively by the applicable Target Company without obligation to pay royalties, licensing fees or other fees, or otherwise account to any third party with respect to such Company Registered IP.
(b) Each Target Company has a valid and enforceable license to use all Intellectual Property that is the subject of the Company IP Licenses applicable to such Target Company. The Company IP Licenses include all of the licenses, sublicenses and other agreements or permissions necessary to operate the Target Companies as presently conducted. Each Target Company has performed all obligations imposed on it in the Company IP Licenses, has made all payments required to date, and such Target Company is not, nor, to the Knowledge of the Company, is any other party thereto, in breach or default thereunder, nor has any event occurred that with notice or lapse of time or both would constitute a default thereunder. The continued use by the Target Companies of the Intellectual Property that is the subject of the Company IP Licenses in the same manner that it is currently being used is not restricted by any applicable license of any Target Company. All registrations for Copyrights, Patents and Trademarks that are owned by or exclusively licensed to any Target Company are valid and in force, and all applications to register any Copyrights, Patents and Trademarks are pending and in good standing, all without challenge of any kind. No Target Company is party to any Contract that requires a Target Company to assign to any Person all of its rights in any Intellectual Property developed by a Target Company under such Contract.
(c) Schedule 4.13(c) sets forth all licenses, sublicenses and other agreements or permissions under which a Target Company is the licensor (each, an “Outbound IP License”), and for each such Outbound IP License, describes (i) the applicable Intellectual Property licensed, (ii) the licensee under such Outbound IP License, and (iii) any royalties, license fees or other compensation due to a Target Company, if any. Each Target Company has performed all obligations imposed on it in the Outbound IP Licenses, and such Target Company is not, nor, to the Knowledge of the Company, is any other party thereto, in breach or default thereunder, nor has any event occurred that with notice or lapse of time or both would constitute a default thereunder.
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(d) No Action is pending or, to the Company’s Knowledge, threatened that challenges the validity, enforceability, ownership, or right to use, sell, license or sublicense any Intellectual Property currently licensed, used or held for use by the Target Companies in any material respect. No Target Company has received any written or, to the Knowledge of the Company, oral notice or claim asserting or suggesting that any infringement, misappropriation, violation, dilution or unauthorized use of the Intellectual Property of any other Person is or may be occurring or has or may have occurred, as a consequence of the business activities of any Target Company, nor to the Knowledge of the Company is there a reasonable basis therefor. There are no Orders to which any Target Company is a party or is otherwise bound that (i) restrict the rights of a Target Company to use, transfer, license or enforce any Intellectual Property owned by a Target Company, (ii) restrict the conduct of the business of a Target Company in order to accommodate a third Person’s Intellectual Property, or (iii) grant any third Person any right with respect to any Intellectual Property owned by a Target Company. No Target Company is currently infringing, or has, in the past, infringed, misappropriated or violated any Intellectual Property of any other Person in any material respect in connection with the ownership, use or license of any Intellectual Property owned or purported to be owned by a Target Company or, to the Knowledge of the Company, otherwise in connection with the conduct of the respective businesses of the Target Companies. To the Company’s Knowledge, no third party is infringing upon, has misappropriated or is otherwise violating any Intellectual Property owned, licensed by, licensed to, or otherwise used or held for use by any Target Company (“Company IP”) in any material respect.
(e) All employees and independent contractors of a Target Company have assigned to the Target Companies all Intellectual Property arising from the services performed for a Target Company by such Persons. No current or former officers, employees or independent contractors of a Target Company have claimed any ownership interest in any Intellectual Property owned by a Target Company. To the Knowledge of the Company, there has been no violation of a Target Company’s policies or practices related to protection of Company IP or any confidentiality or nondisclosure Contract relating to the Intellectual Property owned by a Target Company. The Company has provided the Purchaser with true and complete copies of all written Contracts referenced in subsections under which employees and independent contractors assigned their Intellectual Property to a Target Company.
(f) To the Knowledge of the Company, no Person has obtained unauthorized access to third party information and data in the possession of a Target Company, nor has there been any other compromise of the security, confidentiality or integrity of such information or data. Each Target Company has complied with all applicable Laws relating to privacy, personal data protection, and the collection, processing and use of personal information and its own privacy policies and guidelines. The operation of the business of the Target Companies has not and does not materially violate any right to privacy or publicity of any third person, or constitute unfair competition or trade practices under applicable Law.
(g) The consummation of any of the transactions contemplated by this Agreement will neither violate nor by their terms result in the material breach, material modification, cancellation, termination, suspension of, or acceleration of any payments with respect to, or release of source code because of (i) any Contract providing for the license or other use of Intellectual Property owned by a Target Company, or (ii) any Company IP License. Following the Closing, the Company shall be permitted to exercise, directly or indirectly through its Subsidiaries, all of the Target Companies’ rights under such Contracts or IP Licenses described in the previous sentence to the same extent that the Target Companies would have been able to exercise had the transactions contemplated by this Agreement not occurred, without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Target Companies would otherwise be required to pay in the absence of such transactions.
4.14 Taxes and Returns.
(a) Each Target Company has or will have timely filed, or caused to be timely filed, all Tax Returns and reports required to be filed by it (taking into account all available extensions), which Tax Returns are true, accurate, correct and complete in all material respects, and has paid, collected or withheld, or caused to be paid, collected or withheld, all Taxes required to be paid, collected or withheld, other than such Taxes for which adequate reserves in the Company Financials have been established in accordance with GAAP. Each Target Company has complied with all applicable Laws relating to Tax.
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(b) There is no current pending or, to the Knowledge of the Company, threatened Action against a Target Company by a Governmental Authority in a jurisdiction where the Target Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction.
(c) No Target Company is being audited by any Tax authority or has been notified in writing or, to the Knowledge of the Company, orally by any Tax authority that any such audit is contemplated or pending. There are no claims, assessments, audits, examinations, investigations or other Actions pending against a Target Company in respect of any Tax, and no Target Company has been notified in writing of any proposed Tax claims or assessments against it (other than, in each case, claims or assessments for which adequate reserves in the Company Financials have been established).
(d) There are no Liens with respect to any Taxes upon any Target Company’s assets, other than Permitted Liens.
(e) Each Target Company has collected or withheld all Taxes currently required to be collected or withheld by it, and all such Taxes have been paid to the appropriate Governmental Authorities or set aside in appropriate accounts for future payment when due.
(f) No Target Company has any outstanding waivers or extensions of any applicable statute of limitations to assess any amount of Taxes. There are no outstanding requests by a Target Company for any extension of time within which to file any Tax Return or within which to pay any Taxes shown to be due on any Tax Return.
(g) No Target Company has made any change in accounting method or received a ruling from, or signed an agreement with, any taxing authority that would reasonably be expected to have a material impact on its Taxes following the Closing.
(h) No Target Company has any Liability for the Taxes of another Person (other than another Target Company) (i) under any applicable Tax Law, (ii) as a transferee or successor, or (iii) by contract, indemnity or otherwise. No Target Company is a party to or bound by any Tax indemnity agreement, Tax sharing agreement or Tax allocation agreement or similar agreement, arrangement or practice with respect to Taxes (including advance pricing agreement, closing agreement or other agreement relating to Taxes with any Governmental Authority) that will be binding on the Company or its Subsidiaries with respect to any period following the Closing Date.
(i) No Target Company has requested, or is the subject of or bound by any private letter ruling, technical advice memorandum, closing agreement or similar ruling, memorandum or agreement with any Governmental Authority with respect to any Taxes, nor is any such request outstanding.
4.15 Real Property. Schedule 4.15 contains a complete and accurate list of all premises currently leased or subleased or otherwise used or occupied by a Target Company for the operation of the business of a Target Company (the “Leased Premises”), and of all current leases, lease guarantees, agreements and documents related thereto, including all amendments, terminations and modifications thereof or waivers thereto (collectively, the “Company Real Property Leases”), as well as the current annual rent and term under each Company Real Property Lease. The Company has provided to the Purchaser a true and complete copy of each of the Company Real Property Leases, and in the case of any oral Company Real Property Lease, a written summary of the material terms of such Company Real Property Lease. The Company Real Property Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. To the Knowledge of the Company, no event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default on the part of a Target Company or any other party under any of the Company Real Property Leases, and no Target Company has received notice of any such condition. No Target Company owns or has ever owned any real property or any interest in real property (other than the leasehold interests in the Company Real Property Leases).
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4.16 Personal Property. Each item of Personal Property which is currently owned, used or leased by a Target Company with a book value or fair market value of greater than $20,000 is set forth on Schedule 4.16, along with, to the extent applicable, a list of lease agreements and lease guarantees related thereto, including all amendments, terminations and modifications thereof or waivers thereto (“Company Personal Property Leases”). All such items of Personal Property are in good operating condition and repair (reasonable wear and tear excepted), and are suitable for their intended use in the business of the Target Companies. The Company has provided to the Purchaser a true and complete copy of each of the Company Personal Property Leases, and in the case of any oral Company Personal Property Lease, a written summary of the material terms of such Company Personal Property Lease. The Company Personal Property Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect. To the Knowledge of the Company, no event has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default on the part of a Target Company or any other party under any of the Company Personal Property Leases, and no Target Company has received notice of any such condition.
4.17 Title to and Sufficiency of Assets. Each Target Company has good and marketable title to, or a valid leasehold interest in or right to use, all of its assets, free and clear of all Liens other than (a) Permitted Liens, (b) the rights of lessors under leasehold interests and (c) Liens specifically identified on the Company Financials. The assets (including Intellectual Property rights and contractual rights) of the Target Companies constitute all of the assets, rights and properties that are used in the operation of the businesses of the Target Companies as it is now conducted and presently proposed to be conducted or that are used or held by the Target Companies for use in the operation of the businesses of the Target Companies, and taken together, are adequate and sufficient for the operation of the businesses of the Target Companies as currently conducted and as presently proposed to be conducted.
4.18 Employee Matters.
(a) No Target Company is a party to any collective bargaining agreement or other Contract with any group of employees, labor organization or other representative of any of the employees of any Target Company and the Company has no Knowledge of any activities or proceedings of any labor union or other party to organize or represent such employees. There has not occurred or, to the Knowledge of the Company, been threatened any strike, slow-down, picketing, work- stoppage, or other similar labor activity with respect to any such employees. There are no unresolved labor controversies (including unresolved grievances and age or other discrimination claims), if any, that are pending or, to the Knowledge of the Company, threatened between any Target Company and Persons employed by or providing services to a Target Company. No current officer or employee of a Target Company has provided any Target Company written or, to the Knowledge of the Company, oral notice of his or her plan to terminate his or her employment with any Target Company.
(b) Each Target Company (i) is and has been in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment, health and safety and wages and hours, and other Laws relating to discrimination, disability, labor relations, hours of work, payment of wages and overtime wages, pay equity, immigration, workers compensation, working conditions, employee scheduling, occupational safety and health, family and medical leave, and employee terminations, and have not received written notice, or any other form of notice, that there is any pending Action involving unfair labor practices against a Target Company, (ii) is not liable for any material arrears of wages or any material penalty for failure to comply with any of the foregoing, and (iii) is not liable for any material payment to any Governmental Authority with respect to unemployment compensation benefits, social security or other benefits or obligations for employees, independent contractors or consultants (other than routine payments to be made in the ordinary course of business and consistent with past practice). There are no Actions pending or, to the Knowledge of the Company, threatened against a Target Company brought by or on behalf of any applicant for employment, any current or former employee, any Person alleging to be a current or former employee, or any Governmental Authority, relating to any such Law or regulation, or alleging breach of any express or implied contract of employment, wrongful termination of employment, or alleging any other discriminatory, wrongful or tortious conduct in connection with the employment relationship.
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(c) The Target Companies have paid in full to all employees all wages, salaries, commission, bonuses and other compensation due to its employees, including overtime compensation, and there are no severance payments which are or could become payable by a Target Company to any employees under the terms of any written or, to the Company’s Knowledge, oral agreement, or commitment or any Law, custom, trade or practice. Each employee has entered into the Company’s standard form of employee non-disclosure, inventions and restrictive covenants agreement with the Company or its Subsidiaries (whether pursuant to a separate agreement or incorporated as part of such employee’s overall employment agreement), a copy of which has been provided to the Purchaser by the Company.
4.19 Benefit Plans.
(a) No Target Company has ever maintained or contributed to (or had an obligation to contribute to) any “employee benefit plan” (as defined in Section 3(3) of ERISA).
(b) With respect to each Company Benefit Plan which covers any current or former officer, director, consultant or employee (or beneficiary thereof) of a Target Company, the Company has provided to the Purchaser accurate and complete copies, if applicable, of all Company Benefit Plans and related trust agreements or annuity Contracts (including any amendments, modifications or supplements thereto).
(c) With respect to each Company Benefit Plan: (i) such Company Benefit Plan has been administered and enforced in all material respects in accordance with its terms and the requirements of any and all applicable Laws, and has been maintained, where required, in good standing with applicable regulatory authorities and Governmental Authorities; (ii) no breach of fiduciary duty has occurred; (iii) no Action is pending, or to the Company’s Knowledge, threatened (other than routine claims for benefits arising in the ordinary course of administration); and (iv) all contributions and premiums required to be made with respect to a Company Benefit have been timely made. No Target Company has incurred any obligation in connection with the termination of, or withdrawal from, any Company Benefit Plan.
4.20 Environmental Matters.
(a) Each Target Company is and has been in compliance in all material respects with all applicable Environmental Laws, including obtaining, maintaining in good standing, and complying with all Permits required for its business and operations by Environmental Laws (“Environmental Permits”), no Action is pending or, to the Company’s Knowledge, threatened to revoke, modify, or terminate any such Environmental Permit, and, to the Company’s Knowledge, no facts, circumstances, or conditions currently exist that could adversely affect such continued compliance with Environmental Laws and Environmental Permits or require capital expenditures to achieve or maintain such continued compliance with Environmental Laws and Environmental Permits.
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(b) No Target Company is the subject of any outstanding Order or Contract with any Governmental Authority or other Person in respect of any (i) Environmental Laws, (ii) Remedial Action, or (iii) Release or threatened Release of a Hazardous Material. No Target Company has assumed, contractually or by operation of Law, any Liabilities or obligations under any Environmental Laws.
(c) No Action has been made or is pending, or to the Company’s Knowledge, threatened against any Target Company or any assets of a Target Company alleging either or both that a Target Company may be in material violation of any Environmental Law or Environmental Permit or may have any material Liability under any Environmental Law.
(d) No Target Company has manufactured, treated, stored, disposed of, arranged for or permitted the disposal of, generated, handled or released any Hazardous Material, or owned or operated any property or facility, in a manner that has given or would reasonably be expected to give rise to any material Liability or obligation under applicable Environmental Laws. No fact, circumstance, or condition exists in respect of any Target Company or any property currently or formerly owned, operated, or leased by any Target Company or any property to which a Target Company arranged for the disposal or treatment of Hazardous Materials that could reasonably be expected to result in a Target Company incurring any material Environmental Liabilities.
(e) There is no investigation of the business, operations, or currently owned, operated, or leased property of a Target Company or, to the Company’s Knowledge, previously owned, operated, or leased property of a Target Company pending or, to the Company’s Knowledge, threatened that could lead to the imposition of any Liens under any Environmental Law or material Environmental Liabilities.
4.21 Transactions with Related Persons. Except as set forth in the financial statements and related notes previously delivered to the Purchaser, no Target Company nor any of its Affiliates, nor any officer, director, manager, employee, trustee or beneficiary of a Target Company or any of its Affiliates, nor any immediate family member of any of the foregoing (whether directly or indirectly through an Affiliate of such Person) (each of the foregoing, a “Related Person”) is presently, or since January 1, 2020 has been, a party to any transaction with a Target Company, including any Contract or other arrangement (a) providing for the furnishing of services by (other than as officers, directors or employees of the Target Company), (b) providing for the rental of real property or Personal Property from or (c) otherwise requiring payments to (other than for services or expenses as directors, officers or employees of the Target Company in the ordinary course of business consistent with past practice), any Related Person or any Person in which any Related Person has an interest as an owner, officer, manager, director, trustee or partner or in which any Related Person has any direct or indirect interest (other than the ownership of securities representing no more than two percent of the outstanding voting power or economic interest of a publicly traded company). Except as set forth in the financial statements and related notes previously delivered to the Purchaser, no Target Company has outstanding any Contract or other arrangement or commitment with any Related Person, and no Related Person owns any real property or Personal Property, or right, tangible or intangible (including Intellectual Property) which is used in the business of any Target Company.
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4.22 Insurance.
(a) Schedule 4.22(a) lists all insurance policies (by policy number, insurer, coverage period, coverage amount, annual premium and type of policy) held by a Target Company relating to a Target Company or its business, properties, assets, directors, officers and employees, copies of which have been provided to the Purchaser. All premiums due and payable under all such insurance policies have been timely paid and the Company and its Subsidiaries are otherwise in material compliance with the terms of such insurance policies. All such insurance policies are in full force and effect, and to the Knowledge of the Company, there is no threatened termination of, or material premium increase with respect to, any of such insurance policies.
(b) Schedule 4.22(b) identifies each individual insurance claim in excess of $10,000 made by a Target Company since January 1, 2020. Each Target Company has reported to its insurers all claims and pending circumstances that would reasonably be expected to result in a claim that could be covered by any such insurance policies, except where such failure to report such a claim would not be reasonably likely to be material to the Target Companies. No Target Company has made any claim against an insurance policy as to which the insurer is denying coverage.
4.23 Top Customers and Suppliers. Schedule 4.23 lists, by dollar volume paid for each of (a) the twelve months ended on December 31, 2019, (b) the twelve (12) months ended on December 31, 2020 and (c) the period from January 1, 2021 through the Interim Balance Sheet Date, the key customers of the Target Companies (the “Top Customers”) and the key suppliers of goods or services to the Target Companies (the “Top Suppliers”). The relationships of each Target Company with such suppliers and customers are good commercial working relationships and (i) no Top Supplier or Top Customer within the last twelve months has cancelled or otherwise terminated, or, to the Company’s Knowledge, intends to cancel or otherwise terminate, any relationships of such Person with a Target Company, (ii) no Top Supplier or Top Customer has during the last twelve months decreased materially or, to the Company’s Knowledge, threatened to stop, decrease or limit materially, or intends to modify materially its relationships with a Target Company or intends to stop, decrease or limit materially its products or services to any Target Company or its usage or purchase of the products or services of any Target Company, (iii) to the Company’s Knowledge, no Top Supplier or Top Customer intends to refuse to pay any amount due to any Target Company or seek to exercise any remedy against any Target Company, (iv) no Target Company has since January 1, 2020 been engaged in any material dispute with any Top Supplier or Top Customer, and (v) to the Company’s Knowledge, the consummation of the transactions contemplated in this Agreement will not affect the relationship of any Target Company with any Top Supplier or Top Customer.
4.24 Books and Records. All of the financial books and records of the Target Companies are complete and accurate in all material respects and have been maintained in the ordinary course consistent with past practice and in accordance with applicable Laws.
4.25 Accounts Receivable. All accounts, notes and other receivables, whether or not accrued, and whether or not billed, of the Target Companies (the “Accounts Receivable”) arose from sales actually made or services actually performed and represent valid obligations to a Target Company. None of the Accounts Receivable are, to the Knowledge of the Company, subject to any right of recourse, defense, deduction, return of goods, counterclaim, offset, or set off on the part of the obligor in excess of any amounts reserved therefor on the Company Financials. All of the Accounts Receivable are, to the Knowledge of the Company, fully collectible according to their terms in amounts not less than the aggregate amounts thereof carried on the books of the Target Companies (net of reserves) within ninety days.
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4.26 Certain Business Practices.
(a) No Target Company, nor any of their respective Representatives acting on their behalf, has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees, to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977 or (iii) made any other unlawful payment. No Target Company, nor any of their respective Representatives acting on their behalf has directly or indirectly, given or agreed to give any gift or similar benefit in any material amount to any customer, supplier, governmental employee or other Person who is or may be in a position to help or hinder any Target Company or assist any Target Company in connection with any actual or proposed transaction.
(b) The operations of each Target Company are and have been conducted at all times in compliance with laundering statutes in all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Authority, and no Action involving a Target Company with respect to the any of the foregoing is pending or, to the Knowledge of the Company, threatened.
(c) No Target Company or any of their respective directors or officers, or, to the Knowledge of the Company, any other Representative acting on behalf of a Target Company is currently identified on the specially designated nationals or other blocked person list or otherwise currently subject to any U.S. sanctions administered by OFAC, and no Target Company has, directly or indirectly, used any funds, or loaned, contributed or otherwise made available such funds to any Subsidiary, joint venture partner or other Person, in connection with any sales or operations in Cuba, Iran, Syria, Sudan, Myanmar or any other country sanctioned by OFAC or for the purpose of financing the activities of any Person currently subject to, or otherwise in violation of, any U.S. sanctions administered by OFAC in the last five fiscal years.
4.27 Investment Company Act. No Target Company is an “investment company” or a Person directly or indirectly “controlled” by or acting on behalf of an “investment company”, in each case within the meaning of the Investment Company Act of 1940, as amended.
4.28 Finders and Investment Bankers. No Target Company has incurred or will incur any Liability for any brokerage, finder’s or other fee or commission in connection with the transactions contemplated hereby.
4.29 Independent Investigation. The Company has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Purchaser, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of the Purchaser for such purpose. The Company acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of the Purchaser set forth in Article III (including the related portions of the Purchaser Disclosure Schedules and any Supplemental Disclosure Schedules provided by the Purchaser); and (b) neither the Purchaser nor any of its Representatives have made any representation or warranty as to the Purchaser or this Agreement, except as expressly set forth in Article III (including the related portions of the Purchaser Disclosure Schedules and Supplemental Disclosure Schedules provided by the Purchaser).
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4.30 Information Supplied. None of the information supplied or to be supplied by the Company expressly for inclusion or incorporation by reference: (a) in any Current Report on Form 8-K, and any exhibits thereto or any other report, form, registration or other filing made with any Governmental Authority with respect to the transactions contemplated by this Agreement; or (b) in the mailings or other distributions to the Purchaser’s stockholders and/or prospective investors with respect to the consummation of the transactions contemplated by this Agreement or in any amendment to any of documents identified in (a) and (b), will, when filed, made available, mailed or distributed, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by the Company expressly for inclusion or incorporation by reference in either of the Signing Filing or the Closing Filing will, when filed or distributed, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Company makes no representation, warranty or covenant with respect to any information supplied by or on behalf of the Purchaser or its Affiliates.
4.31 Disclosure. No representations or warranties by the Company in this Agreement (including the disclosure schedules hereto), (a) contains or will contain any untrue statement of a material fact, or (b) omits or will omit to state, when read in conjunction with all of the information contained in this Agreement, the disclosure schedules hereto, any fact necessary to make the statements or facts contained therein not materially misleading.
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V.
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Except as set forth in the Company Disclosure Schedules or in the schedules delivered by the Sellers to the Purchaser on the date hereof, the Section numbers of which are numbered to correspond to the Section numbers of this Agreement to which they refer, the Sellers hereby jointly and severally represent and warrant to the Purchaser as follows:
5.1 Due Organization and Good Standing. Each Seller, if not an individual person, is an entity duly organized, validly existing and in good standing under the Laws of the jurisdiction of its formation and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted.
5.2 Authorization; Binding Agreement. Each Seller has all requisite power, authority and legal right and capacity to execute and deliver this Agreement, to perform such Seller’s obligations hereunder and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by such Seller and assuming the due authorization, execution and delivery of this Agreement by the other parties hereto, constitutes the legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms, subject to the Enforceability Exceptions.
5.3 Ownership. Sellers own good, valid and marketable title to the Purchased Shares, free and clear of any and all Liens, with each Seller owning the Purchased Shares set forth on Annex I. There are no proxies, voting rights, shareholders’ agreements or other agreements or understandings, to which a Seller is a party or by which a Seller is bound, with respect to the voting or transfer of any of such Seller’s Purchased Shares other than this Agreement. Upon delivery of the Purchased Shares to the Purchaser on the Closing Date in accordance with this Agreement, the entire legal and beneficial interest in the Purchased Shares and good, valid and marketable title to the Purchased Shares, free and clear of all Liens (other than those imposed by applicable securities Laws or those incurred by the Purchaser), will pass to the Purchaser.
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5.4 Governmental Approvals. No Consent of or with any Governmental Authority on the part of any Seller is required to be obtained or made in connection with the execution, delivery or performance by such Seller of this Agreement or the consummation by a Seller of the transactions contemplated hereby other than such filings as expressly contemplated by this Agreement.
5.5 Non-Contravention. The execution and delivery by each Seller of this Agreement, the consummation by each Seller of the transactions contemplated hereby, and compliance by each Seller with any of the provisions hereof will not result in the breach of any term or provision of, constitute a default under, or terminate, accelerate or modify the terms of, any indenture, mortgage, deed of trust, or other material agreement or instrument to which each Seller is a party or to which any of its assets, properties or operations are subject, except to the extent that such breach would not reasonably be expected to have a Material Adverse Effect on the Seller.
5.6 No Litigation. There is no Action pending or, to the Knowledge of such Seller, threatened, nor any Order is outstanding, against or involving any Seller or any of its officers, directors, managers, shareholders, properties, assets or businesses, whether at law or in equity, before or by any Governmental Authority, which would reasonably be expected to adversely affect the ability of such Seller to consummate the transactions contemplated by, and discharge its obligations under, this Agreement.
5.7 Investment Representations. Each Seller: (a) is an “accredited investor” as such term is defined in Rule 501(a) of Regulation D under the Securities Act; (b) is acquiring its portion of the Exchange Shares for itself for investment purposes only, and not with a view towards any resale or distribution of such Exchange Shares; (c) has been advised and understands that the Exchange Shares (i) are being issued in reliance upon one or more exemptions from the registration requirements of the Securities Act and any applicable state securities Laws and (ii) have not been and shall not be registered under the Securities Act or any applicable state securities Laws and, therefore, must be held indefinitely and cannot be resold unless such Exchange Shares are registered under the Securities Act and all applicable state securities Laws, unless exemptions from registration are available; (d) is aware that an investment in the Purchaser is a speculative investment and is subject to the risk of complete loss; and (e) acknowledges that the Purchaser is under no obligation hereunder to register the Exchange Shares under the Securities Act. No Seller has any Contract with any Person to sell, transfer, or grant participations to such Person, or to any third Person, with respect to the Exchange Shares. By reason of such Seller’s business or financial experience, or by reason of the business or financial experience of such Seller’s “purchaser representatives” (as that term is defined in Rule 501(h) under the Securities Act), each Seller is capable of evaluating the risks and merits of an investment in the Purchaser and of protecting its interests in connection with this investment. Each Seller has carefully read and understands all materials provided by or on behalf of the Purchaser or its Representatives to such Seller or such Seller’s Representatives pertaining to an investment in the Purchaser and has consulted, as such Seller has deemed advisable, with its own attorneys, accountants or investment advisors with respect to the investment contemplated hereby and its suitability for such Seller. Each Seller acknowledges that the Exchange Shares are subject to dilution for events not under the control of such Seller. Each Seller has completed its independent inquiry and has relied fully upon the advice of its own legal counsel, accountant, financial and other Representatives in determining the legal, tax, financial and other consequences of this Agreement and the transactions contemplated hereby and the suitability of this Agreement and the transactions contemplated hereby for such Seller and its particular circumstances, and, except as set forth herein, has not relied upon any representations or advice by the Purchaser or its Representatives. Each Seller acknowledges and agrees that such Seller has not been guaranteed or represented to by any Person, (i) any specific amount or the event of the distribution of any cash, property or other interest in the Purchaser or (ii) the profitability or value of the Exchange Shares in any manner whatsoever. Each Seller: (A) has been represented by independent counsel (or has had the opportunity to consult with independent counsel and has declined to do so); (B) has had the full right and opportunity to consult with such Seller’s attorneys and other advisors and has availed itself of this right and opportunity; (C) has carefully read and fully understands this Agreement in its entirety and has had it fully explained to it or him by such counsel; (D) is fully aware of the contents hereof and the meaning, intent and legal effect thereof; and (E) is competent to execute this Agreement and has executed this Agreement free from coercion, duress or undue influence.
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5.8 Lock-Up Provisions.
(a) Each Seller hereby agrees not to, during the period commencing from the Closing Date and ending on the six-month anniversary of the Closing Date (the “Lock-Up Period”): (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Exchange Shares, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Exchange Shares or (iii) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (i), (ii), or (iii) above is to be settled by delivery of the Exchange Shares or other securities, in cash or otherwise (any of the foregoing described in clauses (i), (ii), or (iii), a “Prohibited Transfer”). The foregoing sentence shall not apply to the transfer of any or all of the Exchange Shares owned by a Seller, either during his or her lifetime or on death, (A) by gift, will or intestate succession, or (B) to any Affiliate, shareholder, member, partner or trust beneficiary, as the case may be, of such Seller; provided, however, that in any of cases (A) or (B) it shall be a condition to such transfer that the transferee executes and delivers to the Purchaser an agreement stating that the transferee is receiving and holding the Exchange Shares subject to the provisions of this Agreement, and there shall be no further transfer of such Exchange Shares except in accordance with this Section 5.8(a). Each Seller further agrees to execute such agreements as may be reasonably requested by Purchaser that are consistent the foregoing or that are necessary to give further effect thereto.
(b) If any Prohibited Transfer is made or attempted contrary to the provisions of Section 5.8(a), such purported Prohibited Transfer shall be null and void ab initio, and the Purchaser shall refuse to recognize any such purported transferee of the Exchange Shares as one of its equity holders for any purpose. In order to enforce this Section 5.8(b), Purchaser may impose stop-transfer instructions with respect to the Exchange Shares of each Seller (and permitted transferees and assigns thereof) until the end of the Lock-Up Period.
(c) During the Lock-Up Period, each certificate evidencing any Exchange Shares shall be stamped or otherwise imprinted with a legend in substantially the following form, in addition to any other applicable legends:
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN A SHARE EXCHANGE AGREEMENT DATED AS OF FEBRUARY 1, 2021 BY AND AMONG THE ISSUER OF SUCH SECURITIES (THE “COMPANY”) AND CERTAIN OF THE COMPANY’S STOCKHOLDERS, AS AMENDED. A COPY OF SUCH SHARE EXCHANGE AGREEMENT WILL BE FURNISHED WITHOUT CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST.”
5.9 Finders and Investment Bankers. No Seller, nor any of their respective Representatives on their behalf, has employed any broker, finder or investment banker or incurred any liability for any brokerage fees, commissions, finders’ fees or similar fees in connection with the transactions contemplated by this Agreement.
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5.10 Independent Investigation. Each Seller has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Purchaser, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of the Purchaser for such purpose. Each Seller acknowledges and agrees that: (a) in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, it has relied solely upon its own investigation and the express representations and warranties of the Purchaser set forth in Article III (including the related portions of the Purchaser Disclosure Schedules and any Supplemental Disclosure Schedules provided by the Purchaser); and (b) neither the Purchaser nor any of its Representatives have made any representation or warranty as to the Purchaser or this Agreement, except as expressly set forth in Article III (including the related portions of the Purchaser Disclosure Schedules and Supplemental Disclosure Schedules provided by the Purchaser).
5.11 Information Supplied. None of the information supplied or to be supplied by any Seller expressly for inclusion or incorporation by reference: (a) in any Current Report on Form 8-K, and any exhibits thereto or any other report, form, registration or other filing made with any Governmental Authority with respect to the transactions contemplated by this Agreement or (b) in the mailings or other distributions to the Purchaser’s stockholders and/or prospective investors with respect to the consummation of the transactions contemplated by this Agreement or in any amendment to any of documents identified in (a) and (b), will, when filed, made available, mailed or distributed, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. None of the information supplied or to be supplied by any Seller expressly for inclusion or incorporation by reference in either of the Signing Filing or the Closing Filing will, when filed or distributed, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, no Seller makes any representation, warranty or covenant with respect to any information supplied by or on behalf of the Purchaser or its Affiliates.
5.12 Disclosure. No representations or warranties by any Seller in this Agreement (including the disclosure schedules hereto) (a) contains or will contain any untrue statement of a material fact, or (b) omits or will omit to state, when read in conjunction with all of the information contained in this Agreement or the disclosure schedules hereto, any fact necessary to make the statements or facts contained therein not materially misleading.
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VI.
COVENANTS.
6.1 Access and Information.
(a) The Company shall give, and shall direct its Representatives to give, the Purchaser and its Representatives, at reasonable times during normal business hours and upon reasonable intervals and notice, access to all offices and other facilities and to all employees, properties, Contracts, agreements, commitments, books and records, financial and operating data and other information (including Tax Returns, internal working papers, client files, client Contracts and director service agreements), of or pertaining to the Target Companies, as the Purchaser or its Representatives may reasonably request regarding the Target Companies and their respective businesses, assets, Liabilities, financial condition, prospects, operations, management, employees and other aspects (including unaudited quarterly financial statements, including a consolidated quarterly balance sheet and income statement, a copy of each material report, schedule and other document filed with or received by a Governmental Authority pursuant to the requirements of applicable securities Laws, and independent public accountants’ work papers (subject to the consent or any other conditions required by such accountants, if any)) and instruct each of the Company’s Representatives to cooperate with the Purchaser and its Representatives in their investigation; provided, however, that the Purchaser and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of the Target Companies.
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(b) The Purchaser shall give, and shall direct its Representatives to give, the Company and its Representatives, at reasonable times during normal business hours and upon reasonable intervals and notice, access to all offices and other facilities and to all employees, properties, Contracts, agreements, commitments, books and records, financial and operating data and other information (including Tax Returns, internal working papers, client files, client Contracts and director service agreements), of or pertaining to the Purchaser, as the Company or its Representatives may reasonably request regarding the Purchaser’s business, assets, Liabilities, financial condition, prospects, operations, management, employees and other aspects (including unaudited quarterly financial statements, including a consolidated quarterly balance sheet and income statement, a copy of each material report, schedule and other document filed with or received by a Governmental Authority pursuant to the requirements of applicable securities Laws, and independent public accountants’ work papers (subject to the consent or any other conditions required by such accountants, if any)) and instruct each of the Purchaser’s Representatives to cooperate with the Company and its Representatives in their investigation; provided, however, that the Company and its Representatives shall conduct any such activities in such a manner as not to unreasonably interfere with the business or operations of the Purchaser.
6.2 Conduct of Business of the Company.
(a) Unless the Purchaser shall otherwise consent in writing (such consent not to be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement in accordance with Section 9.1 or the Closing (the “Interim Period”), except as expressly contemplated by this Agreement the Company shall, and shall cause the Target Companies to, (i) conduct their respective businesses, in all material respects, in the ordinary course of business consistent with past practice, (ii) comply with all Laws applicable to the Target Companies and their respective businesses, assets and employees, and (iii) take all reasonable measures necessary or appropriate to preserve intact, in all material respects, their respective business organizations, to keep available the services of their respective managers, directors, officers, employees and consultants, to maintain, in all material respects, their existing relationships with all Top Customers and Top Suppliers, and to preserve the possession, control and condition of their respective material assets, all as consistent with past practice.
(b) Without limiting the generality of Section 6.2(a) and except as contemplated by the terms of this Agreement, during the Interim Period, without the prior written consent of the Purchaser (such consent not to be unreasonably withheld, conditioned or delayed), the Company shall not, and shall cause the Target Companies to not:
(i) amend, waive or otherwise change, in any respect, its Organizational Documents;
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any of its equity securities or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any of its equity securities, or other securities, including any securities convertible into or exchangeable for any of its shares or other equity securities or securities of any class and any other equity-based awards, or engage in any hedging transaction with a third Person with respect to such securities;
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(iii) split, combine, recapitalize or reclassify any of its shares or other equity interests or issue any other securities in respect thereof or pay or set aside any dividend or other distribution (whether in cash, equity or property or any combination thereof) in respect of its equity interests, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any of its securities;
(iv) incur, create, assume, prepay or otherwise become liable for any Indebtedness (directly, contingently or otherwise), outside the ordinary course of business, in excess of $50,000 (individually or in the aggregate), make a loan or advance to or investment in any third party, or guarantee or endorse any Indebtedness, Liability or obligation of any Person;
(v) increase the wages, salaries or compensation of its employees other than in the ordinary course of business, consistent with past practice, and in any event not in the aggregate by more than five percent, or make or commit to make any bonus payment (whether in cash, property or securities) to any employee, or materially increase other benefits of employees generally, or enter into, establish, materially amend or terminate any Company Benefit Plan with, for or in respect of any current consultant, officer, manager director or employee, in each case other than as required by applicable Law, pursuant to the terms of any Company Benefit Plans or in the ordinary course of business consistent with past practice;
(vi) make or rescind any material election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, or make any material change in its accounting or Tax policies or procedures, in each case except as required by applicable Law or in compliance with GAAP;
(vii) transfer or license to any Person or otherwise extend, materially amend or modify, permit to lapse or fail to preserve any of the Company Registered IP, Company Licensed IP or other Company IP, or disclose to any Person who has not entered into a confidentiality agreement any Trade Secrets;
(viii) terminate, or waive or assign any material right under, any Company Material Contract outside of the ordinary course of business or enter into any Contract (A) involving amounts reasonably expected to exceed $50,000 per year or $100,000 in the aggregate, (B) that would be a Company Material Contract or (C) with a term longer than one year that cannot be terminated without payment of a material penalty and upon notice of sixty days or less;
(ix) fail to maintain its books, accounts and records in all material respects in the ordinary course of business consistent with past practice;
(x) establish any Subsidiary or enter into any new line of business;
(xi) fail to use commercially reasonable efforts to keep in force insurance policies or replacement or revised policies providing insurance coverage with respect to its assets, operations and activities in such amount and scope of coverage as are currently in effect;
(xii) revalue any of its material assets or make any change in accounting methods, principles or practices, except to the extent required to comply with GAAP and after consulting with the Company’s outside auditors;
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(xiii) waive, release, assign, settle or compromise any claim, action or proceeding (including any suit, action, claim, proceeding or investigation relating to this Agreement or the transactions contemplated hereby), other than waivers, releases, assignments, settlements or compromises that involve only the payment of monetary damages (and not the imposition of equitable relief on, or the admission of wrongdoing by, the Company or its Affiliates) not in excess of $50,000 (individually or in the aggregate), or otherwise pay, discharge or satisfy any Actions, Liabilities or obligations, unless such amount has been reserved in the Company Financials;
(xiv) close or materially reduce its activities, or effect any layoff or other personnel reduction or change, at any of its facilities;
(xv) acquire, including by merger, consolidation, acquisition of stock or assets, or any other form of business combination, any corporation, partnership, limited liability company, other business organization or any division thereof, or any material amount of assets outside the ordinary course of business consistent with past practice;
(xvi) make capital expenditures in excess of $10,000 (individually for any project (or set of related projects) or $25,000 in the aggregate);
(xvii) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization;
(xviii) voluntarily incur any Liability or obligation (whether absolute, accrued, contingent or otherwise) in excess of $10,000 individually or $50,000 in the aggregate other than pursuant to the terms of a Company Material Contract or Company Benefit Plan;
(xix) sell, lease, license, transfer, exchange or swap, mortgage or otherwise pledge or encumber (including securitizations), or otherwise dispose of any material portion of its properties, assets or rights;
(xx) enter into any agreement, understanding or arrangement with respect to the voting of equity securities of the Company;
(xxi) take any action that would reasonably be expected to significantly delay or impair the obtaining of any consents or approvals of any Governmental Authority to be obtained in connection with this Agreement;
(xxii) enter into, amend, waive or terminate (other than terminations in accordance with their terms) any transaction with any Related Person (other than compensation and benefits and advancement of expenses, in each case, provided in the ordinary course of business consistent with past practice); or
(xxiii) authorize or agree to do any of the foregoing actions.
6.3 Conduct of Business of the Purchaser. Except as contemplated by the terms of this Agreement during the Interim Period, without the prior written consent of the Company (such consent not to be unreasonably withheld, conditioned or delayed), the Purchaser shall not:
(a) amend, waive or otherwise change, in any respect, its Organizational Documents;
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(b) except as contemplated herein, authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any of its equity securities or any options, warrants, commitments, subscriptions or rights of any kind to acquire or sell any of its equity securities, or other securities, including any securities convertible into or exchangeable for any of its equity securities or other security interests of any class and any other equity-based awards, or engage in any hedging transaction with a third Person with respect to such securities;
(c) split, combine, recapitalize or reclassify any of its shares or other equity interests or issue any other securities in respect thereof or pay or set aside any dividend or other distribution (whether in cash, equity or property or any combination thereof) in respect of its shares or other equity interests, or directly or indirectly redeem, purchase or otherwise acquire or offer to acquire any of its securities;
(d) incur, create, assume, prepay or otherwise become liable for any Indebtedness (directly, contingently or otherwise) in excess of $50,000 (individually or in the aggregate), make a loan or advance to or investment in any third party, or guarantee or endorse any Indebtedness, Liability or obligation of any Person;
(e) make or rescind any material election relating to Taxes, settle any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, file any amended Tax Return or claim for refund, or make any material change in its accounting or Tax policies or procedures, in each case except as required by applicable Law or in compliance with GAAP;
(f) terminate, waive or assign any material right under any material agreement to which it is a party;
(g) fail to maintain its books, accounts and records in all material respects in the ordinary course of business consistent with past practice;
(h) establish any Subsidiary or enter into any new line of business;
(i) fail to use commercially reasonable efforts to keep in force insurance policies or replacement or revised policies providing insurance coverage with respect to its assets, operations and activities in such amount and scope of coverage as are currently in effect;
(j) revalue any of its material assets or make any change in accounting methods, principles or practices, except to the extent required to comply with GAAP and after consulting the Purchaser’s outside auditors;
(k) waive, release, assign, settle or compromise any claim, action or proceeding (including any suit, action, claim, proceeding or investigation relating to this Agreement or the transactions contemplated hereby), other than waivers, releases, assignments, settlements or compromises that involve only the payment of monetary damages (and not the imposition of equitable relief on, or the admission of wrongdoing by, the Purchaser) not in excess of $10,000 (individually or in the aggregate), or otherwise pay, discharge or satisfy any Actions, Liabilities or obligations, unless such amount has been reserved in the Purchaser Financials;
(l) acquire, including by merger, consolidation, acquisition of stock or assets, or any other form of business combination, any corporation, partnership, limited liability company, other business organization or any division thereof, or any material amount of assets outside the ordinary course of business;
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(m) make capital expenditures in excess of $20,000 individually for any project (or set of related projects) or $50,000 in the aggregate;
(n) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization;
(o) voluntarily incur any Liability or obligation (whether absolute, accrued, contingent or otherwise) in excess of $20,000 individually or $50,000 in the aggregate other than pursuant to the terms of a material Contract in existence as of the date of this Agreement or entered into in the ordinary course of business or in accordance with the terms of this Section 6.3 during the Interim Period;
(p) sell, lease, license, transfer, exchange or swap, mortgage or otherwise pledge or encumber (including securitizations), or otherwise dispose of any material portion of its properties, assets or rights;
(q) enter into any agreement, understanding or arrangement with respect to the voting of the Common Stock;
(r) take any action that would reasonably be expected to significantly delay or impair the obtaining of any consents or approvals of any Governmental Authority to be obtained in connection with this Agreement; or
(s) authorize or agree to do any of the foregoing actions.
6.4 Annual and Interim Financial Statements. From the date hereof through the Closing Date, within thirty calendar days following the end of each three-month quarterly period and each fiscal year, the Company shall deliver to the Purchaser an unaudited consolidated income statement and an unaudited consolidated balance sheet for the period from the Interim Balance Sheet Date through the end of such quarterly period or fiscal year and the applicable comparative period in the preceding fiscal year, in each case accompanied by a certificate of the Chief Financial Officer of the Company to the effect that all such financial statements fairly present the consolidated financial position and results of operations of the Target Companies as of the date or for the periods indicated, in accordance with GAAP, subject to year-end audit adjustments and excluding footnotes. From the date hereof through the Closing Date, the Company will also promptly deliver to the Purchaser copies of any audited consolidated financial statements of the Company and its Subsidiaries that the Company’s certified public accountants may issue.
6.5 Purchaser Public Filings. During the Interim Period, the Purchaser will keep current and timely file all of its public filings with the SEC or the OTC Markets Group and otherwise comply in all material respects with applicable securities Laws and shall use its commercially reasonable efforts to maintain the listing of the Common Stock on the OTC Bulletin Board.
6.6 No Solicitation.
(a) For purposes of this Agreement, (i) an “Acquisition Proposal” means any inquiry, proposal or offer, or any indication of interest in making an offer or proposal, from any Person or group at any time relating to an Alternative Transaction, and (ii) an “Alternative Transaction” means with respect to (A) the Company, the Sellers and their respective Affiliates and (B) the Purchaser and its Affiliates, a transaction (other than the transactions contemplated by this Agreement) concerning the sale of (x) all or any material part of the business or assets of any Target Companies or the Purchaser or (y) any of the shares or other equity interests or profits of any Target Companies or the Purchaser, in any case, whether such transaction takes the form of a sale of shares or other equity, assets, merger, consolidation, issuance of debt securities, management Contract, joint venture or partnership, or otherwise.
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(b) During the Interim Period, in order to induce the other Parties to continue to commit to expend management time and financial resources in furtherance of the transactions contemplated hereby, each Party shall not, and shall cause its Representatives to not, without the prior written consent of the Company and the Purchaser, directly or indirectly, (i) solicit, assist, initiate or facilitate the making, submission or announcement of, or intentionally encourage, any Acquisition Proposal, (ii) furnish any non-public information regarding such Party or its Affiliates (or, with respect to any Seller, any Target Company) or their respective businesses, operations, assets, Liabilities, financial condition, prospects or employees to any Person or group (other than a Party to this Agreement or their respective Representatives) in connection with or in response to an Acquisition Proposal, (iii) engage or participate in discussions or negotiations with any Person or group with respect to, or that could be expected to lead to, an Acquisition Proposal, (iv) approve, endorse or recommend, or publicly propose to approve, endorse or recommend, any Acquisition Proposal, (v) negotiate or enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Acquisition Proposal, or (vi) release any third Person from, or waive any provision of, any confidentiality agreement to which such Party is a party.
(c) Each Party shall notify the others as promptly as practicable (and in any event within 48 hours) orally and in writing of the receipt by such Party or any of its Representatives of (i) any bona fide inquiries, proposals or offers, requests for information or requests for discussions or negotiations regarding or constituting any Acquisition Proposal or any bona fide inquiries, proposals or offers, requests for information or requests for discussions or negotiations that could be expected to result in an Acquisition Proposal, and (ii) any request for non-public information relating to such Party or its Affiliates (or any Target Company), specifying in each case, the material terms and conditions thereof (including a copy thereof if in writing or a written summary thereof if oral) and the identity of the party making such inquiry, proposal, offer or request for information. Each Party shall keep the others promptly informed of the status of any such inquiries, proposals, offers or requests for information. During the Interim Period, each Party shall, and shall cause its Representatives to, immediately cease and cause to be terminated any solicitations, discussions or negotiations with any Person with respect to any Acquisition Proposal and shall, and shall direct its Representatives to, cease and terminate any such solicitations, discussions or negotiations.
6.7 No Trading. The Company and the Sellers acknowledge and agree that each is aware, and that the Company’s Affiliates are aware (and each of their respective Representatives is aware or, upon receipt of any material nonpublic information of the Purchaser, will be advised) of the restrictions imposed by the Federal Securities Laws and other applicable foreign and domestic Laws on a Person possessing material nonpublic information about a publicly traded company. Each of the Company and the Sellers hereby agree that, while any of them are in possession of such material nonpublic information, it shall not purchase or sell any securities of the Purchaser (other than acquire the Exchange Shares in accordance with Article I), communicate such information to any third party, take any other action with respect to the Purchaser in violation of such Laws, or cause or encourage any third party to do any of the foregoing.
6.8 Notification of Certain Matters. During the Interim Period, each of the Parties shall give prompt notice to the other Parties if such Party or its Affiliates (or, with respect to the Company, any Seller): (a) fails to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it or its Affiliates (or, with respect to the Company, any Seller) hereunder in any material respect; (b) receives any notice or other communication in writing from any third party (including any Governmental Authority) alleging (i) that the Consent of such third party is or may be required in connection with the transactions contemplated by this Agreement or (ii) any non-compliance with any Law by such Party or its Affiliates (or, with respect to the Company, any Seller); (c) receives any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; (d) discovers any fact or circumstance that, or becomes aware of the occurrence or non-occurrence of any event the occurrence or non-occurrence of which, would reasonably be expected to cause or result in any of the conditions set forth in Article VIII to not being satisfied or the satisfaction of those conditions being materially delayed; or (e) becomes aware of the commencement or threat, in writing, of any Action against such Party or any of its Affiliates (or, with respect to the Company, any Seller), or any of their respective properties or assets, or, to the Knowledge of such Party, any officer, director, partner, member or manager, in his, her or its capacity as such, of such Party or of its Affiliates (or, with respect to the Company, any Seller) with respect to the consummation of the transactions contemplated by this Agreement. No such notice shall constitute an acknowledgement or admission by the Party providing the notice regarding whether or not any of the conditions to the Closing have been satisfied or in determining whether or not any of the representations, warranties or covenants contained in this Agreement have been breached.
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6.9 Efforts.
(a) Subject to the terms and conditions of this Agreement, each Party shall use its commercially reasonable efforts, and shall cooperate fully with the other Parties, to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate the transactions contemplated by this Agreement (including the receipt of all applicable consents of Governmental Authorities) and to comply as promptly as practicable with all requirements of Governmental Authorities applicable to the transactions contemplated by this Agreement.
(b) Prior to the Closing, each Party shall use its commercially reasonable efforts to obtain any Consents of Governmental Authorities or other third Persons as may be necessary for the consummation by such Party or its Affiliates of the transactions contemplated by this Agreement or required as a result of the execution or performance of, or consummation of the transactions contemplated by, this Agreement by such Party or its Affiliates, and the other Parties shall provide reasonable cooperation in connection with such efforts.
(c) Notwithstanding anything herein to the contrary, no Party shall be required to agree to any term, condition or modification with respect to obtaining any Consents in connection with the transactions contemplated by this Agreement that would result in, or would be reasonably likely to result in: (i) a Material Adverse Effect to such Party or its Affiliates, or (ii) such Party having to cease, sell or otherwise dispose of any material assets or businesses (including the requirement that any such assets or business be held separate).
6.10 Further Assurances. The Parties hereto shall further cooperate with each other and use their respective commercially reasonable efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable on their part under this Agreement and applicable Laws to consummate the transactions contemplated by this Agreement as soon as practicable, including preparing and filing as soon as practicable all documentation to effect all necessary notices, reports and other filings.
6.11 Stockholder Approval. As promptly as practicable after the date hereof, the Purchaser shall seek approval of the requisite number of stockholders of the Purchaser, including by written stockholder consent, as is required to approve the Agreement and the transactions contemplated hereby or referred to herein.
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6.12 Public Announcements; SEC Filings.
(a) The Parties agree that no public release, filing or announcement concerning this Agreement or the transactions contemplated hereby shall be issued by any Party or any of their Affiliates without the prior consent of the Purchaser and the Company (which consent shall not be unreasonably withheld, conditioned or delayed), except as such release or announcement may be required by applicable Law or the rules or regulations of any securities exchange, in which case the applicable Party shall use commercially reasonable efforts to allow the other Parties reasonable time to comment on, and arrange for any required filing with respect to, such release or announcement in advance of such issuance.
(b) The Parties shall mutually agree upon and, as promptly as practicable after the execution of this Agreement (but in any event within four business days thereafter), file a Current Report on Form 8-K (the “Signing Filing”) with a description of this Agreement as required by U.S. federal securities laws and the rules and regulations of the SEC and the OTC Markets Group promulgated thereunder or otherwise (the “Federal Securities Laws”), which the Company shall review, comment upon and approve (which approval shall not be unreasonably withheld, conditioned or delayed) prior to filing (with the Company reviewing, commenting upon and approving such Signing Filing in any event no later than the second business day after the execution of this Agreement). The Parties shall mutually agree upon and, as promptly as practicable after the Closing (but in any event within four business days thereafter), file a Current Report on Form 8-K (the “Closing Filing”) with a description of the Closing as required by Federal Securities Laws which the Company shall review, comment upon and approve (which approval shall not be unreasonably withheld, conditioned or delayed) prior to filing (with the Company reviewing, commenting upon and approving such Closing Filing in any event no later than the second business day after the Closing). In connection with the preparation of the Signing Filing, the Closing Filing, or any other report, statement, filing notice or application made by or on behalf of a Party to any Governmental Authority or other third party in connection with the transactions contemplated hereby, each Party shall, upon request by any other Party, furnish the Parties with all information concerning themselves, their respective directors, officers and equity holders, and such other matters as may be reasonably necessary or advisable in connection with the transactions contemplated hereby, or any other report, statement, filing, notice or application made by or on behalf of a Party to any third party and/ or any Governmental Authority in connection with the transactions contemplated hereby.
6.13 Confidential Information.
(a) The Company (prior to the Closing) and the Sellers hereby agree that they shall, and shall cause their respective Representatives to: (i) treat and hold in strict confidence any Purchaser Confidential Information, and will not use it for any purpose (except in connection with the consummation of the transactions contemplated by this Agreement, performing their obligations hereunder, enforcing their rights hereunder, or in furtherance of their authorized duties on behalf of the Purchaser), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the Purchaser Confidential Information without the Purchaser’s prior written consent; and (ii) in the event that the Company (prior to the Closing), any Seller or any of the respective Representatives becomes legally compelled to disclose any Purchaser Confidential Information, (A) provide the Purchaser with prompt written notice of such requirement so that the Purchaser or an Affiliate thereof may seek a protective order or other remedy or waive compliance with this Section 6.13(a), and (B) in the event that such protective order or other remedy is not obtained, or the Purchaser waives compliance with this Section 6.13(a), furnish only that portion of such Purchaser Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Purchaser Confidential Information. In the event that this Agreement is terminated and the transactions contemplated hereby are not consummated, the Company and the Sellers shall, and shall cause their respective Representatives to, promptly deliver to the Purchaser any and all copies (in whatever form or medium) of Purchaser Confidential Information and destroy all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon.
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(b) The Purchaser hereby agrees that during the Interim Period and, in the event this Agreement is terminated in accordance with Article IX, for a period of two years after such termination, it shall, and shall cause its Representatives to: (i) treat and hold in strict confidence any Company Confidential Information, and will not use for any purpose (except in connection with the consummation of the transactions contemplated by this Agreement, performing its obligations hereunder or thereunder or enforcing its rights hereunder or thereunder), nor directly or indirectly disclose, distribute, publish, disseminate or otherwise make available to any third party any of the Company Confidential Information without the Company’s prior written consent; and (ii) in the event that the Purchaser or any of its Representatives becomes legally compelled to disclose any Company Confidential Information, (A) provide the Company with prompt written notice of such requirement so that the Company, a Seller or an Affiliate of any of them may seek a protective order or other remedy or waive compliance with this Section 6.13(b), and (B) in the event that such protective order or other remedy is not obtained, or the Company waives compliance with this Section 6.13(b), furnish only that portion of such Company Confidential Information which is legally required to be provided as advised in writing by outside counsel and to exercise its commercially reasonable efforts to obtain assurances that confidential treatment will be accorded such Company Confidential Information. In the event that this Agreement is terminated and the transactions contemplated hereby are not consummated, the Purchaser shall, and shall cause its Representatives to, promptly deliver to the Company any and all copies (in whatever form or medium) of Company Confidential Information and destroy all notes, memoranda, summaries, analyses, compilations and other writings related thereto or based thereon. Notwithstanding the foregoing, the Purchaser and its Representatives shall be permitted to disclose any and all Company Confidential Information to the extent required by the Federal Securities Laws.
6.14 Litigation Support. Following the Closing, in the event that and for so long as any Party is actively contesting or defending against any third party or Governmental Authority Action in connection with any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction that existing on or prior to the Closing Date involving the Purchaser or any Target Company, each of the other Parties will (i) reasonably cooperate with the contesting or defending party and its counsel in the contest or defense, (ii) make available its personnel at reasonable times and upon reasonable notice and (iii) provide (A) such testimony and (B) access to its non-privileged books and records as may be reasonably requested in connection with the contest or defense, at the sole cost and expense of the contesting or defending party.
6.15 Documents and Information. After the Closing Date, the Purchaser and the Target Companies shall, and the Company shall cause its Subsidiaries to, until the seventh anniversary of the Closing Date, retain all books, records and other documents pertaining to the business of the Target Companies in existence on the Closing Date.
6.16 Supplemental Disclosure Schedules.
(a) During the Interim Period, each of the Company, the Sellers and the Purchaser shall have the right, by providing one or more written supplemental disclosure schedules (“Supplemental Disclosure Schedules”) to the others, to update its disclosure schedules: (a) to reflect changes in the ordinary course of business first existing or occurring after the date of this Agreement, which if existing or occurring on or prior to the date of this Agreement, would have been required to be set forth on such schedules, and (b) which updates do not result from any breach of a covenant made by such disclosing Party or its Affiliates in this Agreement. Other than any updates permitted by the prior sentence, no Supplemental Disclosure Schedule shall affect any of the conditions to the Parties’ respective obligations under the Agreement (including for purposes of determining satisfaction or waiver of the conditions set forth in Article VIII), or any other remedy available to the Parties arising from a representation or warranty that was or would be inaccurate, or a warranty that would be breached, without qualification by the update.
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(b) For the purposes of the Company Disclosure Schedules and the Purchaser Disclosure Schedules, any information, item or other disclosure set forth in any part of such disclosure schedules (or, to the extent applicable, any Supplemental Disclosure Schedule) shall be deemed to have been set forth in all other applicable parts of such disclosure schedules (or, to the extent applicable, Supplemental Disclosure Schedules) to the extent that the applicability of such disclosure to such other parts is reasonably apparent on the face of such disclosure. Inclusion of information in any disclosure schedule or Supplemental Disclosure Schedule shall not be construed as an admission by such party that such information is material to the business, properties, financial condition or results of operations of, as applicable, the Company, the Sellers or the Purchaser or their respective Affiliates. Matters reflected in any disclosure schedule or Supplemental Disclosure Schedule is not necessarily limited to matters required by this Agreement to be reflected therein and the inclusion of such matters shall not be deemed an admission that such matters were required to be reflected in such disclosure schedule or Supplemental Disclosure Schedule. Such additional matters are set forth for informational purposes only and do not necessarily include other matters of a similar nature.
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VII.
SURVIVAL.
7.1 Survival.
(a) All representations and warranties of the Company and the Sellers contained in this Agreement (including all schedules and exhibits hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement) shall survive the Closing through and until the second anniversary of the Closing Date; provided, however, that (a) the representations and warranties contained in Sections 4.14 (Taxes and Returns), 4.19 (Benefit Plans), 4.20 (Environmental Matters), 4.30 (Information Supplied) and 5.11 (Information Supplied) shall survive until sixty days after the expiration of the applicable statute of limitations, and (b) the representations and warranties contained in Sections 4.1 (Due Organization and Good Standing), 4.2 (Authorization; Binding Agreement), 4.3 (Capitalization), 4.4 (Subsidiaries), 4.28 (Finders and Investment Bankers), 4.29 (Independent Investigation), 5.1 (Due Organization and Good Standing), 5.2 (Authorization; Binding Agreement), 5.3 (Ownership), 5.9 (Finders and Investment Bankers) and 5.10 (Independent Investigation) will survive indefinitely. Additionally, Fraud Claims against the Company or the Sellers shall survive indefinitely. If written notice of a claim for breach of any representation or warranty has been given before the applicable date when such representation or warranty no longer survives in accordance with this Section 7.1(a), then the relevant representations and warranties shall survive as to such claim, until the claim has been finally resolved. All covenants, obligations and agreements of the Company and the Sellers contained in this Agreement (including all schedules and exhibits hereto and all certificates, documents, instruments and undertakings furnished pursuant to this Agreement) shall survive the Closing and continue until fully performed in accordance with their terms.
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(b) The representations and warranties of the Purchaser contained in this Agreement or in any certificate or instrument delivered pursuant to this Agreement shall not survive the Closing, and from and after the Closing, the Purchaser and its Representatives shall not have any further obligations, nor shall any claim be asserted or action be brought against the Purchaser or its Representatives with respect thereto. The covenants and agreements made by the Purchaser in this Agreement or in any certificate or instrument delivered pursuant to this Agreement, including any rights arising out of any breach of such covenants or agreements, shall not survive the Closing, except for those covenants and agreements contained herein and therein that by their terms apply or are to be performed in whole or in part after the Closing.
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VIII.
CLOSING CONDITIONS.
8.1 Conditions to Each Party’s Obligations. The obligations of each Party to consummate the transactions described herein shall be subject to the satisfaction or written waiver (where permissible) by the Company and the Purchaser of the following conditions:
(a) Required Purchaser Stockholder Approval. The stockholders of the Purchaser shall have approved, by vote or written consent, the Agreement and the transactions contemplated hereby by the requisite vote of the stockholders of the Purchaser (the “Required Stockholder Approval”).
(b) Requisite Regulatory Approvals. All Consents required to be obtained from or made with any Governmental Authority in order to consummate the transactions contemplated by this Agreement, shall have been obtained or made.
(c) Requisite Consents. The Consents required to be obtained from or made with any third Person (other than a Governmental Authority) in order to consummate the transactions contemplated by this Agreement as set forth in Schedule 8.1(c) shall have each been obtained or made.
(d) No Law. No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary or permanent) or Order that is then in effect and which has the effect of making the transactions or agreements contemplated by this Agreement illegal or which otherwise prevents or prohibits consummation of the transactions contemplated by this Agreement.
(e) No Litigation. There shall not be any pending Action brought by a third-party non-Affiliate to enjoin or otherwise restrict the consummation of the Closing.
8.2 Conditions to Obligations of the Company and the Sellers. In addition to the conditions specified in Section 8.1, the obligations of the Company and the Sellers to consummate the transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by the Company) of the following conditions:
(a) Representations and Warranties. All of the representations and warranties of the Purchaser set forth in this Agreement and in any certificate delivered by the Purchaser pursuant hereto shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that do not materially and adversely affect the Purchaser’s ability to consummate the transactions contemplated hereby.
(b) Agreements and Covenants. The Purchaser shall have performed in all material respects all of the Purchaser’s obligations and complied in all material respects with all of the Purchaser’s agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.
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(c) No Material Adverse Effect. No Material Adverse Effect shall have occurred with respect to the Purchaser since the date of this Agreement.
(d) Closing Deliveries.
(i) Officer Certificate. The Purchaser shall have delivered to the Company a certificate, dated the Closing Date, signed by an executive officer of the Purchaser in such capacity, certifying as to the satisfaction of the conditions specified in Sections 8.2(a), 8.2(b) and 8.2(c).
(ii) Secretary Certificate. The Purchaser shall have delivered to the Company a certificate from its secretary certifying as to (A) copies of the Purchaser’s Organizational Documents as in effect as of the Closing Date, (B) the resolutions of the Purchaser’s board of directors authorizing the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, (C) evidence of the Required Stockholder Approval and (D) the incumbency of officers authorized to execute this Agreement.
(iii) Good Standing. The Purchaser shall have delivered to the Company a good standing certificate (or similar documents applicable for such jurisdictions) for the Purchaser certified as of a date no later than ten days prior to the Closing Date from the proper Governmental Authority of the Purchaser’s jurisdiction of organization.
8.3 Conditions to Obligations of the Purchaser. In addition to the conditions specified in Section 8.1, the obligations of the Purchaser to consummate the transactions contemplated by this Agreement are subject to the satisfaction or written waiver (by the Purchaser) of the following conditions:
(a) Representations and Warranties. All of the representations and warranties of the Company and the Sellers set forth in this Agreement and in any certificate delivered by the Company or any Seller pursuant hereto shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date as if made on the Closing Date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date), and (ii) any failures to be true and correct that (without giving effect to any qualifications or limitations as to materiality or Material Adverse Effect), individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect on, or with respect to, any Target Company or adversely affects the Company’s or Sellers’ ability to consummate the transactions contemplated hereby.
(b) Agreements and Covenants. The Company and each Seller shall have performed in all material respects all of such Party’s obligations and complied in all material respects with all of such Party’s agreements and covenants under this Agreement to be performed or complied with by it on or prior to the Closing Date.
(c) No Material Adverse Effect. No Material Adverse Effect shall have occurred with respect to any Target Company since the date of this Agreement.
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(d) Closing Deliveries.
(i) Officer Certificate. The Purchaser shall have received a certificate from the Company, dated as the Closing Date, signed by an executive officer of the Company in such capacity, certifying as to the satisfaction of the conditions specified in Sections 8.3(a), 8.3(b) and 8.3(c).
(ii) Seller Certificate. The Purchaser shall have received a certificate from each Seller, dated as of the Closing Date, signed by such Seller, certifying as to the satisfaction of the conditions specified in Sections 8.3(a) and 8.3(b) with respect to such Seller.
(iii) Secretary Certificate. The Company shall have delivered to the Purchaser a certificate from its secretary certifying as to (A) copies of the Company’s Organizational Documents as in effect as of the Closing Date, (B) the resolutions of the Company’s board of directors and shareholders authorizing the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, and (C) the incumbency of officers authorized to execute this Agreement.
(iv) Good Standing. The Company shall have delivered to the Purchaser good standing certificates (or similar documents applicable for such jurisdictions) for each Target Company certified as of a date no later than ten days prior to the Closing Date from the proper Governmental Authority of the Target Company’s jurisdiction of organization and from each other jurisdiction in which the Target Company is qualified to conduct business as a foreign corporation or other entity as of the Closing, in each case to the extent that good standing certificates or similar documents are generally available in such jurisdictions.
(v) Certified Charter. A copy of the Company Charter, as in effect as of the Closing, certified by the appropriate Governmental Authority of The Cayman Islands as of a date no more than ten business days prior to the Closing Date.
(vi) Share Certificates and Transfer Instruments. The Purchaser shall have received from each Seller share certificates representing the Purchased Shares (or duly executed affidavits of lost stock certificates and indemnities in forms and substance reasonably acceptable to the Purchaser), together with executed instruments of transfer in respect of the Purchased Shares in favor of the Purchaser (or its nominee) and in form reasonably acceptable for transfer on the books of the Company.
(vii) Board Resolutions. The Purchaser shall have received duly executed written resolutions of the board of directors of the Company, in the agreed form, approving: the transfer of the Purchased Shares to the Purchaser (or its nominee) at Closing.
8.4 Frustration of Conditions. Notwithstanding anything contained herein to the contrary, no Party may rely on the failure of any condition set forth in this Article VIII to be satisfied if such failure was caused by the failure of such Party or its Affiliates (or with respect to the Company, any Seller) to comply with or perform any of its covenants or obligations set forth in this Agreement.
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IX.
TERMINATION AND EXPENSES.
9.1 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing as follows:
(a) by mutual written consent of the Purchaser and the Company;
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(b) by written notice by the Purchaser or the Company if any of the conditions to the Closing set forth in Article VIII have not been satisfied or waived by the three month anniversary of the date of this Agreement (the “Outside Date”); provided, however, the right to terminate this Agreement under this Section 9.1(b) shall not be available to a Party if the breach or violation by such Party or its Affiliates (or with respect to the Company, the Sellers) of any representation, warranty, covenant or obligation under this Agreement was the cause of, or resulted in, the failure of the Closing to occur on or before the Outside Date;
(c) by written notice by either the Purchaser or the Company if a Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such Order or other action has become final and non-appealable; provided, however, that the right to terminate this Agreement pursuant to this Section 9.1(c) shall not be available to a Party if the failure by such Party or its Affiliates (or with respect to the Company, the Sellers) to comply with any provision of this Agreement has been a substantial cause of, or substantially resulted in, such action by such Governmental Authority;
(d) by written notice by the Company, if (i) there has been a breach by the Purchaser of any of its representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of the Purchaser shall have become untrue or inaccurate, in any case, which would result in a failure of a condition set forth in Section 8.2(a) or Section 8.2(b) to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty days after written notice of such breach or inaccuracy is provided by the Company or (B) the Outside Date;
(e) by written notice by the Purchaser, if (i) there has been a breach by the Company or the Sellers of any of their respective representations, warranties, covenants or agreements contained in this Agreement, or if any representation or warranty of such Parties shall have become untrue or inaccurate, in any case, which would result in a failure of a condition set forth in Section 8.3(a) or Section 8.3(b) to be satisfied (treating the Closing Date for such purposes as the date of this Agreement or, if later, the date of such breach), and (ii) the breach or inaccuracy is incapable of being cured or is not cured within the earlier of (A) twenty days after written notice of such breach or inaccuracy is provided by the Purchaser or (B) the Outside Date; or
(f) by written notice by the Purchaser if there shall have been a Material Adverse Effect on the Target Companies following the date of this Agreement which is uncured and continuing.
9.2 Effect of Termination. This Agreement may only be terminated in the circumstances described in Section 9.1 and pursuant to a written notice delivered by the applicable Party to the other applicable Parties, which sets forth the basis for such termination, including the provision of Section 9.1 under which such termination is made. In the event of the valid termination of this Agreement pursuant to Section 9.1, this Agreement shall forthwith become void, and there shall be no Liability on the part of any Party or any of their respective Representatives, and all rights and obligations of each Party shall cease, except: (i) Sections 6.12, 6.13, 9.3, Article XI and this Section 9.2 shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any Party from Liability for any willful breach of any representation, warranty, covenant or obligation under this Agreement or any Fraud Claim against such Party, in either case, prior to termination of this Agreement (in each case of clauses (i) and (ii) above). Without limiting the foregoing, and except as provided in Sections 9.3 and this Section 9.2, the Parties’ sole right prior to the Closing with respect to any breach of any representation, warranty, covenant or other agreement contained in this Agreement by another Party or with respect to the transactions contemplated by this Agreement shall be the right, if applicable, to terminate this Agreement pursuant to Section 9.1.
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9.3 Fees and Expenses. All Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses. As used in this Agreement, “Expenses” shall include all out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, financial advisors, financing sources, experts and consultants to a Party hereto or any of its Affiliates) incurred by a Party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution or performance of this Agreement and all other matters related to the consummation of this Agreement.
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X.
RELEASES.
10.1 Release and Covenant Not to Sue. Effective as of the Closing, to the fullest extent permitted by applicable Law, each Seller, on behalf of itself and its Affiliates and any Person that owns any share or other equity interest in or of such Seller (the “Releasing Persons”), hereby releases and discharges the Target Companies from and against any and all Actions, obligations, agreements, debts and Liabilities whatsoever, whether known or unknown, both at law and in equity, which such Releasing Person now has, has ever had or may hereafter have against the Target Companies arising on or prior to the Closing Date or on account of or arising out of any matter occurring on or prior to the Closing Date, including any rights to indemnification or reimbursement from a Target Company, whether pursuant to its Organizational Documents, Contract or otherwise, and whether or not relating to claims pending on, or asserted after, the Closing Date. From and after the Closing, each Releasing Person hereby irrevocably covenants to refrain from, directly or indirectly, asserting any Action, or commencing or causing to be commenced, any Action of any kind against the Target Companies or their respective Affiliates, based upon any matter purported to be released hereby. Notwithstanding anything herein to the contrary, the releases and restrictions set forth herein shall not apply to any claims a Releasing Person may have against any party pursuant to the terms and conditions of this Agreement.
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XI.
MISCELLANEOUS.
11.1 Notices. All notices, consents, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered (i) in person, (ii) by facsimile or other electronic means, with affirmative confirmation of receipt, (iii) one business day after being sent, if sent by reputable, nationally recognized overnight courier service or (iv) three business days after being mailed, if sent by registered or certified mail, pre-paid and return receipt requested, in each case to the applicable Party at the addresses located on such Party’s signature page, in the case of the Purchaser or the Company, or to the following address, in the case of the Seller’s (or at such other address for a Party as shall be specified by like notice):
Sunshine Technology Limited
Wickhams Cay II
Road Town, Tortola, VG1110
British Virgin Islands
11.2 Binding Effect; Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns. This Agreement shall not be assigned by operation of Law or otherwise without the prior written consent of the Purchaser and the Company, and any assignment without such consent shall be null and void; provided that no such assignment shall relieve the assigning Party of its obligations hereunder.
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11.3 Third Parties. Nothing contained in this Agreement or in any instrument or document executed by any party in connection with the transactions contemplated hereby shall create any rights in, or be deemed to have been executed for the benefit of, any Person that is not a Party hereto or thereto or a successor or permitted assign of such a Party.
11.4 Arbitration. Any and all disputes, controversies and claims (other than applications for a temporary restraining order, preliminary injunction, permanent injunction or other equitable relief or application for enforcement of a resolution under this Section 11.4) arising out of, related to, or in connection with this Agreement or the transactions contemplated hereby (a “Dispute”) shall be governed by this Section 11.4. A party must, in the first instance, provide written notice of any Disputes to the other parties subject to such Dispute, which notice must provide a reasonably detailed description of the matters subject to the Dispute. The parties involved in such Dispute shall seek to resolve the Dispute on an amicable basis within ten business days of the notice of such Dispute being received by such other parties subject to such Dispute (the “Resolution Period”); provided, that if any Dispute would reasonably be expected to have become moot or otherwise irrelevant if not decided within sixty days after the occurrence of such Dispute, then there shall be no Resolution Period with respect to such Dispute. Any Dispute that is not resolved during the Resolution Period may immediately be referred to and finally resolved by arbitration pursuant to the then-existing Expedited Procedures of the Commercial Arbitration Rules (the “AAA Procedures”) of the American Arbitration Association (the “AAA”). Any party involved in such Dispute may submit the Dispute to the AAA to commence the proceedings after the Resolution Period. To the extent that the AAA Procedures and this Agreement are in conflict, the terms of this Agreement shall control. The arbitration shall be conducted by one arbitrator nominated by the AAA promptly (but in any event within five business days) after the submission of the Dispute to the AAA and reasonably acceptable to each party subject to the Dispute, which arbitrator shall be a commercial lawyer with substantial experience arbitrating disputes under acquisition agreements. The arbitrator shall accept his or her appointment and begin the arbitration process promptly (but in any event within five business days) after his or her nomination and acceptance by the parties subject to the Dispute. The proceedings shall be streamlined and efficient. The arbitrator shall decide the Dispute in accordance with the substantive law of the state of Nevada. Time is of the essence. Each party shall submit a proposal for resolution of the Dispute to the arbitrator within twenty days after confirmation of the appointment of the arbitrator. The arbitrator shall have the power to order any party to do, or to refrain from doing, anything consistent with this Agreement and applicable Law, including to perform its contractual obligation(s); provided, that the arbitrator shall be limited to ordering pursuant to the foregoing power (and, for the avoidance of doubt, shall order) the relevant party (or parties, as applicable) to comply with only one or the other of the proposals. The arbitrator’s award shall be in writing and shall include a reasonable explanation of the arbitrator’s reason(s) for selecting one or the other proposal. The seat of arbitration shall be in the State of Nevada. The language of the arbitration shall be English.
11.5 Governing Law; Jurisdiction. This Agreement shall be governed by, construed and enforced in accordance with the Laws of the State of Nevada without regard to the conflict of laws principles thereof. Subject to Section 11.4, all Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any state or federal court located in Clark County, Nevada (or in any court in which appeal from such courts may be taken) (the “Specified Courts”). Subject to Section 11.4, each Party hereto hereby (a) submits to the exclusive jurisdiction of any Specified Court for the purpose of any Action arising out of or relating to this Agreement brought by any Party hereto and (b) irrevocably waives, and agrees not to assert by way of motion, defense or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated hereby may not be enforced in or by any Specified Court. Each Party agrees that a final judgment in any Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. Each Party irrevocably consents to the service of the summons and complaint and any other process in any other action or proceeding relating to the transactions contemplated by this Agreement, on behalf of itself, or its property, by personal delivery of copies of such process to such Party at the applicable address set forth in Section 11.1. Nothing in this Section 11.5 shall affect the right of any Party to serve legal process in any other manner permitted by Law.
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11.6 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY ACTION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.6.
11.7 Specific Performance. Each Party acknowledges that the rights of each Party to consummate the transactions contemplated hereby are unique, recognizes and affirms that in the event of a breach of this Agreement by any Party, money damages may be inadequate and the non-breaching Parties may have not adequate remedy at law, and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed by an applicable Party in accordance with their specific terms or were otherwise breached. Accordingly, each Party shall be entitled to seek an injunction or restraining order to prevent breaches of this Agreement and to seek to enforce specifically the terms and provisions hereof, without the requirement to post any bond or other security or to prove that money damages would be inadequate, this being in addition to any other right or remedy to which such Party may be entitled under this Agreement, at law or in equity.
11.8 Severability. In case any provision in this Agreement shall be held invalid, illegal or unenforceable in a jurisdiction, such provision shall be modified or deleted, as to the jurisdiction involved, only to the extent necessary to render the same valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby nor shall the validity, legality or enforceability of such provision be affected thereby in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties will substitute for any invalid, illegal or unenforceable provision a suitable and equitable provision that carries out, so far as may be valid, legal and enforceable, the intent and purpose of such invalid, illegal or unenforceable provision.
11.9 Amendment. This Agreement may be amended, supplemented or modified only by execution of a written instrument signed by the Purchaser and the Company.
11.10 Waiver. The Purchaser on behalf of itself and its Affiliates, on the one hand, and the Company on behalf of itself and its Affiliates, may in its sole discretion (i) extend the time for the performance of any obligation or other act of any other non-Affiliated Party hereto, (ii) waive any inaccuracy in the representations and warranties by such other non-Affiliated Party contained herein or in any document delivered pursuant hereto and (iii) waive compliance by such other non-Affiliated Party with any covenant or condition contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the Party or Parties to be bound thereby. Notwithstanding the foregoing, no failure or delay by a Party in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any other right hereunder.
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11.11 Entire Agreement. This Agreement and the documents or instruments referred to herein, including any exhibits, annexes and schedules attached hereto, which exhibits, annexes and schedules are incorporated herein by reference, embody the entire agreement and understanding of the Parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or the documents or instruments referred to herein, which collectively supersede all prior agreements and the understandings among the Parties with respect to the subject matter contained herein.
11.12 Interpretation. The table of contents and the Article and Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. In this Agreement, unless the context otherwise requires: (a) any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and words in the singular, including any defined terms, include the plural and vice versa; (b) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity; (c) any accounting term used and not otherwise defined in this Agreement has the meaning assigned to such term in accordance with GAAP; (d) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding or succeeding such term and shall be deemed in each case to be followed by the words “without limitation”; (e) the words “herein,” “hereto,” and “hereby” and other words of similar import in this Agreement shall be deemed in each case to refer to this Agreement as a whole and not to any particular Section or other subdivision of this Agreement; (f) the word “if” and other words of similar import when used herein shall be deemed in each case to be followed by the phrase “and only if”; (g) the term “or” means “and/or”; (h) any reference to the term “ordinary course” or “ordinary course of business” shall be deemed in each case to be followed by the words “consistent with past practice”; (i) any agreement, instrument, insurance policy, Law or Order defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument, insurance policy, Law or Order as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes, regulations, rules or orders) by succession of comparable successor statutes, regulations, rules or orders and references to all attachments thereto and instruments incorporated therein; (j) except as otherwise indicated, all references in this Agreement to the words “Section,” “Article”, “Schedule”, “Exhibit” and “Annex” are intended to refer to Sections, Articles, Schedules, Exhibits and Annexes to this Agreement; and (k) the term “Dollars” or “$” means United States dollars. Any reference in this Agreement to a Person’s directors shall include any member of such Person’s governing body and any reference in this Agreement to a Person’s officers shall include any Person filling a substantially similar position for such Person. Any reference in this Agreement to a Person’s shareholders shall include any applicable owners of the equity interests of such Person, in whatever form, including with respect to the Purchaser its stockholders under the NRS or its Organizational Documents. The Parties have participated jointly in the negotiation and drafting of this Agreement. Consequently, in the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.
11.13 Counterparts. This Agreement may be executed and delivered (including by facsimile or other electronic transmission) in one or more counterparts, and by the different Parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
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XII.
DEFINITIONS.
12.1 Certain Definitions. For purpose of this Agreement, the following capitalized terms have the following meanings:
“Action” means any notice of noncompliance or violation, or any claim, demand, charge, action, suit, litigation, audit, settlement, complaint, stipulation, assessment or arbitration, or any request (including any request for information), inquiry, hearing, proceeding or investigation, by or before any Governmental Authority.
“Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling, Controlled by, or under common Control with such Person.
“Benefit Plans” of any Person means any and all deferred compensation, executive compensation, incentive compensation, equity purchase or other equity-based compensation plan, employment or consulting, severance or termination pay, holiday, vacation or other bonus plan or practice, hospitalization or other medical, life or other insurance, supplemental unemployment benefits, profit sharing, pension, or retirement plan, program, agreement, commitment or arrangement, and each other employee benefit plan, program, agreement or arrangement, including each “employee benefit plan” as such term is defined under Section 3(3) of ERISA, maintained or contributed to or required to be contributed to by a Person for the benefit of any employee or terminated employee of such Person, or with respect to which such Person has any Liability, whether direct or indirect, actual or contingent, whether formal or informal, and whether legally binding or not.
“Cayman Islands Act” means the Companies Law (2018, as amended) of the Cayman Islands.
“Code” means the Internal Revenue Code of 1986, as amended, and any successor statute thereto, as amended. Reference to a specific section of the Code shall include such section and any valid treasury regulation promulgated thereunder.
“Company Benefit Plan” means any plan, fund (including any superannuation fund) or other similar program or arrangement established or maintained outside the United States by the Company or any one or more of its Subsidiaries primarily for the benefit of employees of the Company or such Subsidiaries residing outside the United States, which plan, fund or other similar program or arrangement provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code.
“Company Charter” means the memorandum of association and articles of incorporation of the Company, as amended and effective under the Cayman Islands Act.
“Company Confidential Information” means all confidential or proprietary documents and information concerning the Target Companies or the Sellers or any of their respective Representatives, furnished in connection with this Agreement or the transactions contemplated hereby; provided, however, that Company Confidential Information shall not include any information which, (i) at the time of disclosure by the Purchaser or its Representatives, is generally available publicly and was not disclosed in breach of this Agreement or (ii) at the time of the disclosure by the Company, the Sellers or their respective Representatives to the Purchaser or its Representatives was previously known by such receiving party without violation of Law or any confidentiality obligation by the Person receiving such Company Confidential Information.
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“Company Ordinary Shares” means the shares of par value $0.00001 each in the Company.
“Consent” means any consent, approval, waiver, authorization or Permit of, or notice to or declaration or filing with any Governmental Authority or any other Person.
“Contracts” means all contracts, agreements, binding arrangements, bonds, notes, indentures, mortgages, debt instruments, purchase order, licenses (and all other contracts, agreements or binding arrangements concerning Intellectual Property), franchises, leases and other instruments or obligations of any kind, written or oral (including any amendments and other modifications thereto).
“Control” of a Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. “Controlled”, “Controlling” and “under common Control with” have correlative meanings. Without limiting the foregoing a Person (the “Controlled Person”) shall be deemed Controlled by (a) any other Person (the “10% Owner”) (i) owning beneficially, as meant in Rule 13d-3 under the Exchange Act, securities entitling such Person to cast ten percent (10%) or more of the votes for election of directors or equivalent governing authority of the Controlled Person or (ii) entitled to be allocated or receive ten percent (10%) or more of the profits, losses, or distributions of the Controlled Person; (b) an officer, director, general partner, partner (other than a limited partner), manager, or member (other than a member having no management authority that is not a 10% Owner) of the Controlled Person; or (c) a spouse, parent, lineal descendant, sibling, aunt, uncle, niece, nephew, mother-in-law, father-in-law, sister-in-law, or brother-in-law of an Affiliate of the Controlled Person or a trust for the benefit of an Affiliate of the Controlled Person or of which an Affiliate of the Controlled Person is a trustee.
“Copyrights” means any works of authorship, mask works and all copyrights therein, including all renewals and extensions, copyright registrations and applications for registration and renewal, and non-registered copyrights.
“Environmental Law” means any Law in any way relating to (a) the protection of human health and safety, (b) the protection, preservation or restoration of the environment and natural resources (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or (c) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Materials.
“Environmental Liabilities” means, in respect of any Person, all Liabilities, obligations, responsibilities, Remedial Actions, Losses, damages, costs, and expenses (including all reasonable fees, disbursements, and expenses of counsel, experts, and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any other Person or in response to any violation of Environmental Law, whether known or unknown, accrued or contingent, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, to the extent based upon, related to, or arising under or pursuant to any Environmental Law, Environmental Permit, Order, or Contract with any Governmental Authority or other Person, that relates to any environmental, health or safety condition, violation of Environmental Law, or a Release or threatened Release of Hazardous Materials.
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“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fraud Claim” means any claim based in whole or in part upon fraud, willful misconduct or intentional misrepresentation.
“GAAP” means generally accepted accounting principles as in effect in the United States of America.
“Governmental Authority” means any federal, state, local, foreign or other governmental, quasi-governmental or administrative body, instrumentality, department or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body.
“Hazardous Material” means any waste, gas, liquid or other substance or material that is defined, listed or designated as a “hazardous substance”, “pollutant”, “contaminant”, “hazardous waste”, “regulated substance”, “hazardous chemical”, or “toxic chemical” (or by any similar term) under any Environmental Law, or any other material regulated, or that could result in the imposition of Liability or responsibility, under any Environmental Law, including petroleum and its by- products, asbestos, polychlorinated biphenyls, radon, mold, and urea formaldehyde insulation.
“Indebtedness” of any Person means (a) all indebtedness of such Person for borrowed money (including the outstanding principal and accrued but unpaid interest) or for the deferred purchase price of property or services, (b) any other indebtedness of such Person that is evidenced by a note, bond, debenture, credit agreement or similar instrument, (c) all obligations of such Person under leases that should be classified as capital leases in accordance with GAAP, (d) all obligations of such Person for the reimbursement of any obligor on any line or letter of credit, banker’s acceptance, guarantee or similar credit transaction, in each case, that has been drawn or claimed against, (e) all obligations of such Person in respect of acceptances issued or created, (f) all interest rate and currency swaps, caps, collars and similar agreements or hedging devices under which payments are obligated to be made by such Person, whether periodically or upon the happening of a contingency, (g) all obligations secured by an Lien on any property of such Person, (h) any premiums, prepayment fees or other penalties, fees, costs or expenses associated with payment of any Indebtedness of such Person and (i) all obligation described in clauses (a) through (h) above of any other Person which is directly or indirectly guaranteed by such Person or which such Person has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which it has otherwise assured a creditor against loss.
“Intellectual Property” means all of the following as they exist in any jurisdiction throughout the world: Patents, Trademarks, Copyrights, Trade Secrets, Internet Assets, Software and other intellectual property, and all licenses, sublicenses and other agreements or permissions related to the preceding property.
“Internet Assets” means any all domain name registrations, web sites and web pages and related rights, items and documentation related thereto.
“Knowledge” means, with respect to (i) the Company, the actual knowledge of the executive officers or directors of any Target Company, after due inquiry or (ii) any other Party, the actual knowledge of its directors and executive officers, after due inquiry.
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“Law” means any federal, state, local, municipal, foreign or other law, statute, legislation, principle of common law, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, directive, requirement, writ, injunction, settlement, Order or Consent that is or has been issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Authority.
“Liabilities” means any and all liabilities, Indebtedness, Actions or obligations of any nature (whether absolute, accrued, contingent or otherwise, whether known or unknown, whether direct or indirect, whether matured or unmatured and whether due or to become due), including Tax liabilities due or to become due.
“Lien” means any mortgage, pledge, security interest, attachment, right of first refusal, option, proxy, voting trust, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof), restriction (whether on voting, sale, transfer, disposition or otherwise), any subordination arrangement in favor of another Person, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar Law.
“Material Adverse Effect” means, with respect to any specified Person, any fact, event, occurrence, change or effect that has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect upon (a) the business, assets, Liabilities, results of operations, prospects or condition (financial or otherwise) of such Person and its Subsidiaries, taken as a whole, or (b) the ability of such Person or any of its Subsidiaries on a timely basis to consummate the transactions contemplated by this Agreement or to perform its obligations hereunder; provided, however, that any changes or effects directly or indirectly attributable to, resulting from, relating to or arising out of the following (by themselves or when aggregated with any other, changes or effects) shall not be deemed to be, constitute, or be taken into account when determining whether there has or may, would or could have occurred a Material Adverse Effect: (i) general changes in the financial or securities markets or general economic or political conditions in the country or region in which such Person or any of its Subsidiaries does business; (ii) changes, conditions or effects that generally affect the industries in which such Person or any of its Subsidiaries principally operate; (iii) changes in GAAP or other applicable accounting principles or mandatory changes in the regulatory accounting requirements applicable to any industry in which such Person and its Subsidiaries principally operate; (iv) conditions caused by acts of God, terrorism, war (whether or not declared) or natural disaster; (v) any failure in and of itself by such Person and its Subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period (provided that the underlying cause of any such failure may be considered in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur to the extent not excluded by another exception herein); provided further, however, that any event, occurrence, fact, condition, or change referred to in clauses (i)–(iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition, or change has a disproportionate effect on such Person or any of its Subsidiaries compared to other participants in the industries in which such Person or any of its Subsidiaries primarily conducts its businesses.
“NRS” means Nevada Revised Statutes, as amended.
“OFAC” means the U.S. Department of Treasury, Office of Foreign Assets Control.
“OTC Bulletin Board” means the Over-the-Counter Bulletin Board maintained by the OTC Markets Group and the National Association of Securities Dealers.
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“OTC Markets Group” means OTC Markets Group, Inc.
“Organizational Documents” means, (i) with respect to the Purchaser, the Purchaser Charter, (ii) with respect to the Company, the Company Charter, and (iii) with respect to any other Party, its Certificate of Incorporation and Bylaws or similar organizational documents, in each case, as amended.
“Order” means any order, decree, ruling, judgment, injunction, writ, determination, binding decision, verdict, judicial award or other action that is or has been made, entered, rendered, or otherwise put into effect by or under the authority of any Governmental Authority.
“Patents” means any patents, patent applications and the inventions, designs and improvements described and claimed therein, patentable inventions, and other patent rights (including any divisionals, provisionals, continuations, continuations-in-part, substitutions, or reissues thereof, whether or not patents are issued on any such applications and whether or not any such applications are amended, modified, withdrawn, or refiled).
“Permits” means all federal, state, local or foreign or other third-party permits, grants, easements, consents, approvals, authorizations, exemptions, licenses, franchises, concessions, ratifications, permissions, clearances, confirmations, endorsements, waivers, certifications, designations, ratings, registrations, qualifications or orders of any Governmental Authority or any other Person.
“Permitted Liens” means (a) Liens for Taxes or assessments and similar governmental charges or levies, which either are (i) not delinquent or (ii) being contested in good faith and by appropriate proceedings, and adequate reserves have been established with respect thereto, (b) other Liens imposed by operation of Law arising in the ordinary course of business for amounts which are not due and payable and as would not in the aggregate materially adversely affect the value of, or materially adversely interfere with the use of, the property subject thereto, (c) Liens incurred or deposits made in the ordinary course of business in connection with social security, (d) Liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the ordinary course of business, or (v) Liens arising under this Agreement.
“Person” means an individual, corporation, partnership (including a general partnership, limited partnership or limited liability partnership), limited liability company, association, trust or other entity or organization, including a government, domestic or foreign, or political subdivision thereof, or an agency or instrumentality thereof.
“Personal Property” means any machinery, equipment, tools, vehicles, furniture, leasehold improvements, office equipment, plant, parts and other tangible personal property.
“Purchaser Charter” means the articles of incorporation of the Purchaser, as amended and effective under the NRS.
“Purchaser Confidential Information” means all confidential or proprietary documents and information concerning the Purchaser or any of its Representatives; provided, however, that Purchaser Confidential Information shall not include any information which, (i) at the time of disclosure by the Company, any Seller or their respective Representatives, is generally available publicly and was not disclosed in breach of this Agreement or (ii) at the time of the disclosure by the Purchaser or its Representatives to the Company, any Seller or their respective Representatives was previously known by such receiving party without violation of Law or any confidentiality obligation by the Person receiving such Purchaser Confidential Information. For the avoidance of doubt, from and after the Closing, Purchaser Confidential Information will include the confidential or proprietary information of the Target Companies.
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“Release” means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, or leaching into the indoor or outdoor environment, or into or out of any property.
“Remedial Action” means all actions to (i) clean up, remove, treat, or in any other way address any Hazardous Material, (ii) prevent the Release of any Hazardous Material so it does not endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (iv) correct a condition of noncompliance with Environmental Laws.
“Representative” means, as to any Person, such Person’s Affiliates and its and their managers, directors, officers, employees, agents and advisors (including financial advisors, counsel and accountants).
“SEC” means the Securities and Exchange Commission (or any successor Governmental Authority).
“Securities Act” means the Securities Act of 1933, as amended.
“Software” means any computer software programs, including all source code, object code, and documentation related thereto and all software modules, tools and databases.
“Subsidiary” means, with respect to any Person, any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons will be deemed to have a majority ownership interest in a partnership, association or other business entity if such Person or Persons will be allocated a majority of partnership, association or other business entity gains or losses or will be or control the managing director, managing member, general partner or other managing Person of such partnership, association or other business entity.
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“Target Company” means each of the Company and its direct and indirect Subsidiaries.
“Tax Return” means any return, declaration, report, claim for refund, information return or other documents (including any related or supporting schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Taxes or the administration of any Laws or administrative requirements relating to any Taxes.
“Taxes” means (a) all direct or indirect federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, value-added, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, social security and related contributions due in relation to the payment of compensation to employees, excise, severance, stamp, occupation, premium, property, windfall profits, alternative minimum, estimated, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (b) any Liability for payment of amounts described in clause (a) whether as a result of being a member of an affiliated, consolidated, combined or unitary group for any period or otherwise through operation of law and (c) any Liability for the payment of amounts described in clauses (a) or (b) as a result of any tax sharing, tax group, tax indemnity or tax allocation agreement with, or any other express or implied agreement to indemnify, any other Person.
“Trade Secrets” means any trade secrets, confidential business information, concepts, ideas, designs, research or development information, processes, procedures, techniques, technical information, specifications, operating and maintenance manuals, engineering drawings, methods, knowhow, data, mask works, discoveries, inventions, modifications, extensions, improvements, and other proprietary rights (whether or not patentable or subject to copyright, trademark, or trade secret protection).
“Trademarks” means any trademarks, service marks, trade dress, trade names, brand names, internet domain names, designs, logos, or corporate names (including, in each case, the goodwill associated therewith), whether registered or unregistered, and all registrations and applications for registration and renewal thereof.
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IN WITNESS WHEREOF, each Party hereto has caused this Agreement to be signed and delivered by its respective duly authorized officer as of the date first written above.
| The Purchaser: | ||
| FOUNTAIN HEALTHY AGING, INC., | ||
| a Nevada corporation | ||
| By: | ||
| Name: | Ms. Zhu Hong | |
| Title: | CEO | |
| Address: | ||
| Room 601, Bldg. E | ||
| No. 1, Huabao Fubao China Street | ||
| Futian District | ||
| Shenzhen City, Guangdong Province, China | ||
[Signature page to Share Exchange Agreement]
Exhibit 3.1
Exhibit 3.2
Exhibit 21.1
Subsidiaries of Fountain Healthy Aging, Inc.
| Entity | Date of incorporation | Place of incorporation | Percentage of legal ownership by the Company | |||
| Wei Lian Jin Meng Group Limited | June 30, 2020 | Cayman Islands | 100% | |||
| Wei Lian Jin Meng (Hong Kong) Co., Ltd | August 5, 2020 | Hong Kong | 100% | |||
| Jin You Wei Meng (Shenzhen) Consulting Co., Ltd. | November 24, 2020 | PRC | 100% | |||
| Shenzhen Wei Lian Jin Meng Electronic Commerce Limited | October 17, 2017 | PRC | 100% | |||
| Dongguan Dishi Coffee Limited | October 25, 2018 | PRC | 100% | |||
| Shenzhen Nainiang Coffee Art Museum Limited | June 20, 2019 | PRC | 100% |