HANJIAO GROUP, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)
The following discussion and analysis of our Company's financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in the report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. See "Cautionary Note Concerning Forward-Looking Statements" on page 2. The description of our business included in this quarterly report is summary in nature and only includes material developments that have occurred since the latest full description. The full discussion of the history and general development of our business is included in "Item 1. Description of Business" section of the Company's Annual Report on Form 10-K filed with theSEC April 15, 2022 ,, which section is incorporated by reference. Unless otherwise noted, all currency figures quoted as "U.S. dollars", "dollars" or "US$" refer to the legal currency ofthe United States . References to "Chinese Yuan" or "Renminbi ("RMB")" are to the Chinese Yuan, the legal currency ofthe People's Republic of China . Throughout this report, assets and liabilities of the Company's subsidiaries are translated intoU.S. dollars using the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders' equity. We were incorporated under the laws of theState of Nevada onJune 15, 2006 , asJupiter Resources, Inc. Our name was changed toRineon Group, Inc. onApril 30, 2009 , andAS Capital, Inc. onOctober 1, 2018 . OnAugust 6, 2021 , we consummated a share exchange transaction with the shareholders ofHanJiao International Holding Limited , its subsidiaries and variable interest entity,Beijing Yingjun Technology Co., Ltd. , or "Beijing VIE". As a result of the share exchange transaction, we entered into the business of providing health and wellness related products through our e-commerce platform to the middle-aged and elderly populations inthe People's Republic of China ("China" or the "PRC") which business is conducted through Beijing VIE. OnOctober 20, 2021 , we changed our name toHanjiao Group, Inc. The shares of our common stock are currently quoted under the symbol "HJGP."
Beijing VIE, a variable interest entity that we control through contractual arrangements, was formed inBeijing, China , onMarch 27, 2007 . Initially, Beijing VIE focused on the provision of services in paper media, publication of magazines and books, and investment in media businesses. Due to the downturn of the paper media industry and the rise of the elderly healthcare services industry, in 2013, Beijing VIE shifted its business focus to the provision of healthcare related products through its e-commerce platform to the middle-aged and elderly segments in the PRC. In 2016, Beijing VIE expanded its e-commerce operations and introduced its "Fozgo" branded products via its online to offline (O2O) marketplace. The O2O platform integrates its e-commerce platform with physical outlets to connect consumers and merchants in a dynamic marketplace. Its platform not only offers users the convenience of making online purchases, but also provides users the possibility to purchase and receive products at offline service centers. Currently, Beijing VIE's core product categories include nutritional supplements, cosmetics, smart home products (such as smart watches) and home appliances (such as water filters and air purifiers). Beijing VIE has developed several branch offices with outlets across the PRC with approximately 163,000 users. In 2018 and 2022, Beijing VIE was granted hi-tech enterprise status in the PRC and in 2022, it was identified asZhongguancun High -tech Enterprise
inBeijing .
Beijing VIE owns a 44% equity interest in
(“Rongcheng Tianrun”), a PRC company. Rongcheng Tianrun is engaged primarily in
the cultivation and marketing of Taxus, a type of medicinal plant.
38 Our principal executive offices are located atRoom 119 , No.778 Tanghekou Street ,Tanghekou Town ,Huairou District ,Beijing and our telephone number is +86-10-63622901. At present, enterprises inHuairou District can enjoy the best tax preferential policies inBeijing . We maintain an Internet website at www.hanjiaoguoji.com. The information contained in, or accessible from, our website is not a part of this Quarterly Report.
Impact of COVID-19 on our business.
Our business has been significantly and adversely affected by the COVID-19 pandemic and the resulting governmental containment measures such as quarantines, travel restrictions, and the temporary closure of stores and business facilities inChina .China continues to be affected by the COVID-19 pandemic and its ongoing containment measures. Because substantially all of the Company's business operations and its workforce are concentrated inChina , the Company's business, results of operations, and financial condition have been adversely affected. For the nine months endedSeptember 30, 2022 , the Company had a net loss of approximately$4 million . AtSeptember 30, 2022 , the Company has a significant working capital deficiency of approximately$33.3 million , and a shareholders' deficit of approximately$15.0 million . These conditions raise substantial doubt about the Company's ability to continue as a going concern. To mitigate the overall financial impact of COVID-19 on the Company's business, management introduced cost containment and staff reduction measures, revised product selection and incentive programs and worked with its service centers continuously to enhance their marketing and promotion activities. Management believes that COVID-19 will continue to have a material impact on its financial results for the remainder of 2022 and the first half of 2023, which could cause the potential impairment of certain assets. Accordingly, we expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. While the main shareholder of the Company has pledged to give financial support for the Company's operations inChina , there can be no assurance that this support will be sufficient to enable the Company to continue as a going concern. Results of Operations. Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that we will be able to continue to operate in the future in the normal course of business. Our unaudited condensed consolidated financial statements for the nine months endedSeptember 30, 2022 , includes a note about our ability to continue as a going concern due to losses from operations in 2022 and through the quarter endedSeptember 30, 2022 as a result of COVID-19. Business closures in the PRC and limitations on business operations arising from COVID-19 has significantly disrupted our ability to generate revenues and cash flow during the nine months endedSeptember 30, 2022 . While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2022 as market conditions inChina continue to improve. In assessing the Company's liquidity, management monitors and analyzes its cash on hand and its operating expenses, and existing regulatory obligations and commercial commitments. The Company can sell the apartment inBeijing if they have cash issues. The major shareholder of the Company pledged to give financial support to continue the Company's operations. In assessing the Company's liquidity, management monitors and analyzes its cash on hand and its operating expenses, and existing regulatory obligations and commercial commitments. 39
Comparison for the Three Months Ended
The following table sets forth certain financial data for the three months ended
For the Three Months Ended September 30, Percentage
2022 2021 Change
Dollars Dollars
(Unaudited) % (Unaudited) % %
Revenues $ 8,213 100.0 $ 1,052,323 100.0 (99.2 )
Cost of revenues (2,372 ) (28.9 ) (645,030 ) (61.3 ) 99.6
Reversal of inventory
allowance 10,075 122.7 138,812 13.2 92.7
Gross profit 15,916 193.8 546,105 51.9 (97.1 )
General and
administrative expenses 288,082 3,507.6 618,099 58.7 (53.4 )
Selling expenses 82,487 1,004.4 452,822 43.0 (81.8 )
Finance expenses, net 4,430 53.9 10,957 1.0 (59.6 )
Total operating expenses 374,999 4,565.9 1,081,878 102.7 (65.3 )
Operating loss (359,083 ) (4,372.1 ) (535,773 ) (50.8 ) (33.0 )
Other expenses, net (757,869 ) (9,227.7 ) (801,002 ) (76.1 ) (5.4 )
Loss from equity
investment (26,512 ) (322.8 ) - -
Total other expenses,
net (784,381 ) (9,550.5 ) (801,002 ) (76.1 ) (2.1 )
Loss before provision
for income taxes (1,143,464 ) (13,922.6 ) (1,336,775 ) (126.9 ) (14.5 ) Provision for income taxes - - - - - Net loss$ (1,143,464 ) (13,922.6 )$ (1,336,775 ) (126.9 ) (14.5 ) Foreign currency translation adjustment 791,017 9,631.3 (17,027 ) (1.6 ) (4,745.7 ) Comprehensive loss$ (352,447 ) (4,291.3 )$ (1,353,802 ) (128.5 ) (74.0 ) Revenues. Revenues decreased 99.2% or approximately$1 million to$8,000 from approximately$1.1 million for the three months endedSeptember 30, 2021 was primarily due to COVID-19 outbreak during the third quarter in 2022. During the three months endedSeptember 30, 2022 and 2021, all revenues were generated in the PRC; and no customers accounted for 10% or more of total revenues. During the three months endedSeptember 30, 2022 and 2022, revenues were mainly from sales of health foods. Cost of revenues. Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately$2,372 for the three months endedSeptember 30, 2022 and$645,030 for the three months endedSeptember 30, 2021 . The decrease in cost of revenues of approximately$642,658 or 99.6% from the comparable period of 2021 was due mainly to sales growth concentrated in first-quarter rather than second-quarter of 2022. 40
There were no suppliers that accounted for more than 10% of total purchases for
the three months ended
Gross profit (Loss): Gross profit was approximately$16,000 and$546,000 for the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in gross profit of approximately$532,000 or 97.1% from the comparable period of 2021 was due mainly to the decrease in product sales as a result of outbreak of COVID-19 in 2022. General and Administrative Expenses. General and administrative expenses ("G&A expenses") consist primarily of salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional and audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased 53.4% or approximately$330,000 to$288,000 from approximately$618,000 for the three months endedSeptember 30, 2021 was due primarily to the decrease in advisory fees, salaries and benefits. Selling Expenses. Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company's service centers designed to promote product sales. Selling expenses decreased by 81.8% or approximately$370,000 to approximately$82,000 in the three months endedSeptember 30, 2022 from approximately$453,000 in the same period of 2021. The decrease was due mainly to the Company's cost containment plan and initiatives to scale back its marketing expenses in 2022 as the PRC economy continues to recover from the COVID pandemic. During the same period of 2021, the Company organized numerous events designed to boost product sales in light of the negative impact of COVID-19 on its business. Finance Expenses, net. Finance expenses consist mainly of service fees related to the use of third-party online payment platforms, bank fees and interest expenses related to borrowings; net of interest income from bank and related bank products. Total net financial expenses were approximately$4,000 and$11,000 for the three months endedSeptember 30, 2022 , and 2021, respectively. The decrease in net financial expenses was due mainly to decrease in interest expenses in the three months endedSeptember 30, 2022 . Operating Loss. Compared to the same period of 2021, operating loss decreased by approximately$177,000 for the three months endedSeptember 30, 2022 . The decrease in operating loss in 2022 was due primary to the decrease of the sales due to outbreak of the COVID-19. Total Other Expenses, net. Other expenses consist mainly of estimated tax penalties. Total net other expenses were approximately$784,000 for the three months endedSeptember 30, 2022 , compared to approximately$801,000 for the same period of 2021. The decrease in total net other expenses was due primary to decrease in estimated tax penalty in 2022. Provision for Income Taxes. No provision for income taxes was recorded for the three months endedSeptember 30, 2022 and 2021 since the Company reported a pre-tax loss of approximately$1.1 million and$1.3 million for the three months endedSeptember 30, 2022 and 2021. Net Loss. As a result of the factors described above, net loss was approximately$1.1 million for the three months endedSeptember 30, 2022 , a decrease of approximately$193,000 from approximately$1.3 million of net loss for the
same period of 2021.
Comprehensive Loss.Factoring in the impact of foreign currency translation
adjustment, comprehensive loss was approximately
the three months ended
41
Comparison for the nine months Ended
The following table sets forth certain financial data for the nine months ended
For the Nine months Ended September 30, Percentage
2022 2021 Change
Dollars % Dollars % %
Revenues $ 775,617 100.0 $ 1,630,559 100.0 (52.4 )
Cost of revenues (371,128 ) (47.8 ) (1,085,464 ) (66.6 ) 65.8
Provision for inventory
allowance (59,103 ) (7.7 ) (71,836 ) (4.4 ) 17.7
Gross profit 345,386 44.5 473,259 29.0 (27.0 )
General and
administrative expenses 1,325,547 170.6 1,931,899 118.5 (31.5 ) Selling expenses 672,247 86.7 1,481,633 90.9 (54.6 ) Finance expenses, net 15,987 2.1 28,132 1.7 (43.2 ) Total operating expenses 2,011,781 259.4 3,441,664
211.1 (41.5 ) Operating loss (1,666,395 ) (214.9 ) (2,968,405 ) (182.1 ) (43.9 ) Other expenses, net (2,354,583 ) (303.6 ) (2,348,908 ) (144.1 ) 0.2 Loss from equity investment (33,306 ) (4.3 ) (8,166 ) (0.5 ) 307.9
Total other expenses, net (2,387,889 ) (307.9 ) (2,357,074 ) (144.6 ) 1.3 Loss before provision for income taxes (4,054,284 ) (522.8 ) (5,325,479 ) (326.7 ) (23.9 ) Provision for income taxes - - - - - Net loss (4,054,284 ) (522.8 ) (5,325,479 ) (326.7 ) (23.9 ) Foreign currency
translation adjustment 1,507,114 194.3 (33,119 )
(2.0 ) (4,650.6 )
Comprehensive loss$ (2,547,170 ) (328.5 )$ (5,358,598 ) (328.7 ) (52.5 ) Revenues: Revenues were approximately$776,000 and approximately$1.6 million for the nine months endedSeptember 30, 2022 and 2021 respectively. The decrease in revenues of approximately$855,000 or 52.4% is due primarily to outbreak of the COVID-19 in 2022. During the nine months endedSeptember 30, 2022 and 2021, all revenues were generated in the PRC. During the nine months endedSeptember 30, 2022 , revenues were mainly attributable to the sales of health foods and cold Gel, representing 56.7%, and 17.9% of revenues, respectively. For the period of nine months endedSeptember 31, 2021 and 2020, revenues were mainly attributable to the sales of health foods, smart watches and cosmetics products. During the nine months endedSeptember 30, 2022 and 2021, no customers accounted for 10% or more of total revenues. Cost of revenues:Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately$371,000 for the nine months endedSeptember 30, 2022 and$1.1 million for the nine months endedSeptember 30, 2021 . The decrease in cost of revenues of approximately$714,000 or 65.8% from the comparable period of 2022 was due mainly to decrease in product sales as a result of COVID-19 outbreak in 2022. There were two suppliers that accounted for more than 10% of total purchases, for the nine months endedSeptember 30, 2022 . One supplier (Baoqing Meilai Modern Agricultural Service Co., Ltd. ) accounted for 86% for the nine months endedSeptember 30, 2022 . The other supplier (One Four One Three (Tianjin ) Network Technology Development Co., Ltd.) accounted for 14% for the nine months endedSeptember 30, 2022 . 42
Gross Profit. Gross profit was approximately$345,000 and$473,000 for the nine months endedSeptember 30, 2022 and 2021. The decrease in gross profit of approximately$128,000 or 27% from the comparable period of 2021 was due mainly to the decrease in product sales as a result of outbreak of COVID-19 in 2022. General and Administrative Expenses. General and administrative expenses ("G&A expenses") consist primarily of costs in salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional fees, audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased 31.5% or approximately$608,000 to approximately$1.3 million in the nine months endedSeptember 30, 2022 from approximately$1.9 million for the nine months endedSeptember 30, 2021 was due primarily to the decrease in advisory fees, salary and benefits. Selling Expenses. Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company's service centers designed to promote product sales. Selling expenses decreased by 54.6% or approximately$809,000 to approximately$672,000 in the nine months endedSeptember 30, 2022 from approximately$1.5 million in the same period of 2021. The decrease was due mainly to fewer events and lower travel expenses because of the negative impact of COVID-19. Finance Income, net. Total net financial expense was approximately$16,000 for the nine months endedSeptember 30, 2022 , compared to approximately$28,000 for the same period of 2021. The decrease was due mainly to lower interest earned from bank and related bank products in the nine months period endedSeptember 30, 2021 . Operating LossOperating loss was approximately$1.7 million for the nine months endedSeptember 30, 2022 , compared to approximately$3 million for the same period of 2021. The decrease in operating loss in 2021 was due primary to the decrease of operating expenses. Total Other Expenses, net. Other expenses consist mainly of estimated tax penalties. Total net other expenses were approximately$2.4 million for the nine months endedSeptember 30, 2022 , compared to approximately$2.4 million for
the same period of 2021.
Provision for Income Taxes. No provision for income taxes was recorded for the nine months endedSeptember 30, 2022 and 2021 since the Company reported a pre-tax loss of approximately$4.1 million and$5.3 million for the nine months endedSeptember 30, 2022 and 2021. Net Loss. As a result of the factors described above, net loss was approximately$4.1 million for the nine months endedSeptember 30, 2022 , a decrease of approximately$1.2 million from approximately$5.3 million of net loss for
the same period of 2022.
Comprehensive LossComprehensive loss was approximately
million
Liquidity and Capital Resources
As of
of approximately
The following table sets forth a summary of our cash flows for the periods as
indicated:
For the Nine Months Ended
September 30,
2022 2021
(Unaudited) (Unaudited)
Net cash used in provided by operating activities
Net cash used in investing activities
- (196,680 ) Effect of exchange rate changes on cash and cash equivalents (73,355 )
12,869
Net (decrease) in cash and cash equivalents (834,058 ) (2,342,823 ) Cash and cash equivalents at beginning of period 838,850
3,257,005
Cash and cash equivalents at end of period$ 4,792 $
914,182 43
The following table sets forth a summary of our working capital:
September 30, December 31,
2022 2021 Variation %
(Unaudited)
Total Current Assets $ 229,556 $ 1,319,947 $ (1,090,391 ) (82.6 )
Total Current Liabilities 33,744,658 34,453,169 (895,840 ) (2.6 )
Working Capital (Deficit) $ (33,515,102 ) $ (33,133,222 ) $ (194,551 ) 0.6
Working Capital. The deterioration in the Company’s working capital was due
mainly to continuing net losses generated as a result of COVID-19.
Cash used in operating activities was approximately$761,000 and$2.2 million for nine months endedSeptember 30, 2022 and 2021, respectively. The key factors attributing to the net cash outflows in 2022 include: net loss of approximately$4.1 million , increase in inventory of approximately$242,000 , and other payables and other current liabilities of approximately$3.2 million and offset by the decrease in advance from customers of approximately$302,000 . For the nine months endedSeptember 30, 2021 , cash used in operating activities was approximately$2.2 million was due primary to decrease in net loss of approximately$6.1 million , and increase in net cash inflow from changes in advances to suppliers of approximately$186,000 ; inventories of approximately$297,000 ; other payables and other current liabilities of approximately$2.5 million , partially offset by the decrease in tax payable of approximately$208,000 . Net cash used in investing activities was approximately nil and$197,000 for the nine months endedSeptember 30, 2022 and 2021, respectively. Net cash used in investing activities of approximately$197,000 for the nine months endedSeptember 30, 2021 was related to the purchases of property and equipment. The Company expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. The shareholder of the Company pledge to give financial support for the Company operation.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders' equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and
development services with us. Critical Accounting Policies We prepare our financial statements in conformity with accounting principles generally accepted bythe United States of America ("U.S. GAAP"), which require us to make judgments, estimates, and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. We believe that our accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations are summarized in "Note 3 - Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements. 44
Recent Accounting Pronouncements
See "Note 3 - Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements. The Company believes that other recent accounting pronouncement will not have a material effect on the Company's consolidated financial position, results of operations and cash flows.
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