HANJIAO GROUP, INC. 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, 2020 , 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, 2020 , 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 2021, Beijing VIE was granted hi-tech enterprise status in the PRC and in 2021, it was identified asZhongguancun High -tech Enterprise
inBeijing .
Beijing VIE owns a 44% equity interest in
39 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 currently operate 10 branches and approximately 200 service centers, serving approximately 163,000 users throughout the PRC. We maintain an Internet website at www.hanjiaoguoji.com. The information contained in, or accessible from, our website is not a part of
this Quarterly Report.
Impact of COVID-19 on our business
The outbreak of COVID-19 that started in lateJanuary 2020 in the PRC had negatively affected our business. InMarch 2020 , theWorld Health Organization declared COVID-19 as a pandemic and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities inChina and theU.S. in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company's business operations and its workforce are concentrated inChina , the Company's business, results of operations, and financial condition have been adversely affected. For the three months endedMarch 31, 2022 and 2021, the Company had a net losses of approximately$1.5 and$1.9 million , respectively. AtMarch 31, 2022 , the Company has a significant working capital deficiency of approximately$34.9 million , and a shareholders' deficit of approximately$14.0 million . These conditions raise substantial doubt about the Company's ability to continue
as a going concern. To mitigate the overall financial impact of COVID-19 on the Company's business, management introduced cost containment and staff reduction measures, revised product selection and incentive programs and worked with its service centers continuously to enhance their marketing and promotion activities. Management believes that COVID-19 will continue to have a material impact on its financial results for the first half of 2022 and could cause the potential impairment of certain assets. Accordingly, we expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2023 as market conditions inChina continue to improve. Until the Company's operating results improve, the Company hopes to rely on financing from its shareholders to support the Company's operations. Results of Operations Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that we will be able to continue to operate in the future in the normal course of business. Our unaudited condensed consolidated financial statements for the three months endedMarch 31, 2022 , includes a note about our ability to continue as a going concern due to losses from operations in 2021 and through the quarter endedMarch 31, 2022 as a result of COVID-19. Business closures in the PRC and limitations on business operations arising from COVID-19 has significantly disrupted our ability to generate revenues and cash flow during the three months endedMarch 31, 2022 . While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2023 as market conditions inChina improve. In assessing the Company's liquidity, management monitors and analyzes its cash on hand and its operating expenses, and existing regulatory obligations and commercial commitments. Based on its latest sales and cash flows projection, management believes that the Company should be able to generate sufficient cash flows from operations to meet its working capital requirements for the next twelve months, and that its capital resources are currently sufficient to maintain its business operations for the next twelve months. Until the Company's operating results improve, the Company hopes to rely on financing from its shareholders to support the Company's operations. 40
Comparison for the Three Months Ended
The following table sets forth certain financial data for the three months ended
For the Three Months Ended March 31, Percentage
2022 2021 Change
Dollars % Dollars % %
Revenues $ 706,047 100.0 $ 240,495 100.0 193.6
Cost of revenues (447,339 ) (63.4 ) (115,100 ) (47.9 ) 288.7
Gross profit 258,708 36.6 125,395 52.1 106.3
General and
administrative expenses 522,545 74.0 753,698 313.4 (30.7 )
Selling expenses 381,326 54.0 533,491 221,8 (28.5 )
Finance expenses , net 6,963 1.0 10,995 4.6 (36.7 )
Total operating expenses 910,834 129.0 1,298,184 539.8 (29.8 )
Operating loss (652,126 ) (92.4 ) (1,172,789 ) (487.7 ) (44.4 )
Other expenses, net (817,007 ) (115.7 ) (747,738 ) (310.9 ) 9.3
Loss from equity
investment (6,931 ) (1.0 ) (8,150 ) (3.4 ) (15.0 )
Total other expenses,
net (823,938 ) (116.7 ) (755,888 ) (314.3 ) 9.0
Loss before provision
for income taxes (1,476,064 ) (209.1 ) (1,928,677 ) (802.0 ) (23.5 )
Provision for income
taxes - - - - -
Net loss (1,476,064 ) (209.1 ) (1,928,677 ) (802.0 ) (23.5 )
Foreign currency
translation adjustment (56,798 ) (8.0 ) 62,321 25.9 (191.1 )
Comprehensive loss $ (1,532,862 ) (217.1 ) $ (1,866,356 ) (776.1 ) (17.9 )
Revenues: Revenues were approximately $706,000 and approximately $240,000 for
the three months ended March 31, 2022 and 2021 respectively. The increase in
revenues of approximately $466,000 or 193.6% is due primarily to business
recovery after outbreak of the COVID-19 in 2022 as market conditions in China
continue to improve. During the three months ended March 31, 2022 and 2021, all
revenues were generated in the PRC. During the three months ended March 31,
2022 , revenues were mainly attributable to the sales of health foods, cold Gel
and franchise income, representing 46.3%, 25.2% and 10.3% of revenues,
respectively. During to the same period of 2021 revenues were mainly
attributable to the sales of health foods, phonographs, cold Gel, smart watches,
cosmetics products and home appliances, , representing 54.5%, 18.4%, 7.7%, 5.1%,
1.2% and 0.7% of revenues, respectively. During the three months ended March 31,
2022 and 2021, no customers accounted for 10% or more of total revenues.
41
Cost of revenues: Cost of revenues consists primarily of the cost of merchandise
sold, delivery cost, service fees, sales incentives and commissions that are
directly attributable to the sale of certain designated products. Cost of
revenues of approximately $447,000 for the three months ended March 31, 2022 and
$115,000 for the three months ended March 31, 2021 . The increase in cost of
revenues of approximately $332,000 or 288.7% from the comparable period of 2021
was due mainly to increase in product sales as a result of business recovery
from COVID-19 in 2022.
There were two suppliers that accounted for more than 10% of total purchases,
for the three months ended March 31, 2022 and 2021, respectively. One supplier
(Hainan Shanshiyuan Health Management Co. Ltd. ) accounted for 68%, and the other
(Baoqing Meilai Modern Agricultural Service Co., Ltd. ) accounted for 23% for the
three months ended March 31, 2022 . One supplier (Shandong Kangqi Wood Industry
Co. Ltd. ) accounted for 75%, and the other (Suzhou Jianli Space Health
Technology Co. Ltd. ) accounted for 19% for the three months ended March 31,
2021 .
Gross Profit. Gross profit for the three months ended March 31, 2022 and 2021 of
approximately $259,000 and $125,000 . The increase in gross profit of
approximately $133,000 or 106.3% from the comparable period of 2021 was due
mainly to the increase in product sales as a result of business recovery from
COVID-19 in 2022.
General and Administrative Expenses. General and administrative expenses ("G&A
expenses") consist primarily of costs in salary and benefits for our general
administrative and management staff, facilities costs, depreciation expenses,
professional fees, audit fees, and other miscellaneous expenses incurred in
connection with general operations. G&A expenses decreased 30.7% or
approximately $231,000 to approximately $513,000 in the three months ended March
31, 2022 from approximately $754,000 for the three months ended March 31, 2021
was due primarily to the decrease in advisory fees, salary and benefits.
Selling Expenses. Selling expenses consist mainly of payroll and benefits for
employees involved in the sales and distribution functions, meeting/event fees,
advertisement, and marketing and selling expenses that are related to events and
activities at the Company's service centers designed to promote product sales.
Selling expenses decreased by 28.5% or approximately $152,000 to approximately
$381,000 in the three months ended March 31, 2022 from approximately $533,000 in
the same period of 2021. The decrease was due mainly to fewer events and lower
travel expenses because of the negative impact of COVID-19.
Finance Income, net. Total net financial expense was approximately $7,000 for
the three months ended March 31, 2022 , compared to approximately $11,000 for the
same period of 2021. The decrease was due mainly to lower interest earned from
bank and related bank products in the three months period ended March 31, 2022 .
Operating LossOperating loss was approximately $652,000 for the three months
ended March 31, 2022 , compared to approximately $1.2 million for the same period
of 2021. The decrease in operating loss in 2022 was due primary to the increase
of the sales due to business recovery after outbreak of the COVID-19 and
decrease of operating expenses.
Total Other Expenses, net. Other expenses consist mainly of estimated tax
penalties and charitable contributions. Total net other expenses were
approximately $824,000 for the three months ended March 31, 2022 , compared to
approximately $756,000 for the same period of 2021. The increase in total net
other expenses was due primary to increase in estimated tax penalty in 2022.
Provision for Income Taxes. No provision for income taxes was recorded for the
three months ended March 31, 2022 and 2021 since the Company reported a pre-tax
loss of approximately $1.5 million and $1.9 million for the three months ended
March 31, 2022 and 2021.
Net Loss. As a result of the factors described above, net loss was approximately
$1.5 million for the three months ended March 31, 2022 , a decrease of
approximately $1.9 million from approximately $453,000 of net loss for thesame period of 2021.
Comprehensive LossComprehensive loss was approximately
42
Liquidity and Capital Resources
As of
The following table sets forth a summary of our cash flows for the periods as
indicated:
For the Three Months ended
March 31,
2022 2021
(Unaudited) (Unaudited)
Net cash used in provided by operating activities $ (639,150 ) $ (1,303,663 )
Effect of exchange rate changes on cash and cash equivalents 905 (6,549 )
Net (decrease) in cash and cash equivalents (638,245 ) (1,310,212 )
Cash and cash equivalents at beginning of period 838,850 3,257,005
Cash and cash equivalents at end of period $ 200,605 $ 1,946,793 The following table sets forth a summary of our working capital:
March 31, December 31,
2022 2021 Variation %
(Unaudited)
Total Current Assets $ 476,476 $ 1,319,947 $ (843,471 ) (63.9 )
Total Current Liabilities 35,216,772 34,453,169 763,603 2.2
Working Capital $ (34,740,296 ) $ (33,133,222 ) $ (1,607,074 ) 4.9
Working Capital. The deterioration in the Company's working capital was due mainly to continuing net losses generated as a result of COVID-19.
Cash used in operating activities was approximately$639,000 and$1.3 million for three months endedMarch 31, 2022 and 2021, respectively. The key factors attributing to the net cash outflows in 2022 include: net loss of approximately$1.5 million , adjusted by provision for slow-moving inventories of$149,000 ; decrease in advance from customers of approximately$244,000 ; and other payables and other current liabilities of approximately$804,000 . The key factors attributing to the net cash outflows in 2021 include: net loss of approximately$1.9 million due mainly to drop in revenues; increase in inventories of approximately$171,000 ; and increase in tax payable of approximately$244,000 . The Company expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. Until the Company's operating results improve, the Company hopes to rely on financing from its shareholders to support the Company's operations.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders' equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and
development services with us. 43 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.
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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