ITEM 1.BUSINESS.
Business Overview
Global Seed Corporation was incorporated in the State of Texas on July 13, 2010. On October 30, 2019, we closed certain share exchange agreement dated October 1, 2019 (the “Share Exchange Agreement”) and acquired all of the issued and outstanding shares of Well Benefit International Limited, a British Virgin Islands company (“Well Benefit”), in exchange for the issuance to the shareholders of Well Benefit (the “Shareholders”) an aggregate of 252,874,025 restricted shares of the Company’s common stock (the transaction, the “Reverse Merger”).
Dongguan Zhenghao Industrial Investment Company Limited (“Zhenghao”), a company formed under the laws of the People’s Republic of China (“PRC”), is a wholly-owned subsidiary of Well Benenfit. Zhenghao provides healthy coffee and beverage products to customers in China. As a result of the Reverse Merger, Zhenghao became our wholly-owned subsidiary, and we transitioned our business focus to providing healthy coffee and beverage products to customers in China through Zhenghao under its established brand, “Ka Su Le”. Our business used to comprise of three segments: (i) wholesale business, including wholesaling coffee and healthy drinks capsules, coffee brewing machines and health supplements and skin care products; (ii) retail selling coffee products and (iii) retail selling of coffee brewing machines. Starting from February 1, 2020, in an effort to control our cost and maximize our interest, we have shifted our business focus to the wholesale business only. As a result, we are no longer involved in the retailing business of selling coffee products and coffee brew machines. We have also stopped selling health supplements and skin care products.
Corporate History
Since the Company was incorporated in 2010, we had been engaged principally in the distribution of a monthly journal prior to our change in control consummated on June 2, 2018.
On May 21, 2018, Leung Kwok Hei, Chi Siu On, Leung Siu Hung and Chan Hiu (collectively, the “Purchasers”) and various shareholders (the “Sellers”) of the Company entered into a share purchase agreement, pursuant which the Sellers transferred to the Purchasers an aggregate of 4,492,000 shares of common stock (the “Common Stock”) of the Company (such transaction, the “Share Purchase”). The Share Purchase was closed on June 1, 2018.
At the closing of the Share Purchase, there was a change in our board and executive officers. Ms. Jia Tian, the sole director, President, Treasurer and Secretary of the Company appointed Leung Kwok Hei to serve as a director and Chief Executive Officer and Chan Hiu as a director and Chief Financial Officer of the Company, with such appointment effective on June 1, 2018. Ms. Jia Tian resigned from all her positions with the Company effective on June 1, 2018.
Prior to our change in control, our product was the Global Seed Journal. It is a monthly journal published in Chinese for its presentation of Asian community news, advertising content, and articles written by contributors.
On October 30, 2019, we acquired all of the issued and outstanding shares of Well Benefit pursuant to the Share Exchange Agreement in exchange for 252,874,025 of our restricted shares of common stock. As a result of the Reverse Merger, Well Benefit and Zhenghao became our wholly-owned subsidiary, and we transitioned our business focus to providing healthy coffee and beverage products to customers in China.
Corporate Structure
The following diagram illustrates our current corporate structure:
Industry Overview
China’s rising urbanization and disposable income have been and are expected to continue to be the main growth engines of its coffee industry, and more and more people in China have begun to consume more coffee in their daily lives. However, compared to the developed countries, including other East Asian countries and regions, China’s coffee market is still highly underdeveloped. The average coffee consumption has been relatively low and mostly dominated by non-freshly brewed coffee. Despite the increased demand from Chinese consumers, inconsistent qualities, high prices and inconvenience are the key pain points that hamper the growth of China’s coffee consumption. With these pain points being gradually addressed, we expect coffee consumption to accelerate in China.
The capsule beverage market in China, including the capsule coffee market, is far from being saturated and offers tremendous business opportunity due in part to the growth potential of coffee machine sales and the evolving tastes of Chinese customers towards more regular and sophisticated coffee consumption. According to the Statista Report, China ranked number ten with 19.8 billion US dollars, where the top three countries, which is the United States, Brazil and Japan, that has 125.1 billion, 84.1 billion and 80.6 billion US dollars. According to the United Nations Population Division, in 2015 China had 14 billion people where the population of the United States is 0.3 billion. We would love to see people enjoying coffee in this tremendous market.
Although a giant brand of instant coffee is dominating the market in China, based on the report of the Euromonitor International, Hot Drinks, 2016 Research Edition, the market size of instant coffee in China has shown declination. According to International Coffee Organization (ICO), although the instant coffee market in China is still taking the lead, the rate of coffee bean import to China was constantly rising at an annual rate of 15% from 2004-2014. An article written by Jesse W. Mattingly from University of Kentucky concludes that coffee market in China is new, however Chinese are getting more knowledgeable in coffee. Producers and retailers should focus on quality in order to bring the traditional culture of coffee to a developing market.
Our Products and Services
We provide a variety of coffee products and healthy beverages. We use capsules to keep the freshness and tastiness and to standardize the quality of our products. Healthiness, convenience, high quality and affordability are the core values of our product. Our goal is to allow our customers to make coffee or other healthy beverages at home through several simple brewing steps. Our business used to comprises of three segments: (i) wholesale business, including wholesaling coffee and healthy drinks capsules, coffee brewing machines and health supplements and skin care products; (ii) retail selling coffee products and (iii) retail selling of coffee brewing machines. Starting from February 1, 2020, in an effort to control our cost and maximize our interest, we have shifted our business focus to the wholesale business only. As a result, we are no longer involved in the retailing business of selling coffee products and coffee brew machines. We have also stopped selling health supplements and skin care products.
a. Wholesale of Coffee and Healthy Drinks Capsules
Coffee and healthy drinks capsules are our major products. We offer a wide variety of high-quality coffee and beverage items, mainly capsules of coffee and non-coffee drinks, that have strong demand and can be produced in bulk with standardized process and consistent quality. Although coffee products have a big market in China, China remains predominantly a tea-consuming nation and the coffee market is significantly unsaturated. With a deep understanding of the Chinese drinking culture that has a history of thousands of years, we give particular attention to selecting the premium raw materials to ensure the high quality of our products.
From the initial research and development of products, selecting and purchasing raw materials, testing products and delivering the final products to our customers, our management team strictly monitor each of these procedures. For our coffee products, we are in cooperation with KUBE Development Ltd. (KUBE), our sole coffee beans supplier. For our health drink products, we endeavor to procure genuine and healthy raw materials in capsules, such as non-GMO (non-genetically modified organism) soy milk, Italian cocoa, golden flower dark tea, momordica grosvenori and dendrobium among others. All of our suppliers have relevant certificates from the governments, such as business license and food selling permissions, to show their respective manufacturing capability. Afterwards, the materials will be put into a capsule as a final product which will be tested again by Société Générale de Surveillance (SGS), a world’s leading company of inspection, verification, testing and certification to ensure that the quality of the final product meets our standards.
Prior to the COVID-19 pandemic, we sold our capsules through our brand stores (each a “Brand Store”, collectively the “Brand Stores”). To join us as a Brand Store, we will charge a one-time brand authorization fee. After becoming our Brand Store, we will grant it the rights to use our brand, Ka Su Le, and provided it with all of the materials (including different kinds of capsules) and equipment that are necessary to make our coffee and other healthy beverages (collectively, the “Initiation Package”). In addition, we provide our Brand Stores with staff training and help them with the designing and decoration of their stores, setting up the equipment and other matters such as developing and shipping products. After paying the brand authorization fee, our Brand Stores will receive certain amount of coffee and healthy drinks capsules, included in their Initiation Package, enabling them to start their business. After that, if the Brand Stores need more supplies of capsules, they will need to purchase them from our retail stores or online store. Each of our Brand Stores is independent from us. Other than providing the Initiation Package and supplying our capsule products, we do not share interests with or take responsibility for the loss of our Brand Stores.
In addition, in an effort to better promote our products and enhance our brand recognition, we used to work with and place our coffee machines free of charge in our cooperation stores before the pandemic (each a “Cooperation Store”, collectively the “Cooperation Stores”), including grocery stores, bakeries, super markets, shopping malls and other places with significant customer volume and high demand of coffee. The Cooperation Stores can use our coffee machines free of charge with proper care and a commitment of selling a certain amount of brewed coffee and healthy drinks each month. Similar to our Brand Stores, the Cooperation Stores can purchase our capsules products from our retail stores or online store if they need additional supplies.
The global pandemic has posted significant challenges to us. Due to the lockdown policy and the economic downturn in China, many smaller businesses have ceased their operations, including those stores that used to work with us. As of the date of this report, all of our Brand Stores and approximately two thirds of our Cooperation Stores are closed. We are now shifting our business focus to wholesale business only and continue to provide our products to our clients that remain in operations. The management will continue to adjust our operating strategies to better fit the current economy situations and we believe our current priority is to seek new development opportunities while maintaining a low cost of operations.
Our customers can purchase our capsules products from our online store through WeChat, one of the most popular messaging, social media and mobile payment apps in China. We are currently in the process of designing a Wechat Mini Program and we plan to launch it at the beginning of 2021. This program is designed to function to serve the purpose of E-mall and customer services. We also plan to develop our own app, hoping to provide with our customers with more options and convenience of online shopping. See below “Our Mobile Apps”.
b. Wholesale of Coffee Brewing Machines
We provide two types of coffee brewing machines with our customers - one for domestic use and the other is for commercial use. We procure our brewing machines directly from Cino Technology (Shenzhen) Ltd. (“Cino”). Furthermore, we have agreed to use Cino’s fully automatic capsule vending machine (under development) to expand our business distributions to areas with high demand for coffee, such as office buildings, commercial areas and school campuses. Cino provides one to two years of warranties of its brewing machines depending on the type of machine. It also provides training of installation and maintenance to our customer service division.
The commercial brewing machine can be installed at our Brand Stores, restaurants and offices. This machine is designed to be user-friendly, enabling users to learn how to operate the machine in a few hours, and then make a drink in our standardized recipe.
Our brewing machines are included in the Initiation Package for our Brand Stores and we are also providing them to our Cooperation Stores free of charge.
c. Health Supplements and Skin Care Products
Prior to the pandemic, we offered several health supplements and skin care products made from Chinese traditional herbs on our online store. We offer our online customers opportunities to join us as a “health product agent” if they purchase an aggregate of RMB358 (approximately $51) worth of health products from our online store. Each of our health product agent will sign an agent agreement with us and then they will receive their own unique ID codes. Our health product agents have special discounts when they purchase our health products. In addition, each time they develop a new health product agent with their ID codes, they will receive awards points from us which can be then used to purchase health products in our online store. As of the date of this report, we no longer sell health supplements and skin care products.
Our Strategies
The key elements of our strategy to grow our business include:
● Enhance our ability to attract, incentivize and retain talented professionals. We believe our success greatly depends on our ability to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive advantage in the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level personnel, including formulating a market-oriented employee compensation structure and implementing a standardized multi-level performance review mechanism.
● Lower our operating expenses while pursuing new development opportunities. The global pandemic has posted significant challenges to us. Due to the lockdown policy and the economic downturn in China, many smaller businesses have ceased their operations. Starting from February 1, 2020, in an effort to control our cost and maximize our interest, we have shifted our business focus to the wholesale business only. As a result, we are no longer involved in the retailing business of selling coffee products and coffee brew machines. We have also stopped selling health supplements and skin care products. The management will continue to adjust our operating strategies to better fit the current economy situations and we believe our current priority is to seek new development opportunities while maintaining a low cost of operations.
Our Mobile Apps
We are currently in the process of designing a Wechat Mini Program and we plan to launch it at the beginning of 2021. This program is designed to function to serve the purpose of E-mall and customer services. In particular, this program will be designed to cover the entire customer purchase process with user-friendly interfaces. Through this program, our customers can easily view various choice of beverage capsules, health product and accessories, place orders, make payment, check the shipping status and receive notifications of our promotions. We plan to create our own mobile apps with English, simplified Chinese and traditional Chinese versions in 2021.
Procurement
We source a variety of high-quality raw materials, including coffee beans and coffee condiments, as well as beverage items, from selected suppliers. We also purchase different machines, such as coffee machines and ice machines, packaging materials and other consumables in bulk from our suppliers. Due to our significant scale, we are able to procure high-quality products from our suppliers at favorable prices. We maintain good relationships with our suppliers.
We have a dedicated procurement team responsible for the procurement of raw materials, machines and equipment, packaging materials and consumables based on inventory availability, number of stores and marketing events. Our senior management has designed stringent quality control standards and enforced comprehensive quality control measures covering supplier selection, quality inspection and testing.
Coffee Beans
As discussed above, we source premium coffee beans from renowned plantations in Colombia, Ethiopia and Indonesia through our supplier, KUBE
We set detailed specifications for the raw coffee beans procured by our roasted coffee bean supplier, including size, taste and moisture based on their origin and grades. Together with KUBE, we screen for defected beans in each batch of raw coffee beans through sampling to ensure that they meet our specifications before admitting them to roasting.
We set the quality control standards for the testing process of roasted coffee beans. We work with KUBE and a third party inspection agency (SGS) in testing the roasted coffee beans. KUBE conducts the first round of physical and chemical properties testing on the roasted coffee beans, and delivers the batches that passed the test to us. Upon receipt, we will conduct another round of similar testing together with a third-party inspection agency, and return any batch with high defect rate.
With the support of KUBE, we have developed our own and unique coffee recipe and we believe the taste of our products is favored by most coffee consumers in China.
Health Products Ingredients
We also procure many health products ingredients, such as, non-GMO soy milk, Italian cocoa, golden flower dark tea, momordica grosvenori and dendrobium, from reputable suppliers throughout China. We mix these ingredients following our special formula after repeated testing and created our own recipe of drinks. Our health products have been popular among our customers, especially among those who are from western countries.
Coffee Condiments
Coffee condiments, mainly dairy products and syrup, are crucial to the overall quality of our coffee. We source our dairy products, mainly milk and cream, from leading suppliers to ensure their freshness and syrup mainly from distributors of imported syrup. Similar to coffee beans, we have in place stringent quality control measures regarding coffee condiments. For example, we work with our dairy suppliers to have the dairy products tested by SGS.
Packaging Materials and Other Consumables
In addition to coffee and beverage items, we procure a broad range of paper and plastic products, such as cups, straws and cutlery, from a number of suppliers. We inspect the categories, specifications and qualities of our packaging materials and other consumables supplies against our standards set out in the respective supply agreements and quality guarantee agreement.
The manufacturer of our capsule products followed he standard in the process of making the capsules. The final products will be tested again by SGS to ensure that their quality meets our standards.
Our Store Network
As discussed above, before the pandemic, we typically locate our stores in areas with high demand for coffee, such as office buildings, bakeries, shopping malls and residential areas. As of December 31, 2020, we have seven stores located in Guangdong Province, Jilin Province and Chongqing City, including two of our own retail stores and five Brand Stores. We also have worked with and placed our coffee machines into over 400 Cooperation Stores Guangdong, Jilin and Chongqing. However, due to the global pandemic, as of the date of this report, all of our Brand Stores and approximately two thirds of our Cooperation Stores are closed due to COVID-19.
Our Customers
The customers of our coffee and healthy drinks products comprise mainly of companies and beverage stores located in Guangdong Province, Jilin Province and Chongqing City in China.
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the years ended December 31, 2019 and 2018.
Intellectual Property
We develop and protect our intellectual property portfolio by registering our trademarks, copyrights and domain names. As of the date of this report, we have one registered trademark with the Trademark Office of the PRC State Administration for Industry & Commerce (the “Trademark Office”) with an effective period from May 28, 2019 to May 27, 2029 and two domain names (www.agilityholding.com and www.capsulemall.cn) with Ministry of Industry and Information Technology with effective periods from August 4, 2018 to August 4, 2020 and from September 17, 2018 to September 17, 2020, respectively. In addition, we have 13 registered trademarks and 3 pending trademark applications pending with the Trademark Office.
In addition, we entered into standard employee confidentiality agreement with our technology development employees, which provides that the employees own confidentiality obligations in relation to our trade and technology secrets.
Seasonality
We experience seasonality in our business, reflecting seasonal fluctuations in food productions and storages. For example, we generally experience lower transaction volumes during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year.
Employees
As of December 31, 2019, we had 45 full-time employees and no part-time employees. The departments cover, sales and marketing, administration, customer service, logistics, storage, rear service, procurement, accounting, design, public relationship, intellectual technology, research and development and human resources. We are required under PRC law to make contributions to employee benefit plans for our PRC-based full-time employees at specified percentages of the salaries, bonuses and certain allowances of such employees, up to a maximum amount specified by the local governments in China and we also are required to make contributions to the work-related injury insurance for the part-time employees. We maintain a good working relationship with our employees, and as of the date of this report, we have not experienced any material labor disputes in the past. None of our employees are represented by labor unions.
Competitive Strength
We are dedicated to serving our customers. We believe that the following strengths contribute to our success and are the differentiating factors that set us apart from our peers.
● Leading and fastest growing player focusing on capsule coffee in China: we believe that we are a pioneer that develops a taste for coffee in a society with brisk reverence for tea by offering our customers with convenient capsule coffee, enabling them to make tasty coffee easily.
● superior customer propositions: Our commitment to quality is uncompromising. We source premium coffee beans from a prominent supplier and work with an experienced team to design our coffee recipes. We also implement stringent quality control procedures and processes across our supply chain, from procurement to inventory and logistics, as well as in our day-to-day operations. We are able to offer affordable coffee capsule and other high-quality products because we have achieved sustainable cost advantages.
Competition
We integrated many components to create our unique business model which enables us to quickly spread out our coffee and healthy drinks to the market. For those that choose to join us as our Brand Stores, we offer them not only the authorization to use our brand, but also support them with all materials, equipment and even staff training and store decoration guidance to start their business. At the same time, our customers can transfer their roles and become part of our team through various channels, including becoming a health product agent after purchasing certain amount of health products on our online store. In addition, we are creatively expanding our store network by providing coffee machines free of charge to other established stores. Although we are not aware of many famous brands in this field with similar business model, we still face intense competition in China’s coffee industry. Our current or potential competitors are mainly coffee shop operators.
We believe that the principal competitive factors in China coffee industry include the following:
● Product quality and safety;
● Product pricing;
● Supply chain management and operating efficiency;
● Quality of customer services;
● Brand recognition and reputation;
● Effectiveness of sales and marketing; and
● Customer experience.
Our competitors may have longer operating history, greater brand recognition, more capital, better supplier relationships and larger customer base.
Compliance, Licenses and Permits
For compliance requirements related to our business, including applicable licenses and permits, see “Regulation.”
Environmental Law Compliance
We believe that our manufacturing facilities are currently operating under compliance with local, state, and federal environmental laws. We plan to continue acquiring environmental-oriented equipment and incurring the expenditures we deem necessary for compliance with applicable laws. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital expenditures, earnings or competitive position.
Legal Proceedings
From time to time, we are subject to legal proceedings and claims arising in the ordinary course of our business. As of the date of this report, we were not involved in any litigation, arbitration or administrative proceedings pending or, to our knowledge, threatened against us that could have a material and adverse effect on our business, financial condition or results of operations.
Insurance
We provide social security insurance including medical insurance, maternity insurance, workplace injury insurance, unemployment insurance and pension benefits for our employees. Consistent with customary industry practice in China, we do not maintain business interruption insurance, nor do we maintain product liability insurance or key-man life insurance.
ITEM 1A.
ITEM 1A.RISK FACTORS.
We are a smaller reporting company and therefore this item is not applicable to us.
ITEM 1B.
ITEM 1B.UNSOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
ITEM 2.PROPERTIES.
We maintained our principal office at 3905, Vanke ITC Center, Changan, Dongguan, China 523845. We believe that the condition of our principal office is satisfactory, suitable and adequate for current needs.
ITEM 3.
ITEM 3.LEGAL PROCEEDINGS.
As of the date of this report, the Company is not a party to any legal proceeding that could reasonably be expected to have material impact on its operations or finances.
ITEM 4.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is currently quoted on the OTC Pink tier of the OTC Markets Group, an inter-dealer quotation and trading system under the symbol “GLBD”. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not reflect actual transactions.
Holders of Our Common Stock
As of October 8, 2020, we had 29 holders of record of our common stock. There were 257,874,025 shares issued and outstanding.
Outstanding Options, Conversions, and Planned Issuance of Common Stock.
As of October 8, 2020, there were no warrants or options outstanding to acquire any shares of our common stock.
Dividends and Related Policy
We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock. Our future dividend policy will be determined from time to time by our board of director.
Transfer Agent and Registrar
Our transfer agent is OTR, Inc., located at 1050 SW 6th Ave, Ste. 1230, Portland, OR 97204. Their telephone number is 503.225.0375.
Recent Sales of Unregistered Securities
As disclosed above, on October 1, 2019, the Company entered into a Share Exchange Agreement with Well Benefit the Shareholders of Well Benefit acquire all of the issued and outstanding capital stock of Well Benefit in exchange for the issuance to the Shareholders an aggregate of 252,874,025 shares of Common Stock. The Reverse Merger is expected to be closed by the end of October 2019.
In December 2019, the Company closed private placements for the sales of certain convertible notes. The Company has received in total $280,000 net proceeds from six convertible note holders pursuant to six notes. In addition, from January 2020 to March 2020, the Company closed private placements for the sales of four additional convertible notes for total proceeds of $430,000. Each of these notes bears 15% annual interest and payable at maturity, which is thirty (30) months from the issuance dates. Each note holder has the right, at the holder’s option, to convert all or any portion of the outstanding principal of the note to the Company’s common stock. The applicable conversion price is the average stock price, based on a 30-trading-date period prior to the conversion, with 20% discount.
The Company may not redeem these notes at its option at any time before the first year anniversary from the issuance date. Afterward, the Company may elect to redeem all or any portion of the notes with purchase price including premium determined by the redemption schedule.
Upon issuing these securities discussed above, we claimed an exemption from the registration requirements of the Securities Act of 1933, as amended for the offering these securities pursuant to Regulation S promulgated thereunder.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Securities Authorized for Issuance under Equity Compensation Plans
None.
Item 6.
Item 6.Selected Financial Data.
Not applicable.
ITEM 7.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our financial statements and related notes thereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain statements that may be deemed “forward-looking statements” within the meaning of United States of America securities laws. All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate and similar expressions or future conditional verbs such as will, should, would, could or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
These statements include, without limitation, statements about our anticipated expenditures, including those related to general and administrative expenses; the potential size of the market for our services, future development and/or expansion of our services in our markets, our ability to generate revenues, our ability to obtain regulatory clearance and expectations as to our future financial performance. Our actual results will likely differ, perhaps materially, from those anticipated in these forward-looking statements as a result of various factors, including: our need and ability to raise additional cash. The forward-looking statements included in this report are subject to a number of additional material risks and uncertainties, including but not limited to the risks described in our filings with the Securities and Exchange Commission.
You should review this section with our financial statements and the related notes to those statements included in this filing. In addition to historical financial information, this discussion may contain forward-looking statements reflecting our current plans, estimates, beliefs and expectations that involve risks and uncertainties. As a result of many important factors, our actual results and the timing of events may differ materially from those anticipated in these forward-looking statements.
Overview
Global Seed Corporation (the “Company”) was incorporated in the State of Texas on July 13, 2010. We had been engaged principally in the distribution of a monthly journal prior to our change in control consummated on June 2, 2018. On October 1, 2019, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) by and among Well Benefit International Limited (“Well Benefit”) and its shareholders (the “Shareholders”), whereby the Company newly issued 252,874,025 shares of its common stock to the Shareholders in exchange for all the outstanding ordinary shares of Well Benefit. On October 30, 2019, the reverse merger transactions contemplated under the Share Exchange Agreement closed and we acquired all of the issued and outstanding shares of Well Benefit (the transaction, the “Reverse Merger”). Dongguan Zhenghao Industrial Investment Company Limited (“Zhenghao”), a company formed under the laws of the People’s Republic of China (“PRC”), is a wholly-owned subsidiary of Well Benefit. Zhenghao provides healthy coffee and beverage products to customers in China.
As a result of the Reverse Merger, Zhenghao became our wholly-owned subsidiary, and we transitioned our business focus to providing healthy coffee and beverage products to customers in China through Zhenghao under its established brand, “Ka Su Le”. Our business comprises of three segments: (i) wholesale business, including wholesaling coffee and healthy drinks capsules, coffee brewing machines and health supplements and skin care products; (ii) retail selling coffee products and (iii) retail selling of coffee brewing machines. Starting from February 1, 2020, in an effort to control our cost and maximize our interest, we have shifted our business focus to the wholesale business only. As a result, we are no longer involved in the retailing business of selling coffee products and coffee brew machines. We have also stopped selling health supplements and skin care products.
The global pandemic has posted significant challenges to us. Due to the lockdown policy and the economic downturn in China, many smaller businesses have ceased their operations, including those stores that used to work with us. As of the date of this report, all of our Brand Stores and approximately two thirds of our Cooperation Stores are closed. We are now shifting our business focus to wholesale business only and continue to provide our products to our clients that remain in operations. The management will continue to adjust our operating strategies to better fit the current economy situations and we believe our current priority is to seek new development opportunities while maintaining a low cost of operations.
Economic and Political Risks
The outbreak of the novel coronavirus, commonly referred to as “COVID-19”, first found in mainland China, then in Asia and eventually throughout the world, has significantly affected business and manufacturing activities within China, including travel restrictions, widespread mandatory quarantines, and suspension of business activities within China. These government mandates may cause severe business disruptions to our customers and suppliers, and may also lead to postponement of payment from these parties. Our business operation was suspended until early March of 2020. Further, our manufacturing and branding business activities depend on reliable sources of raw materials such as bulk packaged Fenjiu liquor from Shanxi Province and bulk packaged imported wines from foreign countries. We have experienced substantive diminutions in raw material supplies due to the COVID-19 outbreak and ensuing lockdowns, which have negatively impacted our business. Accordingly, our business, results of operations and financial condition were adversely affected. In light of the current situation, our revenues and net income for the first three fiscal quarters in 2020 decreased due to the COVID-19 outbreak.
As of the date of this report, China has shown signs of COVID-19 slowdown and Chinese industries have partially resumed businesses as government officials started to ease the restrictive measures. We believe that the impact of the COVID-19 outbreak on our business is both temporary and limited.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. Our financial statements reflect the selection and application of accounting policies that require management to make significant estimates and judgments. The discussion of our critical accounting policies contained in Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies”, is incorporated herein by reference.
Results of Operations
The following table sets forth a breakdown of revenue for the periods indicated, both in absolute amount and as a percentage of total revenues. The information should be read together with our consolidated financial statements and related notes included elsewhere in this report.
Comparison of the Years Ended December 31, 2019 and 2018
(a) Revenue
As of December 31, 2019, our main revenue stream was derived from wholesale business, retail outlets, coffee capsules and coffee brewing machines. Our business commenced in 2017. Starting from February 1, 2020, we are no longer involved in the retailing business of selling coffee products and coffee brew machines. We have also stopped selling health supplements and skin care products.
For the year ended December 31, 2019 and 2018, our revenue was $195,917 and $16,493, respectively, which represented an increase of $179,424. The increase of revenue was mainly due to the increased sales volume of our products.
(b) Cost of Sales
For the year ended December 31, 2019 and 2018, cost of sales from our coffee wholesale business were $125,572 and $11,807, respectively. The increase of cost of sales was mainly due to the increased sales volume of our coffee capsules.
(c) Gross Profit
Gross profit from our coffee wholesale business increased by $65,659 for the year ended December 31, 2019 from the gross profit of $4,686 for the year ended December 31, 2018. The increase of gross profit was due to the Company’s adoption of a strategy to sell products with stable profit margins.
(d) Selling and Marketing Expenses
For the year ended December 31, 2019, our selling and marketing expenses were $69,732, representing an increase of $57,157, as compared to $12,575 for the year ended December 31, 2018. The increase was primarily due to the increased advertising and marketing expenses during the year.
(e) General and Administrative Expenses
For the year ended December 31, 2019, our administrative expenses were $1,116,473, representing an increase of $706,303 from those in the year 2018. The increase was primarily due to the increase in salaries and wages from $154,985 to $481,880 and professional service fees from $28,311 to $312,449 in 2019.
(f) Other Income
For the year ended December 31, 2019, our other income was $339, representing an increase of $18 as compared to $321 for the same year-ended date of 2018. The increase in other income was primarily due to increased interest income from bank deposits.
(g) Interest and Other Financial Charges
For the year ended December 31, 2019, our interest and other financial charges were $1,190 as compared to $9 for the same year-ended date of 2018. The increase in interest and other financial charges was primarily due to the bank fees and convertible notes.
(h) Income Taxes
The Company’s income taxes decreased by $96 for the year ended December 31, 2019 from $123 for the same year-ended date of 2018. The decrease in the Company’s income taxes was primarily due to decreased taxable income of the Company for the period indicated.
(i) Net Loss
For the year ended December 31, 2019, our net loss was $1,117,372, representing an increase of $699,513, as compared to $417,859 for the same year-ended date of 2018. Our comprehensive loss was $1,103,179, representing an increase of $695,713, as compared to $407,466 for the same year-ended date of 2018.
Liquidity and Capital Resources
For the year ended December 31, 2019, the Company had a net cash outflow from its operating activities $1,046,604 which represented salaries and wages $481,880 and professional service fees $312,449 and increased in inventory $201,671. The Company had a net cash outflow $191,359 from investing activities mainly used in purchase coffee brewing machines and other equipment. The net cash inflows from financing activities is primarily related to $280,000 in net proceeds from the issuance of our convertible notes and $1,262,738 financial support from directors.
For the year ended December 31, 2018, the Company had a net cash outflow from its operating activities $356,222 which represented salaries and wages $154,985, professional service fees $28,311 and increased in inventory $25,775. The Company had a net cash outflow $26,151 from investing activities used in purchase the equipment. The net cash inflows from financing activities is related to $391,166 financial support from directors.
Management believes that our current cash, cash flows from current and future operations, and access to loans may or may not be sufficient to meet our working capital needs for at least the next 12 months. We intend to continue to carefully execute our growth plans and manage market risk.
Going Concern
We currently had recurring losses since the Company’s inception and had a negative working capital of $1,349,774 as of December 31, 2019. Accordingly, there is substantial doubt the Company will continue as a going concern. The Company’s management intends to raise working capital through the sale of stock via private placements.
Off-balance Sheet Arrangements
The Company has no material transactions, arrangements, obligations or other relationships with entities or other persons that have or are reasonably likely to have material current or future impacts on its financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses, other than those disclosed above.
Item 7A.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s financial statements and the related notes, together with the report of WWC, P.C., are set forth following the signature pages of this report.
ITEM 9.
ITEM 9.CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
ITEM 9A.CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, including our principal executive officer and principal accounting officer, does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. The design of a control system is also based upon certain assumptions about potential future conditions; over time controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
As of December 31, 2019, the year covered by this report, we carried out an evaluation, under the supervision and participation of our management, including our principal executive officer and our principal financial officer, to determine the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the year covered by this report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our ICFR as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework in 2013 (the “2013 COSO Framework”). A material weakness is a deficiency or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses.
1.As of December 31, 2019, we did not maintain effective controls over the control environment. Specifically, we have not developed a framework for accounting policies and procedures given we have only one officer, Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
2.As of December 31, 2019, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
Because of these material weaknesses, our management has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2019, based on the criteria established in 2013 COSO Framework. Due to the size and operations of the Company, we are unable to remediate these deficiencies until we develop further.
The Company believes that the financial statements fairly present, in all material respects, the Company’s balance sheets as of December 31, 2019 and 2018 and the related statements of operations and comprehensive loss, stockholders’ deficiency, and cash flows for the years ended December 31, 2019 and 2018 in conformity with U.S. GAAP, notwithstanding the material weaknesses we identified.
This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding ICFR. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Company to provide only management’s report in this report.
Changes in Internal Control Over Financial Reporting
There had been no changes in the Company’s ICFR identified in connection with the above evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR.
ITEM 9B.
ITEM 9B.OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
Our members of the Board of Directors and executive officers were listed below as of December 31, 2019.
* On July 10, 2020, Ms. Yeung Pik Wah tendered her resignation from her positions as director and Chief Operating Officer of the Company, effective immediately. On the same day, Mr. Chiang Venant tendered his resignation from Vice President for Corporate Finance & Development of the Company.
Lam Heung Yeung Horace, director and CEO
Mr. Lam, age 54, has been serving as Convenor of Board of Directors of Agility International Holding Ltd. since 2016 and Managing Director of Logos Surveyors and Construction Co. since 2012. Mr. Lam received his bachelor degree of Science in Building Serveying with honor from Heriot-Watt University in 1993.
Chan Hiu, director and CFO
Mr. Chan, age 46, has been serving as Financial Controller of Zheng Gong Trading Ltd Co in Dongguan, China since 2016. Mr. Chan was a financial advisor of Shenzhen Long Fu Capital based in Shenzhen, China from 2009 to 2016, and he consulted with clients for financial needs and helped them develop marginal investment plans. Prior to that, He was an owner and financial controller of Motoring Concept Distribution in Orlando, Florida from 2001 and 2008. Mr. Chan received his Bachelor of Business Accounting degree from University of Central Florida in Orlando, Florida in 2000.
Yeung Pik Wah, former director and COO
Ms. Yeung, age 50, previously served as Regional Sr. Director at Pfizer Corporation Hong Kong Ltd., where she had been working since 2000 in various positions, such as Finance Director and General Manager. She is also the founder of LoveYoyo Amusement Company Limited and has been working there since 2010. Ms. Yeung also has been serving as the chairwoman at Elderly Care Nursing Home in Hong Kong since 2014. In addition, Ms. Yeung founded Zenecom Internation in 2017 and Zenecom and JMM enterprise, and JMM and Ximu Education Institute in 2018. Ms. Yeung founded LaChou Puff & MilkTea Mini-Shop in 2009 and successfully opened three chain stores within six months. Ms. Yeung received her bachelor degree of Arts in Business Economic from University of California at Los Angeles in 1997.
Chiang Venant, former VP for Corporate Finance & Development
Mr. Chiang, age 42, is a seasoned financial professional with about twenty years of experience in the global financial market and was a senior management for various renowned investment banks such as HSBC, Deutsche Bank, Bank of China International and Jefferies. He currently serves as an executive member of Kami Intelligence Limited, Vice Chairman of the investment committee at the Smart City Consortium and Vice President of the Hong Kong Spirit Charity Sports Association. Mr. Chiang Served as a portfolio manager at Cardinalasia Consulting Limited from July 2016 to May 2017. He was the head of Hong Kong and China Property Research at Jefferies Hong Kong from May 2012 to June 2016. Mr. Chiang graduated Cum Laude from University of California at Los Angeles with a bachelor degree of Arts in Business Economics in 2001.
Meetings of Our Board of Directors
Our board of directors (the “Board”) took all actions by written consent during the years ended December 31, 2019.
Significant Employees
Other than the director and officer described above, we do not expect any other individuals to make a significant contribution to our business.
Involvement in Legal Proceedings
None of our directors, persons nominated to become a director, executive officers or control persons have been involved in any of the following events during the past 10 years:
●Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or
●Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); or
●Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
●Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodity law, and the judgment has not been reversed, suspended, or vacated; or
●Being 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: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or
●Being 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. Based solely on our review of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the year ended December 31, 2019, all filing requirements applicable to its executive officers, directors, and greater than ten percent (10%) beneficial owners were met, except for the following: Mr. Hiu Chan did not timely file his Form 4 after acquiring 10,090,000 shares of the Company’s common stock on October 30, 2019. However, the Form 4 corresponding to this transaction was subsequently filed on November 12, 2019. Mr. Venant Chiang did not timely file his Form 3 after acquiring 1,050,000 shares of the Company’s common stock and being appointed as an officer of the Company on October 30, 2019. However, the Form 3 corresponding to this transaction and appointment was subsequently filed on November 13, 2019. Ms. Pik Wah Yeung did not timely file her Form 3 after being appointed as an officer and director of the Company on October 30, 2019. However, the Form 3 corresponding to her appointment was subsequently filed on November 13, 2019. Mr. Chun Ngan Chan (10% shareholder) did not timely file his Form 3 after acquiring 91,239,300 shares of the Company’s common stock on October 30, 2019. However, the Form 3 corresponding to this transaction was subsequently filed on November 15, 2019. As of the date of this report, all of the filings mentioned above have been made.
Code of Ethics
We currently do not have a Code of Ethics because we presently only have limited size of the Board and management. We plan to adopt a Code of Ethics when the size of the Board and management increases.
Board Committees
The Company does not have an audit committee or an audit committee financial expert (as defined in Item 407 of Regulation S-K) serving on its Board. The Company has not yet employed an audit committee financial expert on its Board due to the inability to attract such a person.
The Company intends to establish an audit committee of the Board, which will consist of independent directors. The audit committee’s duties will be to recommend to the Company’s Board the engagement of an independent registered public accounting firm to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times be composed exclusively of directors who are, in the opinion of the Company’s Board, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
ITEM 11.
ITEM 11.EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows certain compensation information for services rendered in all capacities for the fiscal year ended December 31, 2019 and 2018. No executive officer’s salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.
(1) Ms. Yeung Pik Wah our former director and Chief Operating Officer resigned on July 10, 2020.
(2) Mr. Chiang Venant, our former Vice President for Corporate Finance & Development resigned on July 10, 2020.
(3) Mr. Leung, our former Chief Executive Officer, resigned from the Company on October 30, 2019.
Employment Agreements
Currently, we do not have an employment agreement in place with our officers and directors.
Option Grants
We had no outstanding equity awards as of the end of fiscal years ended December 31, 2019 and 2018.
Option Exercises and Fiscal Year-End Option Value Table
There were no stock options exercised during fiscal years ended December 31, 2019 and 2018 by the executive officers.
Outstanding Equity Awards at Fiscal Year-End Table
We had no outstanding equity awards as of the end of fiscal years ended December 31, 2019 and 2018.
Long-Term Incentive Plans and Awards
There were no awards made to a named executive officer in fiscal 2019 and 2018 under any long-term incentive plan.
Director Compensation
Directors are permitted to receive fixed fees and other compensation for their services as directors. The Board has the authority to fix the compensation of directors.
Our directors did not receive any compensation for their services as directors for the years ended December 31, 2019 and 2018.
ITEM 12.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial ownership of shares of our common stock as of October 8, 2020, by (i) each person known to beneficially own more than 5% of our outstanding common stock, (ii) each of our directors, (iii) each of our named executive officers, and (iv) all of our directors and executive officers as a group. Except as otherwise indicated, the persons named in the table below have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws, where applicable.
* Represents less than 1%.
(1) In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on the date of this report, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on October 8, 2020 (257,874,025) and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred stock and on exercise of the warrants and options, if any, subject to limitations on conversion and exercise. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
(2) Tong Siu Kei Tony is the director of Team Fu International Co., Limited, which has a registered address at 18C MG Towner, 133 HOI BUN Rd., Hong Kong.
ITEM 13.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
There were no related transactions with our director, executive officer, or stockholder holding at least 5% of shares of our common stock, or any family member thereof during the years ended December 31, 2019 and 2018 that exceeds $120,000.
As disclosed above, on October 1, 2019, the Company entered into a Share Exchange Agreement with Well Benefit the Shareholders of Well Benefit acquire all of the issued and outstanding capital stock of Well Benefit in exchange for the issuance to the Shareholders an aggregate of 252,874,025 shares of Common Stock. Mr. Leung Kwok Hei (our former Chief Executive Officer) and Mr. Chan Hiu are among the Shareholders and will respectively receive 10,880,000 shares and 10,090,000 shares of Common Stock of the Company upon closing of the Reverse Merger in accordance with the Share Exchange Agreement.
ITEM 14.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
On August 12, 2019, we dismissed M&K CPAS, PLLC (“M&K”) as our independent registered public accounting firm and on the same date, we engaged WWC, P.C. (“WWC”) as our new independent registered public accounting firm.
The following table shows the fees that we paid for audit and other services provided by M&K, our former independent registered public accounting firm, for fiscal years 2019 and 2018.
The following table shows the fees that we paid for audit and other services provided by WWC for fiscal years 2019 and 2018.
The Company does not currently have a separate audit committee. Rather, the Board serves as the audit committee. Our Board has reviewed and approved the above fees and believes such fees are compatible with the independent registered public accountants’ independence.
PART IV
ITEM 15.
ITEM 15.EXHIBITS
(a)(1) Financial Statements
See “Index to Financial Statements” set forth following the signature paged of this report.
(a)(2) Financial Statement Schedules
None. The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our financial statements or related notes thereto.
Exhibits
The following exhibits of the Company are included herein.
*Filed herewith.
**Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GLOBAL SEED CORPORATION
Date: October 9, 2020
By: /s/ Lam Heung Yeung Horace
Lam Heung Yeung Horace
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
BY: /s/ Lam Heung Yeung Horace
Director and Chief Executive
Date: October 9, 2020
Lam Heung Yeung Horace
Officer (Principal Executive Officer)
BY: /s/ Chan Hiu
Director Chief Financial Officer
Date: October 9, 2020
Chan Hiu
(Principal Executive Officer and
Principal Financial Officer)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GLOBAL SEED CORPORATION
Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To:The Board of Directors and Stockholders of
GLOBAL SEED CORPORATION
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GLOBAL SEED CORPORATION (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, consolidated statements of changes in stockholders’ deficit, and consolidated statements of cash flows for the two years ended December 31, 2019, 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 position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the two years ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 13 to the financial statements, the Company had incurred substantial losses and has a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plan in regards to these matters are also described in Note 13. These 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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
/s/ WWC, P.C.
WWC, P.C.
Certified Public Accountants
We have served as the Company’s auditor since August 12, 2019
San Mateo, California
October 9, 2020
GLOBAL SEED CORPORATION
CONSOLIDATED BALANCE SHEETS
(AUDITED)
See accompanying notes to consolidated financial statements
GLOBAL SEED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(AUDITED)
See accompanying notes to consolidated financial statements
GLOBAL SEED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(AUDITED)
See accompanying notes to consolidated financial statements
GLOBAL SEED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AUDITED)
See accompanying notes to consolidated financial statements
GLOBAL SEED CORPORATION
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Global Seed Corporation (the “Company” or “GLBD”) was incorporated on July 13, 2010 in the State of Texas. A substantial portion of the Company’s initial business activities had involved developing a business plan and establishing contacts and visibility in the Asian communities in Houston, Texas. The Company had a change in control on June 2, 2018.
On October 1, 2019, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Well Benefit International Limited (“Well Benefit”) and all of its shareholders (the “Shareholders”), whereby the Company agreed to newly issue 252,874,025 shares of its common stock to the Shareholders in exchange for all of the outstanding ordinary shares of Well Benefit (such transaction, the “Reverse Merger”). On October 30, 2019, the Reverse Merger contemplated under the Share Exchange Agreement was closed. This transaction has been accounted for a reverse takeover transaction and a recapitalization of the Company whereby the Company, the legal acquirer, is the accounting acquiree, and Well Benefit, the legal acquiree, is the accounting acquirer. As a result, the Company elects to consolidate the financial statements of Well Benefit, including those of Dongguan Zhenghao Industrial Investment Company Limited (“Zhenghao”), the wholly-owned PRC subsidiary of Well Benefit, into the Company as if the Reverse Merger were consummated from the beginning of the periods covered by this report.
Well Benefit is a company formed in the British Virgin Islands on September 3, 2018. Well Benefit is a holding company. Its primary business activities are conducted through its wholly owned subsidiaries in Guangdong province in the People’s Republic of China (“PRC”). Well Benefit primarily sells coffee capsules, capsules for healthy drinks and coffee brewing machines through wholesale and retail.
Agility International Holding Limited (“Agility”) was incorporated on July 8, 2018 in Hong Kong with limited liability. It is a wholly owned subsidiary of Well Benefit.
On September 25, 2018 Shangshang (Guangzhou) Industrial Investment Company Limited (“Shangshang”) was incorporated as wholly owned foreign entity in the PRC. It is a wholly owned subsidiary of Agility.
Dongguan Zhenghao Industrial Investment Company Limited was incorporated on January 26, 2017. Zhenghao was acquired by Shangshang on or about December 27, 2018; accordingly, Zhenghao is wholly-owned subsidiary of Shangshang.
On September 7, 2018, Zhenghao registered Dongguan Kasule Food and Drink Company Limited (“Dongguan Kasule”) with the local industrial and commercial bureau as its wholly owned subsidiary. On February 19, 2019, Zhenghao acquired Shenzhen Kasule Food and Drink Company Limited (“Shenzhen Kasule”).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“US GAAP”). The basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the accounting principles of the PRC (“PRC GAAP”). The differences between US GAAP and PRC GAAP have been adjusted in these financial statements. The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).
These financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company balances, fees, and expenses have been eliminated in consolidation.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less, and unencumbered bank deposits to be cash equivalents.
Accounts Receivable
Receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off against allowances.
Inventories
Inventories consist of finished goods that are stated at the lower of cost or market value. The Company applies the weighted average cost method to its inventory.
Prepayments
The Company makes advance payment to suppliers and vendors for the procurement of goods. Upon physical receipt and inspection of the goods from suppliers the applicable amount is reclassified from prepayments to inventory.
Property and Equipment
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. The Company’s typically applies a salvage value of 0% to 10%. The estimated useful lives of the plant and equipment are as follows:
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss are included in the Company’s results of operations. The costs of maintenance and repairs are recognized to expenses as incurred; significant renewals and betterments are capitalized.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are recognized as its own right-of-use (“ROU”) asset category in the Company’s property and equipment, and the corresponding lease obligations are recognized to current and non-current liabilities. Finance leases are also included as equipment in property and equipment and the corresponding lease obligations are also recognized in current and non-current liabilities in the Company’s statement of financial condition.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
When we have lease agreements with lease and non-lease components, they are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
Accounting for Long-lived Assets
The Company annually reviews its long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Impairment may be the result of becoming obsolete from a change in the industry, introduction of new technologies, or if the Company has inadequate working capital to utilize the long-lived assets to generate the adequate profits. Impairment is present if the carrying amount of an asset is less than its expected future undiscounted cash flows.
If an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell.
Advances from Customers
Advances from customers consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.
Financial Instruments
The Company’s financial instruments, including cash and equivalents, accounts and other receivables, accounts and other payables, accrued liabilities and short-term debt, have carrying amounts that approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
● Level 1 - inputs to the valuation methodology used quoted prices for identical assets or liabilities in active markets.
● Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
● Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.
The convertible notes issued by the Company are financial instruments that are carried at amortized cost.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Beneficial Conversion Valuation
The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt instruments that have conversion features at fixed rates that are in-the-money when issued. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to equity, based on their relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The discounts recorded in connection with the BCF are recognized to the results operations as an interest expense over the term of the debt, using the effective interest method.
Statutory Reserves
Statutory reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations. PRC laws prescribe that an enterprise operating at a profit must appropriate and reserve, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currencies of the Company are in Renminbi (RMB) and Hong Kong Dollar (HKD). The Company’s assets and liabilities are translated into United States dollars from RMB and HKD at year-end exchange rates, and its revenues and expenses are translated at the average exchange rate during the year. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
The RMB and HKD are not freely convertible into foreign currencies and all foreign exchange transactions must be conducted through authorized financial institutions.
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.
Revenue Recognition
The Company adopted ASC 606 “Revenue Recognition”, and recognizes revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services.
The Company derives its revenues from the sale of coffee ad coffee related products. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfils its obligations under each of its agreements:
● identify the contract with a customer;
● identify the performance obligations in the contract;
● determine the transaction price;
● allocate the transaction price to performance obligations in the contract; and
● recognize revenue as the performance obligation is satisfied.
Income Taxes
The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 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 realization is uncertain.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) comprised of net income (loss) and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. The Company’s comprehensive income (loss) consists of net income (loss) and unrealized gains from foreign currency translation adjustments.
Recent Accounting Pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement - Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company does not believe the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
Advertising
All advertising costs are expensed as incurred.
Shipping and Handling
All outbound shipping and handling costs are expensed as incurred.
Research and Development
All research and development costs are expensed as incurred.
Retirement Benefits
Retirement benefits in the form of mandatory government sponsored defined contribution plans are charged to the either expenses as incurred or allocated to inventory as part of overhead.
Comprehensive Income
The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders.
Earnings per Share
The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings per share”. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis from the potential conversion of convertible securities or the exercise of options and or warrants; the dilutive effects of potentially convertible securities are calculated using the as-if method; the potentially dilutive effect of options or warrants are calculated using the treasury stock method. Securities that are potentially an anti-dilutive effect (i.e. those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
NOTE 3 - ACCOUNTS RECEIVABLE
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances.
NOTE 4 - PREPAYMENTS
The prepayment balance of $82,930 as of December 31, 2019 mainly represents the advanced payment to the suppliers for the production of coffee capsules and coffee machines.
NOTE 5 - INVENTORY
The Company’s inventory was comprised of finished goods. No impairment was recorded.
NOTE 6 - PLANT AND EQUIPMENT
Depreciation expense was $22,317 and $3,088 for the years ended December 2019 and 2018, respectively.
NOTE 7 - LEASE ASSETS
The Company’s leased assets include office space and warehouse. The Company’s current lease portfolio has remaining terms from less than one-year up to three years. Renewal options are excluded from the Company’s calculation of lease liabilities unless it is reasonably assured the renewal option will be exercised. The Company’s lease agreements do not contain residual value guarantees or material restrictive covenants.
Operating leases are reflected on our balance sheet within property and equipment and right-of-use assets and the related current and non-current operating lease liabilities. 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 lease agreement. Operating lease ROU assets and liabilities are recognized based upon the present value of the lease payments over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the terms. Variable lease costs such as common area maintenance, property taxes and insurance are expensed as incurred.
For year ended December 31, 2019, the lease expense was as follows:
Future minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2019, based on the former accounting guidance for leases, are as follows:
NOTE 8 - RELATED PARTY TRANSACTIONS
At December 31, 2019 and 2018, the Company was owed by the following related parties for the advanced fund, which were unsecured, non-interest bearing, and due on demand:
As of December 31, 2019 and 2018, the Company had outstanding balance owed to the related parties listed below for funds advanced to the Company for general working capital purposes. These funds were unsecured, non-interest bearing, and due on demand:
NOTE 9 - CONVERTIBLE NOTES
In December 2019, the Company closed private placements for the sales of convertible notes. The Company has received in total $280,000 net proceeds from six convertible note holders pursuant to six notes. Each note bears 15% annual interest and payable at maturity, which is thirty (30) months from the issuance dates. Each note holder has the right, at the holder’s option, to convert all or any portion of the outstanding principal of the note to the Company’s common stock. The applicable conversion price is the average stock price, based on a 30-trading-date period prior to the conversion, with 20% discount.
The Company may not redeem the note at its option at any time before the first year anniversary from the issuance date. Afterward, the Company may elect to redeem all or any portion of the note with purchase price including premium determined by the redemption schedule.
The beneficial conversion feature (“BCF”) of these notes are recognized and measured by allocating a portion of the proceeds to equity, based on their relative fair value, and as a reduction to the carrying amount of the convertible notes equal to the intrinsic value of the conversion feature. The value of BCF related to these notes are recognized periodically as interest expense over the term of the debt, using the effective interest method.
The aggregate principal of $280,000 and the related BCF valued at $70,000 were recorded as a liability and discount to the liability, respectively. The value of BCF was also recognized as additional paid-in capital.
For the year ended December 31, 2019, the total interest for the notes was $1,190, of which $773 was interest accrued based on coupon rate and $417 was amortization of the BCF discount. As of December 31, 2019, the net BCF value was $69,583.
As of December 31, 2019, the potential total conversion shares for the outstanding convertible notes were 205,882 additional shares of common stock of the Company, based on the applicable conversion price of $1.36 per share.
NOTE 10 - GENERAL AND ADMINISTRATIVE EXPENSES
For years ended December 31, 2019 and 2018, total general and administrative expenses were $1,116,473 and $410,170, respectively, and the details were as follows:
NOTE 11 - INCOME TAXES
We use the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thse temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Our effective tax rate for fiscal year 2019 is 21%, which we expect to be fairly consistent in the near term. Our tax rate may also be affected by discrete items that may occur in any given year, but are not consistent from year to year. Income taxes are calculated and accrued for U.S. taxes only.
The Company’s subsidiary formed in the British Virgin Islands is not subject to tax on its income or capital gains. In addition, upon payments of dividends by the Company to its shareholders, no withholding tax is imposed.
The Company’s subsidiary formed in Hong Kong is subject to the profits tax rate at 16.5% for income generated and operation in the special administrative region.
The Company’s subsidiaries incorporated in the PRC 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.
The Company’s subsidiaries incorporated in the PRC has unused net operating losses (“NOLs”) available for carry forward to future years for PRC income tax reporting purposes up to five years. The Company did not recognize a deferred tax asset at December 31, 2019, because management could not reasonably estimate when the Company would generate profits to utilize such a deferred tax asset.
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 following table reconciles the statutory rates to the Company’s effective tax rate:
NOTE 12 - RISKS
Credit Risk
The Company’s deposits are made with banks located in the PRC. They do not carry U.S. federal deposit insurance and may be subject to loss if the banks become insolvent.
Since the Company’s inception, the age of account receivables has been less than one year indicating that the Company is subject to minimal risk borne from credit extended to customers.
Interest Risk
The Company is subject to interest rate risk when short term loans become due and require refinancing.
Economic and Political Risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by changes in the political, economic, and legal environments in the PRC.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
The outbreak of the novel coronavirus, commonly referred to as “COVID-19”, first found in mainland China, then in Asia and eventually throughout the world, has significantly affected business and manufacturing activities within China, including travel restrictions, widespread mandatory quarantines, and suspension of business activities within China. The Company’s sales and operations were materially adversely affected by this global pandemic. These government mandates may cause severe business disruptions to our customers and suppliers, and may also lead to postponement of payment from these parties. Our business operation was suspended until early March of 2020. Further, our manufacturing and branding business activities depend on reliable sources of raw materials such as bulk packaged Fenjiu liquor from Shanxi Province and bulk packaged imported wines from foreign countries. We have experienced substantive diminutions in raw material supplies due to the COVID-19 outbreak and ensuing lockdowns, which has negatively impacted our business. Accordingly, our business, results of operations and financial condition were adversely affected. In light of the current situation, we estimate that our revenues and net income for the fiscal quarter ended on March 31, 2020 would decrease due to the COVID-19 outbreak.
Inflation Risk
Management monitors changes in prices levels. Historically inflation has not materially impacted the Company’s financial statements; however, significant increases in the price of raw materials and labor that cannot be passed to the Company’s customers could adversely impact the Company’s results of operations.
NOTE 13 - GOING CONCERN
The Company’s ability to continue as a going concern is dependent upon the Company’s profitability and working capital. If the Company is unable to meet the financial obligations with its current assets, it may become insolvent and cease to continue as a going concern.
For the years ended December 31, 2019 and 2018, the Company reported net loss of $1,117,372 and $417,859, and net loss from operation of $1,115,860 and $418,059, respectively. As of December 31, 2019 and 2018, the Company had working capital deficit of approximately $1,349,774 and $306,220, respectively.
The Company had net cash outflow of $1,046,604 and $356,222 from its operating activities during the year ended December 31, 2019 and 2018. The net cash inflows in 2019 is primarily related to $280,000 in net proceeds from the issuance of our convertible notes.
The Company management has taken various measures to reduce operating costs to minimize the economic impact of the current pandemic. The Company has raised additional working capital by sale of debt securities through private placements.
NOTE 14 - SUBSEQUENT EVENTS
The Company evaluates subsequent events that has occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
The Company experienced a decline in sales after December 31, 2019 as it was not able to conduct business during the first quarter of 2020 as result of the global COVID-19 pandemic.
No other significant subsequent events have been identified that would require adjustment of or disclosure in the accompanying consolidated financial statements.