HANJIAO GROUP, INC. The following discussion and analysis of our Company's financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in the report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors. See "Cautionary Note Concerning Forward-Looking Statements" on page 2. The description of our business included in this quarterly report is summary in nature and only includes material developments that have occurred since the latest full description. The full discussion of the history and general development of our business is included in "Item 1. Description of Business" section of the Company's Annual Report on Form 10-K filed with theSEC April 15, 2022 ,, which section is incorporated by reference. Unless otherwise noted, all currency figures quoted as "U.S. dollars", "dollars" or "US$" refer to the legal currency ofthe United States . References to "Chinese Yuan" or "Renminbi ("RMB")" are to the Chinese Yuan, the legal currency ofthe People's Republic of China . Throughout this report, assets and liabilities of the Company's subsidiaries are translated intoU.S. dollars using the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders' equity. We were incorporated under the laws of theState of Nevada onJune 15, 2006 , asJupiter Resources, Inc. Our name was changed toRineon Group, Inc. onApril 30, 2009 , andAS Capital, Inc. onOctober 1, 2018 . OnAugust 6, 2021 , we consummated a share exchange transaction with the shareholders ofHanJiao International Holding Limited , its subsidiaries and variable interest entity,Beijing Yingjun Technology Co., Ltd. , or "Beijing VIE". As a result of the share exchange transaction, we entered into the business of providing health and wellness related products through our e-commerce platform to the middle-aged and elderly populations inthe People's Republic of China ("China" or the "PRC") which business is conducted through Beijing VIE. OnOctober 20, 2021 , we changed our name toHanjiao Group, Inc. The shares of our common stock are currently quoted under the symbol "HJGP."
Beijing VIE, a variable interest entity that we control through contractual arrangements, was formed inBeijing, China , onMarch 27, 2007 . Initially, Beijing VIE focused on the provision of services in paper media, publication of magazines and books, and investment in media businesses. Due to the downturn of the paper media industry and the rise of the elderly healthcare services industry, in 2013, Beijing VIE shifted its business focus to the provision of healthcare related products through its e-commerce platform to the middle-aged and elderly segments in the PRC. In 2016, Beijing VIE expanded its e-commerce operations and introduced its "Fozgo" branded products via its online to offline (O2O) marketplace. The O2O platform integrates its e-commerce platform with physical outlets to connect consumers and merchants in a dynamic marketplace. Its platform not only offers users the convenience of making online purchases, but also provides users the possibility to purchase and receive products at offline service centers. Currently, Beijing VIE's core product categories include nutritional supplements, cosmetics, smart home products (such as smart watches) and home appliances (such as water filters and air purifiers). Beijing VIE has developed several branch offices with outlets across the PRC with approximately 163,000 users. In 2018 and 2022, Beijing VIE was granted hi-tech enterprise status in the PRC and in 2022, it was identified asZhongguancun High -tech Enterprise
inBeijing .
Beijing VIE owns a 44% equity interest in
Our principal executive offices are located atRoom 119 , No.778 Tanghekou Street ,Tanghekou Town ,Huairou District ,Beijing and our telephone number is +86-10-63622901. At present, enterprises inHuairou District can enjoy the best tax preferential policies inBeijing . We currently operate 10 branches and approximately 200 service centers, serving approximately 163,000 users throughout the PRC. We maintain an Internet website at www.hanjiaoguoji.com. The information contained in, or accessible from, our website is not a part of
this Quarterly Report. 39
Impact of COVID-19 on our business
The outbreak of COVID-19 that started in lateJanuary 2021 in the PRC had negatively affected our business. InMarch 2021 , theWorld Health Organization declared COVID-19 as a pandemic and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities inChina and theU.S. in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company's business operations and its workforce are concentrated inChina , the Company's business, results of operations, and financial condition have been adversely affected. For the six months endedJune 30, 2022 and 2022, the Company had a net losses of approximately$2.9 and$4.0 million , respectively. AtJune 30, 2022 , the Company has a significant working capital deficiency of approximately$34.3 million , and a shareholders' deficit of approximately$14.6 million . These conditions raise substantial doubt about the Company's ability to continue
as a going concern. To mitigate the overall financial impact of COVID-19 on the Company's business, management introduced cost containment and staff reduction measures, revised product selection and incentive programs and worked with its service centers continuously to enhance their marketing and promotion activities. Management believes that COVID-19 will continue to have a material impact on its financial results for the first half of 2022 and could cause the potential impairment of certain assets. Accordingly, we expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. The shareholder of the Company pledge to give financial support for the Company operation.While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2022 as market conditions inChina continue to improve. Results of Operations Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that we will be able to continue to operate in the future in the normal course of business. Our unaudited condensed consolidated financial statements for the six months endedJune 30, 2022 , includes a note about our ability to continue as a going concern due to losses from operations in 2022 and through the quarter endedJune 30, 2022 as a result of COVID-19. Business closures in the PRC and limitations on business operations arising from COVID-19 has significantly disrupted our ability to generate revenues and cash flow during the six months endedJune 30, 2022 . While the Company cannot accurately predict the full impact of COVID-19 on its business in 2022, management believes that its business will gradually stabilize in 2022 as market conditions inChina continue to improve. In assessing the Company's liquidity, management monitors and analyzes its cash on hand and its operating expenses, and existing regulatory obligations and commercial commitments. Based on its latest sales and cash flows projection, management believes that the Company should be able to generate sufficient cash flows from operations to meet its working capital requirements for the next twelve months, and that its capital resources are currently sufficient to maintain its business operations for the next twelve months. Also, the shareholder of the Company pledge to give financial support for the Company operation. 40
Comparison for the Three Months Ended
The following table sets forth certain financial data for the three months endedJune 30, 2022 and 2021: For the Three Months Ended June 30, Percentage 2022 2021 Change Dollars Dollars (Unaudited) % (Unaudited) % % Revenues$ 61,357 100.0$ 337,741 100.0 (81.8 ) Cost of revenues 9,405 15.3 (535,982 ) (158.7 ) (101.8 ) Gross loss 70,762 115.3 (198,241 ) (58.7 ) (135.7 ) General and administrative expenses 512,920 836.0 560,102 165.8 (8.4 ) Selling expenses 208,434 339.7 495,320 146.7 (57.9 ) Finance expenses, net 4,594 7.5 6,180 1.8 (25.7 ) Total operating expenses 725,948 1,183.2 1,061,602 314.3 (31.6 ) Operating loss (655,186 ) (1,067.8 ) (1,259,843 ) (373 ) (48.0 ) Other expenses, net (779,707 ) (1,270.8 ) (800,168 ) (236.9 ) (2.6 ) Loss from equity investment (16 ) 0.0 (100.0 ) Total other expenses, net (779,570 ) (1,270.6 ) (800,184 ) (236.9 ) (2.6 ) Loss before provision
for income taxes (1,434,756 ) (2,338.4 ) (2,060,027 ) (609.9 ) (30.4 ) Provision for income taxes - - - - - Net loss$ (1,434,756 ) (2,338.4 )$ (2,060,027 ) (609.9 ) (30.4 ) Foreign currency translation adjustment (772,895 ) 1,259.7 (78,413 ) (23.2 ) (1,085.7 ) Comprehensive loss$ (661,861 ) (1,078.7 )$ (2,138,440 ) (633.1 ) (69.0 ) Revenues. Revenues decreased 81.8% or approximately$276,000 to$61,000 from approximately$338,000 for the three months endedJune 30, 2021 was primarily due to sales growth concentrated in first-quarter rather than second-quarter of 2022. During the three months endedJune 30, 2022 and 2021, all revenues were generated in the PRC; and no customers accounted for 10% or more of total revenues. During the three months endedJune 30, 2022 and 2022, revenues were mainly from sales of health foods. Cost of revenues. Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately -$9,000 for the three months endedJune 30, 2022 and$536,000 for the three months endedJune 30, 2021 . The decrease in cost of revenues of approximately$545,000 or 101.8% from the comparable period of 2021 was due mainly to sales growth concentrated in first-quarter rather than second-quarter of 2022. There were one suppliers that accounted for more than 10% of total purchases for the three months endedJune 30, 2022 , and two supplier for the same period in 2021, respectively. One supplier (Chongqing Zhouhai Intelligent Technology Co., LTD. ) accounted for 88% for the six months endedJune 30, 2022 . One supplier (Wuyishan Zuoyun Ecological Tea Co., Ltd ) accounted for 54%, and the other (Hainan Shanshiyuan Health Management Co., LTD. ) accounted for 46% for the
three months endedJune 30, 2021 . 41
Gross profit (Loss): Gross profit for the three months endedJune 30, 2022 was approximately$70,000 ,while, gross loss for the three months endedJune 30, 2021 was approximately$198,000 . The increase in gross profit of approximately$269,000 or 135.7% from the comparable period of 2021 was due mainly to the increase in product sales as a result of business recovery from COVID-19 in 2022. General and Administrative Expenses. General and administrative expenses ("G&A expenses") consist primarily of salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional and audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased 8.4% or approximately$47,000 to$513,000 from approximately$560,000 for the three months endedJune 30, 2021 was due primarily to the decrease in advisory fees, salaries and benefits. Selling Expenses. Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company's service centers designed to promote product sales. Selling expenses decreased by 57.9% or approximately$287,000 to approximately$208,000 in the three months endedJune 30, 2022 from approximately$495,000 in the same period of 2021. The decrease was due mainly to the Company's cost containment plan and initiatives to scale back its marketing expenses in 2022 as the PRC economy continues to recover from the COVID pandemic. During the same period of 2021, the Company organized numerous events designed to boost product sales in light of the negative impact of COVID-19 on its business. Finance Expenses, net. Finance expenses consist mainly of service fees related to the use of third-party online payment platforms, bank fees and interest expenses related to borrowings; net of interest income from bank and related bank products. Total net financial expenses were approximately$5,000 and$6,000 for the three months endedJune 30, 2022 , and 2021, respectively. The decrease in net financial expenses was due mainly to decrease in interest expenses in the three months endedJune 30, 2022 . Operating Loss. Compared to the same period of 2021, operating loss decreased by approximately$605,000 for the three months endedJune 30, 2022 . The decrease in operating loss in 2022 was due primary to the increase of the sales due to business recovery after outbreak of the COVID-19 and decrease of operating expenses. Total Other Expenses, net. Other expenses consist mainly of estimated tax penalties and charitable contributions. Total net other expenses were approximately$780,000 for the three months endedJune 30, 2022 , compared to approximately$800,000 for the same period of 2021. The decrease in total net other expenses was due primary to decrease in estimated tax penalty in 2022. Provision for Income Taxes. No provision for income taxes was recorded for the three months endedJune 30, 2022 and 2021 since the Company reported a pre-tax loss of approximately$1.4 million and$2 million for the three months endedJune 30, 2022 and 2021. Net Loss. As a result of the factors described above, net loss was approximately$1.4 million for the three months endedJune 30, 2022 , a decrease of approximately$625,000 from approximately$2.1 million of net loss for the
same period of 2021.
Comprehensive Loss.Factoring in the impact of foreign currency translation
adjustment, comprehensive loss was approximately
42
Comparison for the six months Ended
The following table sets forth certain financial data for the six months endedJune 30, 2022 and 2022 For the Six Months Ended June 30, Percentage 2022 2022 Change Dollars % Dollars % % Revenues$ 767,404 100.0$ 578,236 100.0 32.7 Cost of revenues (437,934 ) (57.1 ) (651,082 ) (112.6 ) (32.7 ) Gross profit 329,470 (42.9 ) (72,846 ) (12.6 ) 552.3 General and
administrative expenses 1,035,465 134.9 1,313,800 227.2 (21.2 ) Selling expenses 589,760 76.9 1,028,811 177.9 (42.7 ) Finance expenses , net 11,557 1.5 17,175 3.0 (32.7 ) Total operating expenses 1,636,782 213.3 2,359,786
408.1 (30.6 )
Operating loss (1,307,312 ) (170.4 ) (2,432,632 ) (420.7 ) (46.3 )
Other expenses, net (1,596,714 ) (208.1 ) (1,547,906 ) (267.7 ) 3.2
Loss from equity
investment (6,794 ) (0.9 ) (8,166 ) (1.4 ) (16.8 )
Total other expenses, net (1,603,508 ) (209.0 ) (1,556,072 ) (269.1 ) 3.0 Loss before provision for income taxes (2,910,820 ) (379.3 ) (3,988,704 ) (689.8 ) (27.0 ) Provision for income taxes - - - - - Net loss (1,476,064 ) (379.3 ) (3,988,704 ) (689.8 ) (27.0 ) Foreign currency translation adjustment (716,097 ) 93.3 (16,092 ) (2.8 ) (4,550.0 ) Comprehensive loss$ (2,194,723 ) (286.0 )$ (4,004,796 ) (692.6 ) (45.2 ) Revenues: Revenues were approximately$767,000 and approximately$578,000 for the six months endedJune 30, 2022 and 2021 respectively. The increase in revenues of approximately$189,000 or 32.7% is due primarily to business recovery after outbreak of the COVID-19 in 2022 as market conditions inChina continue to improve. During the six months endedJune 30, 2022 and 2021, all revenues were generated in the PRC. During the six months endedJune 30, 2022 , revenues were mainly attributable to the sales of health foods and cold Gel, representing 50.1%, and 18.4% of revenues, respectively. During to the same period of 2021 revenues were mainly attributable to the sales of health foods and phonographs, representing 54.5% and18.4% of revenues, respectively. During the six months endedJune 30, 2022 and 2022, no customers accounted for 10%
or more of total revenues. Cost of revenues: Cost of revenues consists primarily of the cost of merchandise sold, delivery cost, service fees, sales incentives and commissions that are directly attributable to the sale of certain designated products. Cost of revenues of approximately$437,000 for the six months endedJune 30, 2022 and$651,000 for the six months endedJune 30, 2021 . The increase in cost of revenues of approximately$213,000 or 32.7% from the comparable period of 2022 was due mainly to increase in product sales as a result of business recovery from COVID-19 in 2022. There were one suppliers that accounted for more than 10% of total purchases, for the six months endedJune 30, 2022 and 2021, respectively. One supplier (Chongqing Zhouhai Intelligent Technology Co., LTD. ) accounted for 88% for the six months endedJune 30, 2022 . One supplier (Baoqing Meilai Modern Agricultural Service Co., Ltd. ) accounted for 97% for the six months endedJune 30, 2021 . 43 Gross Profit. Gross profit for the six months endedJune 30, 2022 was approximately$329,000 while. the gross loss for the six months endedJune 30, 2021 was approximately$73,000 . The increase in gross profit of approximately$402,000 or 552.3% from the comparable period of 2021 was due mainly to the increase in product sales as a result of business recovery from COVID-19 in 2022. General and Administrative Expenses. General and administrative expenses ("G&A expenses") consist primarily of costs in salary and benefits for our general administrative and management staff, facilities costs, depreciation expenses, professional fees, audit fees, and other miscellaneous expenses incurred in connection with general operations. G&A expenses decreased 21.2% or approximately$278,000 to approximately$1 million in the six months endedJune 30, 2022 from approximately$1.3 million for the six months endedJune 30, 2021 was due primarily to the decrease in advisory fees, salary and benefits. Selling Expenses. Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, and marketing and selling expenses that are related to events and activities at the Company's service centers designed to promote product sales. Selling expenses decreased by 42.7% or approximately$439,000 to approximately$590,000 in the six months endedJune 30, 2022 from approximately$1 million in the same period of 2021. The decrease was due mainly to fewer events and lower travel expenses because of the negative impact of COVID-19. Finance Income, net. Total net financial expense was approximately$12,000 for the six months endedJune 30, 2022 , compared to approximately$17,000 for the same period of 2021. The decrease was due mainly to lower interest earned from bank and related bank products in the six months period endedJune 30, 2021 . Operating LossOperating loss was approximately$1.3 million for the six months endedJune 30, 2022 , compared to approximately$2.4 million for the same period of 2021. The decrease in operating loss in 2021 was due primary to the increase of the sales due to business recovery after outbreak of the COVID-19 and decrease of operating expenses. Total Other Expenses, net. Other expenses consist mainly of estimated tax penalties and charitable contributions. Total net other expenses were approximately$1.6 million for the six months endedJune 30, 2022 , compared to approximately$1.6 million for the same period of 2021. The increase in total net other expenses was due primary to increase in estimated tax penalty in 2022. Provision for Income Taxes. No provision for income taxes was recorded for the six months endedJune 30, 2022 and 2021 since the Company reported a pre-tax loss of approximately$2.9 million and$4.0 million for the six months endedJune 30, 2022 and 2021. Net Loss. As a result of the factors described above, net loss was approximately$2.9 million for the six months endedJune 30, 2022 , a decrease of approximately$1 million from approximately$4.0 million of net loss for the same period
of 2022.
Comprehensive LossComprehensive loss was approximately
44
Liquidity and Capital Resources
As of
The following table sets forth a summary of our cash flows for the periods as
indicated:
For the Six Months ended
June 30,
2022 2021
(Unaudited) (Unaudited)
Net cash used in provided by operating activities
- (3,523 )
Effect of exchange rate changes on cash and cash
equivalents (18,600 ) 72,969
Net (decrease) in cash and cash equivalents (816,833 ) (2,226,926 ) Cash and cash equivalents at beginning of period 838,850
3,257,005
Cash and cash equivalents at end of period$ 22,017 $
1,030,079
The following table sets forth a summary of our working capital:
June 30, December 31,
2022 2021 Variation %
(Unaudited)
Total Current Assets $ 271,719 $ 1,319,947 $ (1,048,228 ) (79.4 )
Total Current Liabilities 34,600,709 34,453,169 147,540 0.4
Working Capital $ (34,328,990 ) $ (33,133,222 ) $ (1,195,768 ) 3.6
Working Capital. The deterioration in the Company's working capital was due mainly to continuing net losses generated as a result of COVID-19.
Cash used in operating activities was approximately$798,000 and$2.3 million for six months endedJune 30, 2022 and 2021, respectively. The key factors attributing to the net cash outflows in 2022 include: net loss of approximately$2.9 million , increase in inventory of approximately$100,000 , prepayments and other current assets of approximately$131,000 , taxes payable of approximately$322,000 and other payables and other current liabilities of approximately$540,000 and offset by the decrease in advance from customers of approximately$338,000 . For the six months endedJune 30, 2021 , cash used in operating activities was approximately$2.3 million . The decrease in cash outflow of approximately$16.9 million was due primary to decrease in (1) net loss of approximately$4.2 million (2) advances to suppliers of approximately$6.1 million , (3) prepayment and other current assets of approximately$396,000 , (4) accrued expenses of approximately$4.7 million , and (5) other payables and other current liabilities of approximately$680,000 .
Net cash used in investing activities was approximately $nil and$4,000 for the six months endedJune 30, 2022 and 2021, respectively. Net cash used in investing activities of approximately$4,000 for the six months endedJune 30, 2021 was related to the purchases of property and equipment. The Company expect to continue implementing cost containment measures, work closely with our service centers with offline, online and virtual marketing and promotion activities, as well as actively recruit key sales members and obtain product and service collaborations. The shareholder of the Company pledge to give financial support for the Company operation. 45
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders' equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and
development services with us. Critical Accounting Policies We prepare our financial statements in conformity with accounting principles generally accepted bythe United States of America ("U.S. GAAP"), which require us to make judgments, estimates, and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. We believe that our accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations are summarized in "Note 3 - Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements
See "Note 3 - Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements. The Company believes that other recent accounting pronouncement will not have a material effect on the Company's consolidated financial position, results of operations and cash flows. 46
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