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 onMarch 31, 2021 , 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.Hanjiao Group, Inc. , known formerly asAS Capital, Inc. ("ASIN") and its subsidiaries and variable interest entity (collectively, the "Company" or "we") are engaged in the business of selling healthcare and other related products to the middle-aged and elderly market segments in the PRC through our online to offline (O2O) platform. Our O2O platform integrates our e-commerce platform with physical outlets to connect consumers and merchants in a dynamic marketplace. Our 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, our core product categories include nutritional supplements, cosmetics, smart home products (such as smart watches) and home appliances (such as water filters and air purifiers). We have developed several branch offices with outlets across the PRC with approximately 160,000 users. We conduct business primarily through our variable interest entity ("VIE"),Beijing Luji Technology Co., Ltd. ("Beijing Luji") that was formed inBeijing, China onMarch 27, 2007 .
Impact of COVID-19 on our business
The outbreak of COVID-19 that started in lateJanuary 2020 in the PRC has negatively affected our business. InMarch 2020 , theWorld Health Organization declared COVID-19 as a pandemic which 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 for 2020 and the quarter endedMarch 31, 2021 , have been adversely affected. For the quarter endedMarch 31, 2021 , the Company had a net loss of approximately$1.9 million . AtMarch 31, 2021 , the Company has a significant working capital deficiency of approximately$21.5 million , and a shareholders' deficit of approximately$7.1 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 our service centers continuously to enhance their marketing and promotion activities. While we cannot predict future disruptions to the Company which may occur due to the spread of COVID-19 and its variants, management believes that COVID-19 will continue to have a material impact on our financial results for at least the first half of 2021 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 in the foreseeable future. We continue to monitor the status of the pandemic and will adjust our strategies accordingly. Based on our recent sales and cash flows projections, we believe that we could generate sufficient operating cash flows over the next 12 months to continue as a going concern. 26 Results of Operations Our unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes that we will be able to continue to operate in the future in the normal course of business. Our unaudited condensed consolidated financial statements for the three months endedMarch 31, 2021 , includes a note about our ability to continue as a going concern due to significant loss from operations since 2020 as a result of COVID-19. Business closures in the PRC and limitations on business operations arising from COVID-19 has significantly disrupted our ability to generate revenues and cash flow during the three months endedMarch 31, 2021 .
Comparison for the Three Months Ended
The following table sets forth certain financial data for the three months endedMarch 31, 2021 and 2020: For the Three Months Ended March 31, Percentage 2021 2020 Change Dollars % Dollars % % Revenues$ 240,495 100.0$ 34,331 100.0 600.5 Cost of revenues (115,100 ) (47.9 ) (38,781 ) (113.0 ) 196.8 Gross profit (loss) 125,395 (52.1 ) (4,450 )
(13.0 ) (2,917.9 )
General and administrative expenses 753,698 313.4 1,132,466
3,298.7 (33.4 )
Selling expenses 533,491 221,8 1,272,914 3,707.8 (58.1 )
Finance expenses
(income), net 10,995 4.6 (182,138 ) (530.5 ) (106.0 )Total operating expenses 1,298,184 539.8 2,223,242
(6,475.9 ) (41.6 )
Operating loss (1,172,789 ) (487.7 ) (2,227,692 ) (6,488.9 ) (47.4 )
Other expenses, net (747,738 ) (310.9 ) (2,191,729 ) (6,384.1 ) (65.9 )
Loss from equity
investment (8,150 ) (3.4 ) - - 100.0
Total other expenses,
net (755,888 ) (314.3 ) (2,191,729 ) (6,384.1 ) (65.5 )
Loss before provision for income taxes (1,928,677 ) (802.0 ) (4,419,421 ) (12,873.0 ) (56.4 ) Provision for income taxes - - - - - Net loss$ (1,928,677 ) (802.0 )$ (4,419,421 ) (12,873.0 ) (56.4 ) Foreign currency
translation adjustment 62,321 25.9 (83,772 )
(244.0 ) (174.4 )
Comprehensive (loss)
income $ (1,866,356 ) (776.1 ) $ (4,503,193 ) (13,117 ) (58.6 )
27
Revenues: Revenues were approximately $240,000 and approximately $34,000 for the
three months ended March 31, 2021 and 2020 respectively. The increase in
revenues of approximately $206,000 or 600.5% is due primarily to business
recovery after outbreak of the COVID-19 and management believes that its
business will gradually stabilize in the second half of 2021 as market
conditions in China continue to improve. During the three months ended March 31,
2021 and 2020, all revenues were generated in the PRC. During the period of
three months ended March 31, 2021 , revenues were mainly attributable to the
sales of health foods, cold gel, smart watches, cosmetics products and home
appliances, with health foods accounted for 54.5%of revenues. During to the same
period of 2020, the revenues were mainly attributable to the sales of health
foods representing 10.4% of revenues. During the three months ended March 31,
2021 and 2020, no customers accounted for 10% or more of total revenues.
Cost of revenues: Cost of revenues consists primarily of 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 $115,000 and $38,000 for the three months ended March
31, 2021 and 2020, respectively. The increase in cost of revenues of
approximately $76,000 or 196.8% from the comparable period of 2020 was due
mainly to increase in product sales.
There were two suppliers that accounted for more than 10% of total purchases,
for the three months ended March 31, 2021 and 2020, respectively. One supplier
(Shandong Kangqi Wood Industry Co. Ltd. ) accounted for 75%, and the other
(Suzhou Jianli Space Health Technology Co. Ltd. ) accounted for 19% for the three
months ended March 31, 2021 . One supplier (Baoqing Meilai Modern Agricultural
Service Co., Ltd. ) accounted for 84%, and the other (Shandong Kangqi Wood
Industry Co. Ltd. ) accounted for 11% for the three months ended March 31, 2020 .
Gross Profit (loss). Gross profit for the three months ended
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 by 33.4% or
approximately $378,000 , to approximately $754,000 in the three months ended
March 31, 2021 from approximately $1.1 million for the three months ended March
31, 2020 . The decrease 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 58.1%, or approximately $739,000 , to approximately
$533,000 in the three months ended March 31, 2021 from approximately $1.3
million in the same period of 2020. The decrease was due mainly to fewer
marketing and other promotional activities in 2021 due to cost containment
measures.
Finance Expenses/Income, net. Total net financial expense was approximately
$11,000 for the three months ended March 31, 2021 , compared to approximately
$182,000 of financial income for the same period of 2020. The decrease was due
mainly to lower interest from bank and related bank products in the three-month
period ended March 31, 2021 .
Operating LossOperating loss was approximately $1.2 million for the three months
ended March 31, 2021 , compared to approximately $2.2 million for the same period
of 2020. The decrease in operating loss in 2020 was due primary to the increase
of the sales due to business recovery after outbreak of the COVID-19 and
decrease in operating expenses.
Total Other Expenses, net. Other expenses consist mainly of estimated tax
penalties and charitable contributions. Total net other expenses were
approximately $756,000 for the three months ended March 31, 2021 , compared to
approximately $2.2 million for the same period of 2020. The decrease in total
net other expenses was due primary to decrease in estimated tax penalty in 2021.
Provision for Income Taxes. No provision for income taxes was recorded for the
three months ended March 31, 2021 and 2020 since the Company reported a pre-tax
loss of approximately $1.9 million and $4.4 million for the three months ended
March 31, 2021 and 2020, respectively.
Net Loss. As a result of the factors described above, net loss was approximately
$1.9 million for the three months ended March 31, 2021 , a decrease of
approximately $2.5 million from approximately $4.4 million of net loss forthe same period of 2020.
Comprehensive LossComprehensive loss was approximately
28
Liquidity and Capital Resources
As of
The following table sets forth a summary of our cash flows for the periods as
indicated:
For the Three Months ended
March 31,
2021 2020
(Unaudited) (Unaudited)Net cash (used in) operating activities$ (1,303,663 ) $ (13,531,812 ) Net cash (used in) financing activities $ -$ (1,722,055 ) Effect of exchange rate changes on cash and cash equivalents$ (6,549 ) $ (216,145 ) Net decrease in cash and cash equivalents$ (1,310,212 ) $ (15,470,012 ) Cash and cash equivalents at beginning of period$ 3,257,005 $ 28,919,817 Cash and cash equivalents at end of period$ 1,946,793 $
13,449,805
The following table sets forth a summary of our working capital:
March 31, December 31,
2021 2020 Variation %
(Unaudited)
Total Current Assets $ 9,993,538 $ 11,435,892 $ (1,442,354 ) (12.6 )
Total Current Liabilities $ 31,539,358 $ 31,307,498 $ 231,860 0.7
Working Capital $ (21,545,820 ) $ (19,871,606 ) $ (1,674,214 ) 8.4
Working Capital. The deterioration in the Company's working capital was due mainly to continuous net loss since year 2020.
Cash used in operating activities was approximately$1.3 million and$13.5 million for three months endedMarch 31, 2021 and 2020, respectively. The key factors attributing to the net cash outflows in 2021 include: net loss of approximately$1.9 million ; increase in advance to suppliers of approximately$196,000 ; and increase in tax payable of approximately$244,000 . The key reasons for the net cash outflows of approximately$26.1 million in the same period of 2020 include: net loss of approximately$4.4 million ; increase in advance to suppliers and prepayments of approximately$6.6 million , and increase in accrued expenses of approximately$1.7 million . Net cash used in financing activities was $nil and approximately$1.7 million for the three months endedMarch 31, 2021 and 2020. The key factors attributing to the net cash outflows in 2020 was due mainly to dividends paid of approximately$732,000 , repayment of loans of approximately$790,000 , and repayment of loans from related parties of approximately$197,000 .
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. 29 Critical Accounting Policies We prepare our financial statements in conformity with accounting principles generally accepted bythe United States of America ("U.S. GAAP"), which require us to make judgments, estimates, and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past three years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. We believe that our accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations are summarized in "Note 3 - Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements.
Recent Accounting Pronouncements
See "Note 3 - Summary of Significant Accounting Policies" in the notes to our unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements. The Company believes that other recent accounting pronouncement will not have a material effect on the Company's consolidated financial position, results of operations and cash flows.
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