This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries and VIE for the fiscal years endedDecember 31, 2020 and 2019. The discussion and analysis that follows should be read together with the section entitled "Cautionary Note Concerning Forward-Looking Statements" and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K. Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company's control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by
us in this report.
Currency and exchange rate
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.
Impact of COVID-19 on our business
The outbreak of COVID-19 that started in lateJanuary 2020 in the PRC had negatively affected our business. InMarch 2020 , theWorld Health Organization declared COVID-19 as a pandemic and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities inChina and theU.S. in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company's business operations and its workforce are concentrated inChina , the Company's business, results of operations, and financial condition for 2020 have been adversely affected. For the year endedDecember 31, 2020 , the Company had a net loss of approximately$15 million . AtDecember 31, 2020 , the Company has a significant working capital deficiency of approximately$20 million , and a shareholders' deficit of approximately$5.5 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. Management believes that COVID-19 will continue to have a material impact on our financial results for 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. Assuming a significant easing of COVID related restrictive measures, and success in the recruitment and retention of key sales members, we believe that we could generate sufficient operating cash flows over the next 12 months to continue as a going concern. 16 Results of Operations
Our 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. In our consolidated financial statements for the year endedDecember 31, 2020 and 2019, it has included a note about our ability to continue as a going concern due to significant decline in our operating cash flows and significant operating loss in year 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 operating cash flows during the fiscal year 2020. The success of our business strategy is dependent in part upon the availability of additional capital resources on terms satisfactory to management as we are not generating sufficient revenues from our business operations. Our sources of capital in the past have included advance from stockholders and affiliates. There can be no assurance that we can raise such additional capital resources on satisfactory terms. We believe that our current cash and other sources of liquidity discussed above are adequate to support operations for at least the next 12 months. We anticipate continuing to rely on equity sales of our common shares and shareholder loans in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our plan of operations.
Comparison for the Years Ended
The following table sets forth certain financial data for the years endedDecember 31, 2020 and 2019: For the Year Ended December 31, Percentage 2020 2019 Change Dollars % Dollars % % Revenues$ 675,435 100.0$ 58,233,055 100.0 (98.8 ) Cost of revenues (1,802,493 ) (266.9 ) (41,763,786 ) (71.7 ) (95.7 ) Gross (loss) profit (1,127,058 ) (166.9 ) 16,469,269 28.3 (106.8 ) General and administrative expenses 7,319,709 1,083.7 8,110,916 13.9 (9.8 ) Selling expenses 2,418,217 358.0 3,595,934 6.2 (32.8 ) Finance (income) expenses, net (189,759 ) (28.1 ) 83,409 0.1 (327.5 )
Total operating expenses 9,548,167 1,413.6 11,790,259
20.2 (19.0 )
Operating (loss) income (10,675,225 ) (1,580.5 ) 4,679,010
8.0 (328.2 ) Other expenses, net (4,430,599 ) (656.0 ) (2,378,313 ) (4.1 ) 86.3 (Income)/Loss from equity investment 84,828 12.6
(31,098 ) (0.1 ) (372.8 )
Total other expenses, net (4,345,771 ) (643.4 ) (2,409,411 ) (4.1 ) 80.4
(Loss) income before provision for income taxes (15,020,996 ) (2,223.9 ) 2,269,599
3.9 (761.8 ) Provision for income taxes - - 931,201 1.6 (100.0 ) Net (loss) income$ (15,020,996 ) (2,223.9 )$ 1,338,398 2.3 (1,222.3 ) Foreign currency translation adjustment (166,580 ) (24.7 ) (163,254 ) (0.3 ) 2.0
Comprehensive (loss) income
2.0 (1,392.4 ) 17 Revenues: Revenues were approximately$675,000 and approximately$58.2 million for the year endedDecember 31, 2020 and 2019, respectively. The decrease in revenues of approximately$57.6 million or 98.8% is due primarily to business interruptions arising from COVID-19. During the years endedDecember 31, 2020 and 2019, all revenues were generated in the PRC. During the year endedDecember 31, 2020 , revenues were mainly attributable to the sales of home appliances, smart watches, health foods, cold gel and cosmetics products, representing 3.7%, 22.1%, 26.1%, 34.9% and 2.6% of revenues, respectively. During the year endedDecember 31, 2019 , the top products categories were health foods, home appliances and cosmetics, representing 70.92%, 11.38% and 7.32% of the revenue, respectively. During the year endedDecember 31, 2020 and 2019, no customers accounted for 10% or more of our total net 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 as well as allowance for and write-down of slow-moving inventories. Cost of revenues of approximately$1.8 million for the year endedDecember 31, 2020 consisted of provision for slow-moving inventory of approximately$1.4 million . The decrease in cost of revenues of approximately$40.0 million or 95.7% from the comparable period of 2019 was due mainly to decrease in product sales as a result of COVID-19. There were three suppliers that accounted for more than 10% of total purchases for the year endedDecember 31, 2020 . One supplier (Shandong Kangqi Wood Industry Co. Ltd. ) accounted for 50%, one supplier (Harbin Xinyue Technology Co. Ltd. ) accounted for 21% and the other (Suzhou Jianli Kongjian Health Technology Co. Ltd. ) accounted for 20% for the year endedDecember 31, 2020 . There were two suppliers that accounted for more than 10% of total purchases, for the year endedDecember 31, 2019 . One supplier (Harbin Xinyue Technology Co. Ltd. ) accounted for 68%, and the other (Zhongji Technology Services Co. Ltd. ) accounted for 11% for the year endedDecember 31, 2019 .
Gross (Loss) Profit. Gross loss for the year ended
General and Administrative Expenses. General and administrative expenses ("G&A expenses") consist mainly of payroll and related costs for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources, professional fees and other general corporate expenses as well as costs associated with the use by these functions of facilities and equipment, such as depreciation and rental expenses. G&A expenses decreased 9.8% or approximately$791,000 to approximately$7.3 million from approximately$8.1 million for the year endedDecember 31, 2019 was due primarily to the decrease in professional fees, and 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 32.8% or approximately$1.2 million to approximately$2.4 million in the year endedDecember 31, 2020 from approximately$3.6 million in the same period of 2019. The decrease was due mainly to fewer events and lower travel expenses because of the negative impact of COVID-19. Finance Income, net. For the years endedDecember 31, 2020 and 2019, payment processing fees amounted to$9,911 and$274,149 , respectively. For the years endedDecember 31, 2020 and 2019, interest expense amounted to$30,920 and$16,312 , respectively. For year endedDecember 31, 2020 and 2019, interest income amounted to$230,590 and$207,052 , respectively. The increase in net finance income in 2020 was due mainly to lower payment processing fee or the year endedDecember 31, 2020 as a result of the decline in revenues due to COVID-19. Operating (loss) Income. Operating loss was approximately$10.7 million for the year endedDecember 31, 2020 , compared to operating income of approximately$4.7 million for the same period of 2019. The decrease in operating income in 2020 was due primary to the significant decline in revenues in 2020 due to the impact of COVID-19. 18 Total Other Expenses, net. Other expenses consist mainly of estimated tax penalties and charitable contributions. Total net other expenses were approximately$4.4 million for the year endedDecember 31, 2020 , compared to approximately$2.4 million for the same period of 2019. The increase in total net other expenses was due primary to donation toBinzhou Red Cross Society for approximately$1.4 million and estimated tax penalties related to unpaid VAT and income taxes of approximately$2.3 million .
Provision for Income Taxes. Provision for income taxes was nil for the year
ended
Net (loss) Income. As a result of the factors described above, net loss was
approximately
Comprehensive Loss (Income). Comprehensive loss was approximately$15.2 million for the year endedDecember 31, 2020 , as compared to comprehensive income of approximately$1.2 million for the year endedDecember 31, 2019 .
Liquidity and Capital Resources
As of
The following table sets forth a summary of our cash flows for the periods as indicated: For the Years endedDecember 31, 2020 2019
Net cash (used in) provided by operating activities
$ (1,671,064 ) $ (11,581,326 ) Net cash (used in) financing activities$ (1,974,343 ) $ (1,865,742 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash$ 521,508 $ (383,416 ) Net (decrease) increase in cash, cash equivalents and restricted cash$ (25,662,812 ) $
10,900,200
Cash, cash equivalents and restricted cash at beginning of year$ 28,919,817 $
18,019,617
Cash, cash equivalents and restricted cash at end of year$ 3,257,005 $ 28,919,817
The following table sets forth a summary of our working capital:
As of December 31, 2020 2019 Variation % Total Current Assets$ 11,435,892 $ 31,095,695 $ (19,659,803 ) (63.2 ) Total Current Liabilities$ 31,307,498 $ 32,354,228 $ (1,046,730 ) (3.2 ) Working Capital$ (19,871,606 ) $ (1,258,533 ) $ (18,613,073 ) 1,478.9
Working Capital. The deterioration in the Company's working capital was due mainly to the negative impact of COVID-19 as the Company experienced a significant decline in its revenues.
For the year endedDecember 31, 2020 , cash used in operating activities was approximately$22.5 million . For year endedDecember 31, 2019 , cash provided by operating activities was approximately$24.7 million . The key factors attributing to the net cash outflows of approximately$22.5 million in 2020 include: net loss of approximately$15.0 million due mainly to drop in revenues and increase in advance to suppliers of approximately$6.2 million . 19
Net cash generated from operating activities was$24.7 million for the year endedDecember 31, 2019 , was due mainly to net income of$1.3 million , increase in accrued expenses and other liabilities of$4.3 million , an increase in taxes payable of$9.0 million , and increase in due from related parties of$10.2 million ; partially offset by decrease in advance from customers of$3.5 million . Net cash used in investing activities was approximately$1.7 million for the year endedDecember 31, 2020 , as compared to$11.6 million for the year endedDecember 31, 2019 . The change of approximately$9.9 million was due primary to purchases of property and equipment of approximately$1.7 million in 2020, as compared to an investment in equity investee of$11.6 million in 2019. Net cash used in financing activities was approximately$2.0 million for the year endedDecember 31, 2020 , that consisted mainly net repayment of loans from related parties and third parties of approximately$1.2 million plus dividends of approximately$0.7 million . Net cash used in financing activities of approximately$1.9 million for the year endedDecember 31, 2019 consisted mainly of dividends of$3 million , partially offset by loan from third parties and related parties of$1.2 million .
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
Basis of Presentation The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted inthe United States of America ("US GAAP") and pursuant to the rules and regulations of theU.S. Securities and Exchange Commission ("SEC"). Certain prior year balances have been reclassified to conform to the current year's presentation. Principles of Consolidation The accompanying consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and the VIE and its subsidiary. All inter-company transactions and balances have been eliminated upon consolidation.
VIE Agreements with
The Company does not have a direct equity ownership interest in Beijing Luji but relies on the VIE Agreements to control and receive the economic benefits of Beijing Luji's business. The Company relies on contractual arrangements with its variable interest entity to operate its online to office (O2O) business in the PRC in which foreign investment is restricted or prohibited. The O2O platform integrates the Company's e-commerce platform with physical outlets (service centers) to connect consumers and merchants in a dynamic marketplace. Pursuant to the VIE Agreements, the Company, throughBeijing Hongtao , is able to exercise effective control over, bears the risks of, enjoys substantially all of the economic benefits its VIE and its subsidiary and has an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law. The Company's management concluded that Beijing Luji and its subsidiary are variable interest entities of the Company andBeijing Hongtao is the primary beneficiary of Beijing Luji and its subsidiary. As such, the financial statements of the VIE and its subsidiary are included in the consolidated financial statements of the Company.
During the year ended
20 Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company's consolidated financial statements include the allowance for doubtful accounts and slow-moving inventory, and the useful lives of property and equipment. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company followsFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") FASB ASC Section 820, "Fair Value Measurements and Disclosures." ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs, other than quoted prices in level 1, that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the asset or liability.
The carrying value of financial instruments included in current assets and liabilities approximate their fair values because of the short-term nature of these instruments.
Risks and Uncertainties The operations of the Company are located in the PRC. Accordingly, the Company's business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, as well as by the general state of the PRC economy. The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies inNorth America andWestern Europe . These include risks associated with, among other factors, the political, economic and legal environment and foreign currency restrictions. The Company's results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations, changes in the future could affect the Company's interest in these entities. 21 The outbreak of COVID-19 that started in lateJanuary 2020 in the PRC had negatively affected our business. InMarch 2020 , theWorld Health Organization declared COVID-19 as a pandemic and has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities inChina and theU.S. in the subsequent months. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of the Company's business operations and its workforce are concentrated inChina , the Company's business, results of operations, and financial condition for the year endedDecember 31, 2020 have been adversely affected. There is an uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the Company's business. Based on management's assessment of the current economic environment in the PRC, the Company's recent sales trend, and the possible negative impact from a prolonged pandemic in the PRC, management believes that the Company's revenues and operating cash flows may be lower than expected in the first half of 2021. To mitigate the overall financial impact of COVID-19 on the Company's business, management continues to explore opportunities to reduce its operating overhead and works closely with its service centers to develop promotional activities that will hopefully generate additional sales in 2021. Inventories Inventories consist of finished goods and they are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The Company periodically evaluates its inventories and will record an allowance for inventories that are either slow-moving, may not be saleable or whose cost exceeds its net realizable value. Advance to Suppliers Advance to suppliers consists of payments to suppliers for finished goods that have not been delivered to the Company. The Company periodically evaluates and reviews its advance to suppliers to determine whether its carrying value has been impaired.Long-term Investment Long-term investment consists of the Company's equity investment for strategic or business development purposes. The Company applies the equity method of accounting for its equity investment, according to FASB ASC 323 "Investment-Equity Method and Joint Ventures ," over which it has significant influence but does not own a majority equity interest or otherwise control. Under the equity method, the Company's share of the profits or losses of the equity investees are recorded in its consolidated statements of comprehensive income (loss).
The Company reviews its investment at least annually to determine whether a decline in fair value to below the carrying value is other-than-temporary. The primary factors the Company considers in its determination are the duration and severity of the decline in fair value; the financial condition, operating performance and the prospects of the equity investee; and other company specific information such as recent financing activities. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the investment will be written down to its fair value.
No events have occurred that indicated an impairment in fair value for the year
ended
22 Property and Equipment, Net Property and equipment are carried at cost and are depreciated on the straight-line basis over the estimated useful lives of the underlying assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When their assets are retired or disposed of, the cost and accumulated depreciation and amortization are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of its property and equipment, when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Estimated useful lives are as follows, taking into account the assets' estimated residual value:
Classification Estimated useful lives Property 20 years Vehicles 10 years Office equipment 3 years Furniture and fixtures 3 years Software 3 years Long-lived Assets Finite-lived assets and intangibles are reviewed for impairment testing when circumstances require. For purposes of evaluating the recoverability of long-lived assets, when undiscounted future cash flows will not be sufficient to recover an asset's carrying amount, the asset is written down to its fair value. The long-lived assets of the Company that are subject to evaluation consist primarily of property and equipment, and long-term investment. For the year endedDecember 31, 2020 and 2019, the Company did not recognize any impairment of its long-lived assets. Leases InJanuary 2016 , the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02") requiring leases to be recognized on the balance sheet as a right-of-use asset and lease liability for all long-term leases and requiring disclosure of key information about leasing arrangements in order to increase transparency and comparability among organizations. EffectiveJuly 1, 2020 , the Company adopted ASU 2016-02, "Leases" (Topic 842), and elected the practical expedients that do not require it to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. The Company also adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. The Company measures the lease liability based on the present value of the lease payments discounted by the relevant borrowing rate and reduces the carrying value of the lease liability for lease payments made. Leases with an initial expected term of 12 months or less are considered short-term and are not recorded on the Company's consolidated balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the expected lease term. 23 Revenue Recognition OnJanuary 1, 2019 , the Company adopted FASB ASC 606, Revenue from Contracts with Customers using the modified retrospective method for all contracts not completed as of the date of adoption. Accordingly, revenues for the year endedDecember 31, 2020 and 2019, are presented under ASC 606. The core principle underlying the revenue recognition standard is that the Company will recognize revenue to represent the transfer of products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of the product or the benefit of the services transfers to the customer. Under the guidance of ASC 606, the Company is required to (a) identify the contract with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract and (e) recognize revenue when (or as) the Company satisfies its performance obligations. Product Sales: Beijing Luji, the Company's VIE, is primarily engaged in the sale of healthcare and other products (such as nutrition or dietary supplements; water or air purifiers and smart watches) to the middle aged and elderly market segments in the PRC. Beijing Luji sells these products under its own "Fozgo" brand and related healthcare products for other vendors through its internet platform and offline service centers. Revenue from product sales is recognized when control passes to the customer, which generally occurs at a point in time when products are delivered. Allowance for sales returns, that reduces revenues, are estimated based on historical experience. Revenues are recorded net of value-added taxes, business taxes, discounts and surcharges and allowance for returns. Beijing Luji collects cash from customers before or upon delivery of products mainly through banks and third-party online payment platforms (such asAlipay ). Cash collected from customers before product delivery is recognized as advance from customers. 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 as well as allowance for and write-down of slow-moving inventories.
General and Administrative Expenses
General and administrative expenses consist mainly of payroll and related costs for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources, professional fees and other general corporate expenses as well as costs associated with the use by these functions of facilities and equipment, such as depreciation and rental expenses. Selling Expenses Selling expenses consist mainly of payroll and benefits for employees involved in the sales and distribution functions, meeting/event fees, advertisement, marketing and selling expenses that are related to events and activities at the Company's service centers designed to promote product sales as well as operating expenses related to the service centers. 24 Finance Expenses (Income)
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.
For the years endedDecember 31, 2020 and 2019, bank fees amounted to$9,911 and$274,149 , respectively. For year endedDecember 31, 2020 and 2019, interest expense amounted to$30,920 and$16,312 , respectively. For the years endedDecember 31, 2020 and 2019, interest income amounted to$230,590 and$207,052 , respectively. Other Income (Expenses)
Other income consists primarily of income from the administration of Beijing Luji's online marketplace. Other expenses consist mainly of estimated tax penalties and charitable contributions.
Income Taxes
The Company follows FASB ASC Topic 740, "Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating losses that are available to offset the future taxable income. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. The Company follows FASB ASC 740-10-25, "Accounting for Uncertainty in Income Taxes", which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under ASC 740-10-25, tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company believes that it does not have any uncertain tax positions. It is not expected that there will be any uncertain tax position within year ofDecember 31, 2020 .
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or the deferred tax asset valuation allowance. Due to the lack of temporary differences between the tax bases and their financial reporting amounts, the Company has not recognized any deferred tax assets or liabilities as ofDecember 31, 2020 and 2019. Enterprise Income Tax Under the Provisional Regulations of the PRC concerning income tax on enterprises promulgated by the PRC (the "EIT Law"), the Company was qualified as a high and new technology enterprise starting in 2018, and enjoys a preferential tax rate of 15% for 3 years expired in 2020. The Company is applying for the qualification of the preferential tax rate. An entity can re-apply to be a high and new technology enterprise when the prior certificate expires. Income tax is payable at a rate of 15% of our taxable income for the year ended December
31, 2020 and 2019. 25 Value-Added Tax Starting fromMay 1, 2018 , the VAT rate for revenue generated from providing products was 16%. Starting fromApril 1, 2019 , the VAT rate for revenue generated from providing products changed from 16% to 13%. VAT is reported as a reduction of revenue when incurred. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. The net VAT balance between input VAT and output VAT is recorded in taxes payable. Foreign Currency Translation The functional currency of the Company's operations in the PRC is the Chinese Yuan or Renminbi ("RMB"). The financial statements are translated intoU.S. dollars ("USD") using the period end rates of exchange for assets and liabilities, equity is translated at historical exchange rates, and average rates of exchange (for the period) are used for revenues and expenses and cash flows. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into USD are included in determining comprehensive income (loss). Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company's revenue transactions are transacted in its functional currency. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
The exchange rates as of
Year ended December 31, December 31, December 31, 2020 2019 2020 2019 Foreign currency Balance Sheet Balance Sheet Profits/Loss Profits/Loss RMB:1USD 6.5249 6.9762 6.8976 6.8985 Comprehensive Income (Loss) Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders' equity but are excluded from net income (loss). Other comprehensive income (loss) consists entirely of foreign currency translation adjustments resulting from the Company's translation of its financial statements from its functional currency into USD. Earnings (loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of ordinary shares plus dilutive potential ordinary shares outstanding during the period. When the Company has a loss, the potential ordinary shares are not included since their inclusion would be anti-dilutive. For the year endedDecember 31, 2020 and 2019, there were no potential ordinary shares, such as options, warrants or conversion rights, that would have a dilutive effect on the Company's earnings per share. 26
Recent Accounting Pronouncements
InFebruary 2016 , the FASB issued ASU 2016-02, Amendments to the ASC 842 Leases. This update requires a lessee to recognize an asset and liability (the lease liability) arising from operating leases on the balance sheet for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Leases with twelve months or less lease term, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. If a lessee makes this election, it should recognize lease expense on a straight-line basis over the lease term. In transition, this update was effective for public entities for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years. The Company adopted ASU 2016-02 upon the completion of the Share Exchange Transaction. The adoption of ASU 2016-02 did have a material impact on the Company's consolidated financial statements. InJuly 2017 , the FASB Issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815). The amendments in Part I of the Update change the reclassification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning afterDecember 15, 2019 , and interim periods within fiscal years beginning afterDecember 15, 2020 . The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The adoption of this ASU did not have a material effect on the consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which amends certain disclosure requirements over Level 1, Level 2, and Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning afterDecember 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-13 did have a material impact on the Company's consolidated financial statements. InDecember 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) to simplify accounting for income taxes. This ASU removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning afterDecember 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of the new ASU to have a significant impact on its consolidated financial statements. The Company does not believe that other recently issued accounting standards, if currently adopted, will have a material effect on the Company's consolidated financial statements. 27
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