PART
I
ITEM 1.
|
IDENTITY
OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not
applicable.
ITEM 2.
|
OFFER STATISTICS
AND EXPECTED TIMETABLE
|
Not
applicable.
|
A.
|
Selected Financial Data
|
The
following table presents the selected consolidated financial information of our company. The selected consolidated financial data present
the results for the three fiscal years ended and as of March 31, 2021, 2020, and 2019. Our historical results do not necessarily indicate
results expected for any future periods. The selected consolidated financial data below should be read in conjunction with our consolidated
financial statements and notes thereto, “Item 5. Operating and Financial Review and Prospects” below, and the other information
contained in this Form 20-F.
|
|
As
of and For the Years Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
71,484,703
|
|
|
$
|
65,061,953
|
|
|
$
|
63,936,185
|
|
Cost of Revenues
|
|
$
|
53,309,102
|
|
|
$
|
34,642,649
|
|
|
$
|
31,689,117
|
|
Gross Profit
|
|
$
|
18,175,601
|
|
|
$
|
30,419,304
|
|
|
$
|
32,247,068
|
|
Operating income
|
|
$
|
1,525,716
|
|
|
$
|
15,398,717
|
|
|
$
|
21,842,873
|
|
Net Income
|
|
$
|
691,956
|
|
|
$
|
12,688,035
|
|
|
$
|
18,721,979
|
|
Comprehensive Income
|
|
$
|
3,932,148
|
|
|
$
|
9,332,003
|
|
|
$
|
15,736,393
|
|
Earnings per share –
basic and diluted
|
|
$
|
0.03
|
|
|
$
|
0.53
|
|
|
$
|
0.81
|
|
Weighted average shares – basic and diluted
|
|
$
|
26,160,270
|
|
|
$
|
23,843,836
|
|
|
$
|
23,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital
|
|
$
|
79,989,989
|
|
|
$
|
64,477,265
|
|
|
$
|
50,076,858
|
|
Total Assets
|
|
$
|
112,744,685
|
|
|
$
|
85,097,473
|
|
|
$
|
65,679,048
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|
Total Liabilities
|
|
$
|
15,107,629
|
|
|
$
|
5,507,484
|
|
|
$
|
4,763,401
|
|
Total Equity
|
|
$
|
97,637,056
|
|
|
$
|
79,589,989
|
|
|
$
|
60,915,647
|
|
|
B.
|
Capitalization and indebtedness.
|
Not
applicable.
|
C.
|
Reasons for the offer
and use of proceeds.
|
Not
applicable.
An
investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described
below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary
shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in
many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently
foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects
could be materially and adversely affected.
Summary
of Risk Factors
Investing
in our company involves significant risks. You should carefully consider all of the information in this annual report before making an
investment in our company. These risks include but not limited to the following:
Risk
factors relating to our business include but not limited to the following:
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●
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We
face risks related to nature disasters (whether or not caused by climate change), unusually
adverse weather conditions, pandemic outbreaks, in particular, the current coronavirus pandemic,
terrorist acts and global political events
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●
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Our
failure to compete effectively could adversely affect our market share, revenues and growth
prospects.
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●
|
Any
disruption in the supply chain of suppliers for and our dietary supplement products and our
e-commerce solutions services could adversely impact our ability to produce products and
deliver services.
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●
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We
are dependent on certain key personnel and loss of these key personnel could have a material
adverse effect on our business, financial condition and results of operations.
|
|
●
|
If
we fail to increase our brands’ recognition, we may face difficulty in obtaining new
customers.
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|
●
|
If
we are unable to provide superior user experience, we may not be able to maintain or grow
our user base or keep our users highly engaged.
|
|
●
|
If
we fail to renew our Food Production License and registration of our nutraceutical and dietary
supplements products, we may receive fines or even sanctions which may prohibit us from production.
|
|
●
|
We
rely on China’s automotive industry for our net revenues and future growth, the prospects
of which are subject to many uncertainties, including government regulations and policies.
|
Risk
factors relating to doing business in China include but not limited to the following:
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●
|
There
are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
The uncertainty in the PRC legal system may make it difficult for us to predict the outcome
of any disputes that we may be involved in.
|
|
●
|
Our
subsidiaries, main operations and assets are located in the PRC. Shareholders may not be
accorded the same rights and protection that would be accorded under the US law. In addition,
it would be difficult to enforce a U.S. judgment against our PRC subsidiaries and our officers
and directors.
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●
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It
may be difficult for overseas shareholders and/or regulators to conduct investigation or
collect evidence within China.
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●
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Our
results and financial conditions are highly susceptible to changes in the PRC’s political,
economic and social conditions as our revenue is currently wholly derived from our operations
in the PRC.
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●
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We
are subject to a variety of laws and other obligations regarding cybersecurity and data protection,
and any failure to comply with applicable laws and obligations could have a material and
adverse effect on our business, financial condition and results of operations.
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●
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The
increased regulatory scrutiny focusing on U.S.-listed companies with significant operations
in China in the U.S. could add uncertainties to our business operations, share price and
reputation.
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●
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PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents
may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties,
limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s
ability to increase their registered capital or distribute profits to us, or may otherwise
adversely affect us.
|
|
●
|
PRC
regulation of loans and direct investment by offshore holding companies to PRC entities may
delay or prevent us from using the proceeds from the offerings of any securities to make
loans or additional capital contributions to our PRC operating subsidiaries.
|
|
●
|
Uncertainty
in the interpretation of PRC tax regulations may have a negative impact on our business operations,
our acquisition or restructuring strategy or the value of our investment in it.
|
|
●
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Currency
fluctuations and restrictions on currency exchange may adversely affect our business, including
limiting our ability to convert RMB into foreign currencies and, if RMB were to decline in
value, reducing our revenues and profits in U.S. dollar terms.
|
|
●
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We
are subject to the risks relating to the restrictions on paying dividends or making other
payments to us by our subsidiaries in China.
|
Risk
factors relating to our Ordinary Shares include but not limited to the following:
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●
|
Our
Memorandum and Articles of Association afford less protection to our shareholders and may
discourage claims and limit shareholders’ ability to bring claims.
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●
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Certain
judgments obtained against us by our shareholders may not be enforceable.
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●
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We
are an emerging growth company within the meaning of the Securities Act and may
take advantage of certain reduced reporting requirements.
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●
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We
qualify as a foreign private issuer and, as a result, we are not subject to U.S. proxy rules
and are subject to Exchange Act reporting obligations that permit less detailed
and less frequent reporting than that of a U.S. domestic public company.
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●
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As
a foreign private issuer, we are permitted to adopt certain home country practices in relation
to corporate governance matters that differ significantly from Nasdaq corporate governance
listing standards.
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●
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There
can be no assurance that we will not be a passive foreign investment company, or PFIC, for
U.S. federal income tax purposes for any taxable year, which could result in adverse U.S.
federal income tax consequences to U.S. holders of our ordinary shares.
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●
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We
may be exposed to potential risks relating to our internal controls over financial reporting.
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●
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The
relative lack of public company experience of our management team may put us at a competitive
disadvantage.
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|
●
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Our
ordinary shares are very thinly traded, and there can be no assurance that there will be
an active market for our ordinary shares in the future.
|
Risks
related to Our Business
We face risks related to nature disasters
(whether or not caused by climate change), unusually adverse weather conditions, pandemic outbreaks, in particular, the current coronavirus
pandemic, terrorist acts and global political events, all of which could result in adverse effects to our business and financial performance.
The occurrence of one or more
natural disasters, such as hurricanes, fires, floods and earthquakes (whether or not caused by climate change), unusually adverse weather
conditions, pandemic outbreaks, terrorist acts or disruptive global political events, could adversely affect our operations and financial
performance.
On March 11, 2020, the World
Health Organization declared the outbreak of COVID-19 a global pandemic. Many businesses and social activities in China and other countries
and regions have been disrupted, including those of our business partners, customers and employees. This global outbreak has also caused
volatilities in and damage to the global financial markets. Such disruption and the potential slowdown of the world’s economy in
2020 and beyond could have a material adverse effect on our results of operations and financial condition.
In particular, the Chinese
government took a number of actions in order to contain the spread of COVID-19, including mandatory quarantine requirements, shutdown
of schools, travel restrictions, prohibition of public gatherings and postponed resumption of business operations. More specifically,
the COVID-19 has negatively affected our business and operations in many ways, including the plump closures of experience stores,
diving sales in our distribution channels of dietary supplement products, and shut down of production facilities for a period of approximately
three months in 2020. And due to the continual impact of COVID-19 to our experience stores, we closed certain stores in 2021. Our logistics
was also heavily influenced due to travel restrictions among different cities and provinces in China, which also caused the delay of our
employees to be back at our offices and workshops. As a result, our revenue of the three months ended March 31, 2020 dropped by approximately
14.1% compared with the revenue for the same period in 2019.
In the year ended March 31,
2021, our revenue grown 9.9% compared with that in the year ended March 31, 2020. Many of the quarantine measures within China have been
relaxed as of the date of this annual report, however, relaxation of restrictions on economic and social activities may lead to new cases.
There has been occasional outbreaks of COVID-19 in various cities in China, and the Chinese government may again take measures to keep
COVID-19 in check. In addition, the longer-term trajectory of COVID-19, both in terms of scope and intensity of the pandemic in China,
together with its impact on the industry and the broader economy are still difficult to assess or predict and face significant uncertainties
that will be difficult to quantify. If there is not a material recovery in the COVID-19 situation, or the situation further deteriorates
in China, our business, results of operations and financial condition could be materially and adversely affected. While the potential
downturn brought by and the duration of the COVID-19 outbreak is difficult to assess or predict and the full impact of the virus on our
operations will depend on many factors beyond our control. Our business, results of operations, financial condition and prospects could
be materially adversely affected to the extent that COVID-19 persists in China or harms the Chinese and global economy in general.
We
may not effectively manage our growth, which could materially harm our business.
We
expect that our business will continue to grow, which may place a significant strain on our management, personnel, systems and resources.
We must continue to improve our operational and financial systems and managerial controls and procedures, and we will need to continue
to expand, train and manage our technology and workforce. We must also maintain close coordination among our compliance, accounting,
finance, marketing and sales organizations. We cannot assure you that we will manage our growth effectively. If we fail to do so, our
business could be materially harmed.
Our
continued growth will require an increased investment by us in technology, facilities, personnel and financial and management systems
and controls. It also will require expansion of our procedures for monitoring and assuring our compliance with applicable regulations,
and we will need to integrate, train and manage a growing employee base. The expansion of our existing businesses, any expansion into
new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that
are more extensive and broader in scope than those we have historically required. Further, unless our growth results in an increase in
our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability
will be adversely affected.
We
operate in a highly competitive industry. Our failure to compete effectively could adversely affect our market share, revenues and growth
prospects.
The
P.R.C. dietary supplement industry is large. Participants include specialty retailers, supermarkets, drugstores, mass merchants, on-line
merchants, mail-order companies and a variety of other smaller participants. We believe that the market is also highly sensitive to the
introduction of new products, which may rapidly capture a significant share of the market. We also compete for sales with heavily advertised
national brands manufactured by large food companies, as well as other retailers. In addition, as some products become more mainstream,
we experience increased price competition for those products as more participants enter the market. Our manufacturing operations compete
with other manufacturers of third-party dietary supplements. We may not be able to compete effectively and our attempt to do so may require
us to reduce our prices, which may result in lower margins. Failure to effectively compete could adversely affect our market share, revenues
and growth prospects.
An
increase in the price and shortage of supply of key raw materials of our dietary supplement products could adversely affect our business.
Our
dietary supplement products are composed of certain key raw materials. If the prices of these raw materials were to increase significantly,
it could result in a significant increase in our production. Raw material prices may increase in the future and we may not be able to
pass on such increases to our customers. A significant increase in the price of raw materials that cannot be passed on to customers could
have a material adverse effect on our results of operations and financial condition. In addition, if we no longer are able to obtain
products from one or more of our suppliers on terms reasonable to us or at all, our revenues could suffer. Events such as the threat
of political or social unrest, or the perceived threat thereof, may also have a significant impact on raw material prices and transportation
costs for our products. In addition, the interruption in supply of certain key raw materials essential to the manufacturing of our products
may have an adverse impact on our suppliers’ ability to provide us with the necessary products needed to maintain our customer
relationships and an adequate level of sales.
Any disruption in the supply chain of suppliers
for and our dietary supplement products and our e-commerce solutions services could adversely impact our ability to produce products
and deliver services.
As to the dietary supplement
products we manufacture and the services we provided, we must manage our supply chain for raw materials and delivery of dietary supplement
our products. Our top five suppliers provided approximately 43.0% of the sourcing of the supplies for our business for the year ended
March 31, 2021.
A
significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or increase our
transportation costs, which would decrease our profits.
We
rely on our ability to replenish depleted inventory in our stores through deliveries to our distribution centers from vendors and then
from the distribution centers or direct ship vendors to our stores by various means of transportation, including shipments by sea and
truck. Unexpected delays in those deliveries or increases in transportation costs (including through increased fuel costs) could significantly
decrease our ability to make sales and earn profits.
We
are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial
condition and results of operations.
Our
success is, to a certain extent, attributable to the management, sales and marketing, and research and development expertise of key personnel.
We are dependent upon the services of experienced personal and technicians, there can be no assurance that we will be able to recruit
and retain qualified management team and skillful labor, due to labor market competition. The loss of these officers could
have a material adverse effect upon our business, financial condition, and results of operations.
We
may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire these personnel in
the future, our ability to improve our products and implement our business objectives could be adversely affected.
We
must attract, recruit and retain a sizeable workforce of technically competent employees. Competition for senior management and personnel
in the PRC is intense and the pool of qualified candidates in the PRC is very limited. We may not be able to retain the services of our
senior executives or personnel, or attract and retain high-quality senior executives or personnel in the future. This failure could materially
and adversely affect our future growth and financial condition.
If
we fail to increase our brands’ recognition, we may face difficulty in obtaining new customers.
Although
our brand of “Happiness” is well-recognized in the dietary supplement industry, we still believe that maintaining and enhancing
our brand recognition in a cost-effective manner outside of that market is critical to achieving widespread acceptance of our current
and future products and services and is an important element in our effort to increase our customer base. We are also working to promote
our brands of “Happy Buy” and “Taochejun” in the e-commerce solutions and automobile sales industries, respectively.
Successful promotion of our brand will depend largely on our ability to maintain a sizeable and active customer base, our marketing efforts
and ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased
revenue, and even if they do, any increased revenue may not offset the expenses we will incur in building our brand. If we fail to successfully
promote and maintain our brands, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we
may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our
brand-building efforts, in which case our business, operating results and financial condition, would be materially adversely affected.
If
we are unable to provide superior user experience, we may not be able to maintain or grow our customer base or keep our customers highly
engaged. As a result, our revenues, profitability and business prospects may be materially and adversely affected.
The
success of our business largely depends on our ability to provide superior user experience in order to maintain and grow our user base
and keep our customers highly engaged on our online platform, which in turn depends on a variety of factors. These factors include our
ability to continue to offer attractive and relevant content in engaging formats, source quality merchants to respond to user demands
and preferences, maintain the quality of our products and services, provide reliable and user-friendly features for our users to browse
for content and products, and provide high-quality customer service. If our users are not satisfied with our content, products or services,
or our platform is severely interrupted or otherwise fail to meet our users’ requests, our reputation and user loyalty could be
adversely affected.
In
addition, if users cannot obtain satisfactory customer services after they purchase products with us, our brand and user loyalty may
be adversely affected. Any negative publicity or poor feedback regarding our customer service may harm our brand and reputation and in
turn cause us to lose users and market share.
As
a result, if we are unable to continue to maintain our user experience and provide high-quality customer service, we may not be able
to retain or attract users or keep them highly engaged with the content and products we offer on our platform, which may have a material
adverse effect on our business, financial condition and results of operations.
If
our dietary supplement products do not have the effects intended or cause undesirable side effects, our business may suffer.
Although
many of the ingredients in our current dietary supplement products are vitamins, minerals, and other substances for which there is a
long history of human consumption, they also contain innovative ingredients or combinations of ingredients. While we believe that all
of these products and the combinations of ingredients in them are safe when taken as directed, the products could have certain undesirable
side effects if not taken as directed or if taken by a consumer who has certain medical conditions. In addition, these products may not
have the effect intended if they are not taken in accordance with certain instructions, which include certain dietary restrictions. Furthermore,
there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful
side effects in an unforeseen way or on an unforeseen cohort. If any of our products or products we develop or commercialize in the future
are shown to be harmful or generate negative publicity from perceived harmful effects, our business, financial condition, results of
operations, and prospects could be harmed significantly.
Our
dietary supplement business is subject to inherent risks relating to product liability and personal injury claims.
As
a manufacturer of dietary supplement products designed for human consumption, we are subject to product liability claims if the use of
our products is alleged to have resulted in injury. Our products consist of minerals, herbs and other ingredients that are classified
as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain
contaminated substances, and some of our products contain ingredients that do not have long histories of human consumption. Previously
unknown adverse reactions resulting from human consumption of these ingredients could occur. We may also be obligated to recall affected
products. If we are found liable for product liability claims, we could be required to pay substantial monetary damages. Furthermore,
even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial
and other resources, which could disrupt our business, and our reputation as well as our brand name may also suffer. We, like many other
similar companies in China, do not carry product liability insurance. As a result, any imposition of product liability could materially
harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due
to the limited coverage of any available business interruption insurance in China, and as a result, any business disruption or natural
disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
If
we fail to renew our Food Production License and registration of our nutraceutical and dietary supplements products, we may receive fines
or even sanctions which may prohibit us from production.
The
Food Safety Law of PRC, which was amended on April 24, 2015 and became effective on October 1 2015, requires the producers and business
operators of dietary supplements to obtain licensing and to carry out production and operation in accordance with food safety standards.
On February 26, 2016, CFDA promulgated the Administrative Measures for the Registration and Record-filing of Dietary Supplements which
became effective on July 1, 2016. In accordance with the Administrative Measures for the Registration and Record-filing of Dietary Supplements,
dietary supplements that use raw materials other than those included in the catalogue of raw materials for dietary supplements shall
be registered with CFDA. Furthermore, dietary supplements whose raw materials used have been included in the catalogue of raw materials
for dietary supplements shall be subject to record-filing. Under the laws and regulations on nutraceutical and dietary supplements, we
have obtained Food Production License in December 2017 from Nanping Food and Drug Administration and the registration or record-filing
of each nutraceutical and dietary supplements product that we produced. We have been closely monitoring the status of all the permits
and applied for renewal before the relevant certificate expired. The failure to renew the relevant licenses and/or registrations may
subject us to fines or sanctions which will have negative impact on our production.
The fluctuation and seasonality of tourism
in China could adversely affect the sales of our experience stores for our dietary supplement products.
We launched the experience
store model to stimulate our sales in 2017. As of March 31, 2021, we had 17 experience stores in Xiamen, Mount Wuyi, Mountain Lu, Beihai,
Chaozhou, Guilin and other tourism sites in China, respectively. Experience stores are all located in famous scenery areas in China.
Such stores are targeted to tourists, and will be the focus of our growth in the future. The sales of our experience stores could be
affected by the fluctuation and seasonality of tourism in China. The strict quarantine rule and travel restrictions enforced by PRC government
and local governments enforced in 2020 due to the outbreak of COVID-19 have negatively affected the volume of tourists in the cities
where our experience stores are located. Although of the quarantine measures within China have been relaxed as of the date of this annual
report, there has been occasional outbreaks of COVID-19 in various cities in China, and the Chinese government may again take measures
to keep COVID-19 in check, which places uncertainty on our sales of our experience stores.
Our
customers of automobile sale business and e-commerce business use third-party payment service providers to make payments on our platforms.
If these payment services are restricted or curtailed in any way or become unavailable to us or our users for any reason, our business
may be materially and adversely affected.
Our
customers of automobile sale business and e-commerce business make payments through a variety of methods, including payment through our
third-party online payment service partners, such as Weixin Pay, Paypal and Alipay. We may also be subject to fraud, user data leakage
and other illegal activities in connection with the various payment methods we offer. In addition, our business depends on the billing,
payment and escrow systems of the third-party payment service providers to maintain accurate records of payments of sales proceeds by
users and collect such payments. If the quality, utility, convenience or attractiveness of these payment processing and escrow services
declines, or if we have to change the pattern of using these payment services for any reason, the attractiveness of our platform could
be materially and adversely affected.
Business
involving online payment services is subject to a number of risks that could materially and adversely affect third-party online payment
service providers’ ability to provide payment processing and escrow services to us, including:
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●
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dissatisfaction
with these online payment services or decreased use of their services by users and merchants;
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|
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|
increasing
competition, including from other established Chinese internet companies, payment service
providers and companies engaged in other financial technology services;
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|
●
|
changes
to rules or practices applicable to payment systems that link to third-party online payment
service providers;
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breach
of users’ personal information and concerns over the use and security of information
collected from buyers;
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service
outages, system failures or failures to effectively scale the system to handle large and
growing transaction volumes;
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|
●
|
increasing
costs to third-party online payment service providers, including fees charged by banks to
process transactions through online payment channels, which would also increase our costs
of revenues; and
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|
●
|
failure
to manage funds accurately or loss of funds, whether due to employee fraud, security breaches,
technical errors or otherwise.
|
Certain
commercial banks in China impose limits on the amounts that may be transferred by automated payment from users’ bank accounts to
their linked accounts with third-party online payment services. We cannot predict whether these and any additional restrictions that
could be put in place would have a material adverse effect on our platform. We may also be subject to various rules, regulations and
requirements, regulatory or otherwise, governing electronic fund transfers and online payment, which could change or be reinterpreted
to make it difficult or impossible for us to comply with.
In
addition, we cannot assure you that we will be successful to enter into and maintain amicable relationships with online payment service
providers. Identifying, negotiating and maintaining relationships with these providers require significant time and resources. They could
choose to terminate their relationships with us or propose terms that we cannot accept. In addition, these service providers may not
perform as expected under our agreements with them, and we may have disagreements or disputes with such payment service providers, any
of which could adversely affect our brand and reputation as well as our business operations.
Developments in China’s automotive
industry will impact our automobile sales business’s net revenues and future growth, the prospects of which are subject to many
uncertainties, including PRC government regulations and policies.
Developments in China’s
automotive industry will impact our automobile sales business’s net revenues and future growth. The prospects of China’s
automotive industry are subject to many uncertainties, including those relating to general economic conditions in China, the urbanization
rate of China’s population and the cost of automobiles. In addition, government policies may have a considerable impact on the
growth of the automotive industry in China. For example, in an effort to alleviate traffic congestion and improve air quality, a number
of cities, including Beijing, Shanghai, Guangzhou, Tianjin, Harbin, and Hangzhou, have issued regulations to limit the number of new
passenger car plates issued each year starting from 2010. In 2018, Beijing local government extended for another year existing restrictions
on private vehicle use, which greatly reduced the number of automobiles on the road. On the bright side, both central and local governments
in China have adopted a series of favorable policies targeted at new energy vehicle manufacturers. For example, on January 29, 2019,
the PRC Development and Reformation Commission released a national development plan that launched a new energy public transportation
vehicle subsidy plan and reinforced the existing battery infrastructure development. Such regulatory developments, as well as other uncertainties,
may affect the growth prospects of China’s automotive industry, and in turn reduce consumer demand for automobiles. If automakers,
auto dealers or automotive service providers reduce their marketing expenditures as a result, our business, financial condition and results
of operations could be materially and adversely affected.
Our
automobile sales business is subject to risks related to the overall automotive industry ecosystem, including consumer demand, consumption
habits, global supply chain challenges and other macroeconomic issues.
Decreasing
consumer demand could adversely affect the market for automobile purchases and, as a result, adversely affect our automobile sales business.
Consumer purchases of new and used automobiles generally decline during recessionary periods and other periods in which disposable income
is adversely affected. Purchases of new and used automobiles are typically discretionary for consumers and have been, and may continue
to be, affected by negative trends in the economy, including the rising cost of energy and gasoline, the limited availability and increasing
cost of credit, reductions in business and consumer confidence, stock market volatility, and increased unemployment. Further, in recent
years the automotive market has experienced rapid changes in technology and consumer demands. Self-driving technology, ride sharing,
transportation networks, and other fundamental changes in transportation could impact consumer demand for the purchase of automobiles.
A reduction in the number of automobiles purchased by consumers could adversely affect automakers and auto dealers and lead to a reduction
in their spending on our services. In addition, our automobile sales business may be negatively affected by challenges to the overall
automotive industry ecosystem, including global supply chain challenges and other macroeconomic issues such as the recent trade tension
between China and the United States. The occurrence of any of the foregoing could materially and adversely affect our business, results
of operations, and financial condition.
In
addition, our automobile sales business is focused on third and fourth tier cities in China mainly due to the increasing consumer demand
of neighborhood electric vehicles, or “NEV”s, lower initial investment costs, more affordable lease and less marketing costs.
If there is a negative trend in the economy, consumer demand in third and fourth tier cities would decrease and thereby adversely affect
our operations and financial conditions.
Our success depends on our ability to protect
our intellectual property. However, we may not be able to adequately protect our intellectual property rights, and any failure to protect
our intellectual property rights could adversely affect our revenues and competitive position.
Our success depends on our
ability to obtain and maintain patent protection for products developed utilizing our technologies, in the PRC and in other countries,
and to enforce these patents. There is no assurance that any of our existing and future patents will be held valid and enforceable against
third-party infringement or that our products will not infringe any third-party patent or intellectual property. Although we have filed
additional patent applications with the Patent Administration Department of the PRC, there is no assurance that they will be granted.
We have invested significant
resources to develop our own intellectual property and acquire licenses to use and distribute the intellectual property of others. A failure
to maintain or protect these rights could harm our business. In addition, any unauthorized use of our intellectual property by third parties
may adversely affect our current and future revenues and our reputation.
The validity, enforceability and scope of protection available under
intellectual property laws in the PRC are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related
laws have historically been deficient and ineffective. Accordingly, protection of intellectual property rights in the PRC may not be as
effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult
and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or our other intellectual property or
to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination
in any such litigation, if any, could result in substantial costs and diversion of resources and management attention.
Risks
Related to Doing Business in China
Our
subsidiaries, main operations and assets are located in the PRC. Shareholders may not be accorded the same rights and protection that
would be accorded under the US law. In addition, it would be difficult to enforce a U.S. judgment against our PRC subsidiaries and our
officers and directors.
We
are a holding company and all of our operations and assets are held in overseas subsidiaries. Our PRC subsidiaries, Fujian Happiness,
Happiness Nanping, and Shunchang Happiness were established in the PRC, and their main operations and assets are located in the PRC.
Our PRC subsidiaries, main operations and assets are therefore subject to the relevant laws and regulations of the PRC. In addition,
a majority of our officers and directors are non-residents of the United States and substantially all their assets are located outside
the United States. As a result, it could be more difficult for investors to effect service of process in the United States, or to enforce
a judgment obtained in the United States against any of our PRC subsidiaries or any of these persons.
Our
business is subject to certain PRC laws and regulations.
There
are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. The uncertainty in the PRC legal system
may make it difficult for us to predict the outcome of any disputes that we may be involved in.
The
PRC legal system is based on the PRC Constitution and is made up of written laws, regulations, circulars and directives. The PRC government
is still in the process of developing its legal system, so as to meet the needs of investors and to encourage foreign investment. As
the PRC economy is generally developing at a relative faster pace than its legal system, some degree of uncertainty exists in connection
with whether and how existing laws and regulations will apply to certain events or circumstances.
Some
of the laws and regulations, and the interpretation, implementation and enforcement thereof, are still subject to policy changes. There
is no assurance that the introduction of new laws, changes to existing laws and the interpretation or application thereof or the delays
in obtaining approvals from the relevant authorities will not have an adverse impact on our PRC subsidiaries’ business, financial
performance and prospects.
Further,
precedents on the interpretation, implementation and enforcement of the PRC laws and regulations are limited, and unlike other common
law countries such as the United States, decisions on precedent cases are not binding on lower courts. As such, the outcome of dispute
resolutions may not be consistent or predictable as in the other more developed jurisdictions and it may be difficult to obtain swift
or equitable enforcement of the laws in the PRC, or obtain enforcement of judgment by a court of another jurisdiction.
In
addition, the PRC government has recently announced its plans to enhance its regulatory oversight of Chinese companies listing overseas.
The “Opinions on Intensifying Crack Down on Illegal Securities Activities” issued on July 6, 2021 called for:
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tightening oversight of
data security, cross-border data flow and administration of classified information, as well as amendments to relevant regulation
to specify responsibilities of overseas listed Chinese companies with respect to data security and information security;
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enhanced oversight of overseas
listed companies as well as overseas equity fundraising and listing by Chinese companies; and
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extraterritorial application
of China’s securities laws.
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As
the Opinions on Intensifying Crack Down on Illegal Securities Activities were recently issued, there are great uncertainties with respect
to the interpretation and implementation thereof. The Chinese government may promulgate relevant laws, rules and regulations that may
impose additional and significant obligations and liabilities on overseas listed Chinese companies regarding data security, cross-border
data flow, and compliance with China’s securities laws. It is uncertain whether or how these new laws, rules and regulations and
the interpretation and implementation thereof may affect us, but among other things, our ability and the ability of our subsidiaries
to obtain external financing through the issuance of equity securities overseas could be negatively affected.
We
are subject to a variety of laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable
laws and obligations could have a material and adverse effect on our business, financial condition and results of operations.
We
are subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private information,
such as personal information and other data. These laws apply not only to third-party transactions, but also to transfers of information
between us and our subsidiaries, and among us, our subsidiaries, and other parties with which we have commercial relations. These laws
continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties
or other significant legal liabilities.
Pursuant
to the PRC Cybersecurity Law, which was promulgated by the Standing Committee of the National People’s Congress on November 7,
2016 and took effect on June 1, 2017, personal information and important data collected and generated by a critical information infrastructure
operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases
internet products and services that affects or may affect national security, it should be subject to cybersecurity review by the CAC.
Due to the lack of further interpretations, the exact scope of “critical information infrastructure operator” remains unclear.
On July 10, 2021, the Cyberspace Administration of China (“CAC”) publicly issued the Measures for Cybersecurity Censorship
(Revised Draft for Comments) aiming to, upon its enactment, replace the existing Measures for Cybersecurity Censorship. The draft measures
extend the scope of cybersecurity reviews to data processing operators engaging in data processing activities that affect or may affect
national security, including listing in a foreign country. If the enacted version of the draft measures mandates clearance of cybersecurity
review and other specific actions to be completed by companies like us, we face uncertainties as to whether such clearance can be timely
obtained, or at all. We offer IT services and sell hardware and software in China, and we could be subject to cybersecurity review in
the future. During such review, we may be required to suspend our operation experience other disruptions to our operations. Cybersecurity
review could also result in negative publicity with respect to our company and diversion of our managerial and financial resources.
Furthermore,
if we were found to be in violation of applicable laws and regulations in China during such review, we could be subject to administrative
penalties, such as warnings, fines, or service suspension. Therefore, cybersecurity review could materially and adversely affect our
business, financial condition, and results of operations.
In addition, the PRC Data
Security Law, which was promulgated by the Standing Committee of the National People’s Congress on June 10, 2021 and will take
effect on September 1, 2021, requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the
purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system
for data security. As the Data Security Law was recently promulgated and has not yet taken effect, we may be required to make further
adjustments to our business practices to comply with this law. After the Data Security Law takes effect, if our data processing activities
were found to be not in compliance with this law, we could be ordered to make corrections, and under certain serious circumstances, such
as severe data divulgence, we could be subject to penalties, including the revocation of our business licenses or other permits. Furthermore,
the recently issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law require (i) speeding
up the revision of the provisions on strengthening the confidentiality and archives management relating to overseas issuance and listing
of securities and (ii) improving the laws and regulations relating to data security, cross-border data flow, and management of confidential
information. As there remain uncertainties regarding the further interpretation and implementation of those laws and regulations, we
cannot assure you that we will be compliant such new regulations in all respects, and we may be ordered to rectify and terminate any
actions that are deemed illegal by the regulatory authorities and become subject to fines and other sanctions. As a result, we may be
required to suspend our relevant e-commerce businesses, including our internet information and advertising services, and automobile sale
business, shut down our website and online platform, take down our operating application, or face other penalties, which may materially
and adversely affect our business, financial condition, and results of operations.
While
we take measures to comply with all applicable data privacy and protection laws and regulations, we cannot guarantee the effectiveness
of the measures undertaken by us and our business partners. However, compliance with any additional laws could be expensive, and may
place restrictions on our business operations and the manner in which we interact with our users. In addition, any failure to comply
with applicable cybersecurity, privacy, and data protection laws and regulations could result in proceedings against us by government
authorities or others, including notification for rectification, confiscation of illegal earnings, fines, or other penalties and legal
liabilities against us, which could materially and adversely affect our business, financial condition, and results of operations. In
addition, any negative publicity on our website or platform’s safety or privacy protection mechanism and policy could harm our
public image and reputation and materially and adversely affect our business, financial condition, and results of operations.
We have limited insurance coverage for our
operations in China.
The insurance industry in
China is still at an early stage of development. Insurance companies in China offer limited insurance products. We have determined that
the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office
furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or
property insurance coverage for our operations in China except for insurance on some company owned vehicles. Any uninsured occurrence
of loss or damage to property, or litigation or business disruption may result in the incurrence of substantial costs and the diversion
of resources, which could have an adverse effect on our operating results.
It
may be difficult for overseas shareholders and/or regulators to conduct investigation or collect evidence within China.
Shareholder
claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality
in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations
or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities
regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the
securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism.
Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March
2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory
of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the
inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further
increase difficulties faced by you in protecting your interests.
Our
principal business operation is conducted in the PRC. In the event that the U.S. regulators carry out investigation on us and there is
a need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out
such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation
with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism
established with the securities regulatory authority of the PRC.
The
increased regulatory scrutiny focusing on U.S.-listed companies with significant operations in China in the U.S. could add uncertainties
to our business operations, share price and reputation.
U.S.
public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative
publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative
publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial
accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud.
More
recently, as part of increased regulatory focus in the United States on access to audit information, the United States enacted the Holding
Foreign Companies Accountable Act, or the HFCA Act, in December 2020. The HFCA Act includes requirements for the SEC to identify issuers
whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed
by a non-U.S. authority in the auditor’s local jurisdiction. The HFCA Act also requires public companies on this SEC list to certify
that they are not owned or controlled by a foreign government and make certain additional disclosures in their SEC filings. In addition,
if the auditor of a U.S. listed company’s financial statements is not subject to PCAOB inspections for three consecutive “non-inspection”
years after the law becomes effective, the SEC is required to prohibit the securities of such issuer from being traded on a U.S. national
securities exchange, such as Nasdaq, or in U.S. over-the-counter markets. On March 24, 2021, the SEC announced that it had adopted interim
final amendments to implement the foregoing certification and disclosure requirements and that it was seeking public comment on the issuer
identification process as well as the submission and disclosure requirements. On May 13, 2021, the PCAOB issued proposed PCAOB Rule 6100
Board Determinations Under the Holding Foreign Companies Accountable Act for public comment. The proposed rule provides a framework for
making determinations as to whether PCAOB is unable to inspect an audit firm in a foreign jurisdiction, including the timing, factors,
bases, publication and revocation or modification of such determinations, and such determinations will be made on a jurisdiction-wide
basis in a consistent manner applicable to all firms headquartered in the jurisdiction. Accordingly, our securities may be prohibited
from trading on the Nasdaq Capital Market or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive
years, and this ultimately could result in our Ordinary Shares being delisted. Furthermore, on June 22, 2021, the U.S. Senate passed
the Accelerating Holding Foreign Companies Accountable Act, which if enacted into law would amend the HFCA Act and require the SEC to
prohibit an issuer’s securities from trading on U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two
consecutive “non-inspection” years instead of three. While we understand that there has been dialogue among the CSRC, the
SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that our auditor
or us will be able to comply with requirements imposed by U.S. regulators. The market prices of our Ordinary Shares could be adversely
affected as a result of anticipated negative impacts of the HFCA Act upon, as well as negative investor sentiment towards, China-based
companies listed in the United States, regardless of our actual operating performance.
Furthermore,
as part of ongoing efforts to protect U.S. investors, the U.S. President’s Working Group on Financial Markets, or the PWG, released
a report in August 2020 recommending certain enhancements to listing standards on U.S. stock exchanges, including that the PCAOB have
access to work papers of the principal audit firm for the audit of each company as a condition to initial and continued exchange listing.
Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in their
jurisdiction may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the
PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm.
The SEC announced that its staff have been directed to prepare and develop proposals in response to the report of the PWG. Any resulting
actions, proceedings or new rules could adversely affect the listing and compliance status of China-based issuers listed in the United
States, such as our company, and may have a material and adverse impact on the trading prices of the securities of such issuers, including
our Ordinary Shares, and substantially reduce or effectively terminate the trading of our Ordinary Shares in the United States.
PRC regulations relating
to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC
subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability
to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
In July 2014, SAFE promulgated
the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and
Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign
Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or
SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including
PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore
investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore
acquisitions that we make in the future.
Under SAFE Circular 37, PRC
residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore SPVs will
be required to register such investments with the SAFE or its local branches. In addition, any PRC resident who is a direct or indirect
shareholder of a SPV is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any
material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration
with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously
filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital
reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into
its subsidiary in China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration
Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign
exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE
Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept
registrations under the supervision of the SAFE.
We cannot assure you that
all of our shareholders that may be subject to SAFE regulations have completed all necessary registrations with the local SAFE branch
or qualified banks as required by SAFE Circular 37, and we cannot assure you that these individuals may continue to make required filings
or updates in a timely manner, or at all. We can provide no assurance that we are or will in the future continue to be informed of identities
of all PRC residents holding direct or indirect interest in our company. Any failure or inability by such individuals to comply with the
SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC
subsidiary’s ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from
making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially
and adversely affected.
Furthermore, as these foreign
exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear
how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented
by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to
our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect
our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that
we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings
and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and
could adversely affect our business and prospects.
Our
results and financial conditions are highly susceptible to changes in the PRC’s political, economic and social conditions as our
revenue is currently wholly derived from our operations in the PRC.
Since
1978, the PRC government has undertaken various reforms of its economic systems. Such reforms have resulted in economic growth for the
PRC in the last three decades. However, many of the reforms are unprecedented or experimental, and are expected to be refined and modified
from time to time. Other political, economic and social factors may also lead to further readjustment of the reform measures. This refinement
and adjustment process may consequently have a material impact on our operations in the PRC or a material adverse impact on our financial
performance. Our results and financial condition may be adversely affected by changes in the PRC’s political, economic and social
conditions and by changes in policies of the PRC government or changes in laws, regulations or the interpretation or implementation thereof.
The outbreak of COVID-19 heightens the possibility of unpredictable change and accelerates such changes in the PRC’s political,
economic, and social conditions. Our sales of nutraceutical and dietary supplement are highly relevant to the local tourism, which is
already and will be subject to unpredictable changes for an unforeseeable period under restrict travel rules promulgated by local governments.
We
may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may
have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our
ability to conduct our business.
We
rely principally on dividends and other distributions on equity from our PRC Subsidiary for our cash requirements, including for services
of any debt we may incur.
Our
PRC subsidiary’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC
subsidiary to pay dividends to its respective shareholders only out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, our PRC Subsidiary is required to set aside at least 10% of its after-tax profits
each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable
as cash dividends. If our PRC operating subsidiary incur debt on their own behalf in the future, the instruments governing the debt may
restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiary to distribute
dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments
or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
In
addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable
to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties
or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises
are incorporated.
We
may be subject to a significant withholding tax should equity transfers by our non-resident enterprises be determined to have been done
without a reasonable business purpose.
In
December 2009, the State Administration of Tax in China issued a circular on strengthening the management of proceeds from equity transfers
by non-resident enterprises and requires foreign entities to report indirect sales of resident enterprises. If the existence of the overseas
intermediary holding company is disregarded due to lack of reasonable business purpose or substance, gains on such sale are subject to
PRC withholding tax. Due to limited guidance and implementation history of the circular, significant judgment is required in determining
the existence of a reasonable business purpose by considering multiple factors, such as the form and substance of the arrangement, time
of establishment of the foreign entity, relationship between each step of the arrangement, relationship between each component of the
arrangement, implementation of the arrangement and the changes in the financial position of all parties involved in the transaction.
Although we believe that our transactions during all the periods presented would be determined to have reasonable business purposes,
should this not be the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial
position, results of operations and cash flows.
Uncertainty
in the interpretation of PRC tax regulations may have a negative impact on our business operations, our acquisition or restructuring
strategy or the value of our investment in it.
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular
698, issued by the State Administration of Taxation in December 2009, with retroactive effect from January 1, 2008, where a non-resident
enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas
non-public holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has
an effective tax rate of less than 12.5% or (ii) does not impose income tax on foreign income of its residents, the non-resident enterprise,
being the transferor, must report to the competent tax authority of the PRC resident enterprise this Indirect Transfer. Using a “substance
over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable
commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such
Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT Circular 698 also provides that, where a non-PRC
resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than fair market
value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
On
March 28, 2011, the State Administration of Taxation released SAT Public Notice (2011) No. 24, or SAT Public Notice 24, to clarify several
issues related to Circular 698. SAT Public Notice 24 became effective on April 1, 2011. According to SAT Public Notice 24, the term “effective
tax rate” refers to the effective tax rate on the gain derived from disposition of the equity interests of an overseas holding
company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the equity
interests of an overseas holding company is not subject to income tax in the country/region where the overseas holding company is a resident.
There
is uncertainty as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly
defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range
of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions
or made any formal declaration as to the process and format for reporting an Indirect Transfer to the competent tax authority of the
relevant PRC resident enterprise. In addition, there are no formal declarations with regard to how to determine whether a foreign investor
has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. SAT Circular 698 may be determined by the tax authorities
to be applicable to previous investments by non-resident investors in its company, if any of such transactions were determined by the
tax authorities to lack reasonable commercial purpose. As a result, we and our existing non-resident investors may be at risk of being
taxed under SAT Circular 698 and may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we
should not be taxed under SAT Circular 698, which may have a material adverse effect on our financial condition and results of operations
or such non-resident investors’ investments in us. We have conducted and may conduct transactions involving our corporate structure.
We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing
obligations on us or require us to provide assistance for the investigation of PRC tax authorities with respect thereto. Any PRC tax
imposed on a transfer of our shares or any adjustment of such gains would cause us to incur additional costs and may have a negative
impact on the value of your investment in us.
PRC
regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds
from the offerings of any securities to make loans or additional capital contributions to our PRC operating subsidiaries.
As
an offshore holding company, our ability to make loans or additional capital contributions to our PRC operating subsidiaries is subject
to PRC regulations and approvals. These regulations and approvals may delay or prevent us from using the proceeds we received in the
past or will receive in the future from the offerings of securities to make loans or additional capital contributions to our PRC operating
subsidiaries, and impair our ability to fund and expand our business which may adversely affect our business, financial condition and
result of operations.
In
2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment
and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, which used to regulate the conversion
by foreign-invested enterprises of foreign currency into Renminbi by restricting the usage of converted Renminbi. On April 8, 2015, the
SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested
Enterprises, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015 and superseded SAFE Circular 142 on the same date.
SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign-invested
enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit
foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditures beyond their
business scopes. On June 15, 2016, the SAFE promulgated the Circular on Reforming and Standardizing the Administrative Provisions on
Capital Account Foreign Exchange, or SAFE Circular 16. SAFE Circular 19 and SAFE Circular 16 continue to prohibit foreign-invested enterprises
from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment
and financing (except for guarantee products issued by banks), providing loans to non-affiliated enterprises or constructing or purchasing
real estate not for self-use. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer to and use in China
the net proceeds from our initial public offering, which may adversely affect our business, financial condition and results of operations.
Currency
fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert RMB into
foreign currencies and, if RMB were to decline in value, reducing our revenues and profits in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use RMB as functional currencies. The majority of our revenues derived
and expenses incurred are in Chinese RMB with a relatively small amount in U.S. dollars. We are subject to the effects of exchange rate
fluctuations with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government
policies and China’s domestic and international economic and political developments, as well as supply and demand in the local
market. Starting July 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new
policy, the RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. It is possible that the
Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of the RMB against
the U.S. dollar.
The
income statements of our China operations are translated into U.S. dollars at the average exchange rates in each applicable period. To
the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions
results in reduced revenues, operating expenses and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar
weakens against foreign currencies, the translation of RMB denominated transactions results in increased revenues, operating expenses
and net income for our non-U.S. operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements
of our non-U.S. subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion
of the non-U.S. subsidiaries’ financial statements will similarly be affected.
We
have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The
availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate
risks.
Although
Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items,
conversion of RMB into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires
the approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability of
foreign currency. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese
regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant amount
of our future revenues are in the form of RMB, our inability to obtain the requisite approvals or any future restrictions on currency
exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China, or to repay non-RMB-denominated
obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.
We are subject to risks relating to the
restrictions on paying dividends or making other payments to us by our subsidiaries in China.
We
are a holding company and do not have any assets or conduct any business operations in China other than our investments in our subsidiaries
in China. As a result, if our non-China operations require cash from China, we would depend on dividend payments from our subsidiaries
in China. We cannot make any assurance that we can continue to receive payments from our subsidiaries in China. In addition, under Chinese
law, our subsidiaries are only allowed to pay dividends to us out of their distributable earnings, if any, as determined in accordance
with Chinese accounting standards and regulations. Moreover, our Chinese subsidiaries are required to set aside at least 10% of their
respective after-tax profit each year, if any, to fund certain mandated reserve funds, unless these reserves have reached 50% of their
registered capital. These reserve funds are not payable or distributable as cash dividends. For Chinese subsidiaries with after-tax profits
for the periods presented, the difference between after-tax profits as calculated under PRC accounting standards and U.S. GAAP relates
primarily to share-based compensation expenses and intangible assets amortization expenses, which are not pushed down to our subsidiaries
under PRC accounting standards. In addition, under the EIT Law and its implementing Rules, dividends generated from our PRC subsidiaries
after January 1, 2008 and payable to their immediate holding company incorporated in Hong Kong generally will be subject to a withholding
tax rate of 10% (unless the PRC tax authorities determine that our Hong Kong subsidiary is a resident enterprise). If certain conditions
and requirements under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income entered into between Hong Kong and the PRC and
other related PRC laws and regulations are met, the withholding rate could be reduced to 5%.
The
Chinese government also imposes controls on the convertibility of RMB into foreign currencies and the remittance of currency out of China
in certain cases. We have experienced and may continue to experience difficulties in completing the administrative procedures necessary
to obtain and remit foreign currency. If we or any of our subsidiaries are unable to receive substantially all of the economic benefits
from our operations through these contractual or dividend arrangements, we may be unable to effectively finance our operations or pay
dividends on our ordinary shares.
The
PRC Labor Contract Law and its implementing rules may adversely affect our business and results of operations.
The
PRC Labor Contract Law became effective and was implemented on January 1, 2008. The PRC Labor Contract Law has reinforced the protection
for employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor
contracts with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts.
Furthermore, the PRC Labor Contract Law establishes additional restrictions and increases the costs involved with dismissing employees.
As the PRC Labor Contract Law is relatively new, there remains significant uncertainty as to its interpretation and application by the
PRC Government. In the event that we decide to significantly reduce our workforce, the PRC Labor Contract Law could adversely affect
our ability to do so in a timely and cost-effective manner, and our results of operations could be adversely affected. In addition, for
employees whose contracts include non-competition terms, the Labor Contract Law requires us to pay monthly compensation after such employment
is terminated, which will increase our operating expenses.
Risks
Related to Our Ordinary Shares
Our Memorandum and Articles of Association
afford less protection to our shareholders and may discourage claims and limit shareholders’ ability to bring claims.
Our shareholders could have
more difficulty protecting their interests than would shareholders of a corporation incorporated in a jurisdiction of the United States.
As a Cayman Islands company, we are governed by our memorandum and articles of association and Cayman Islands Companies Law (as amended).
The provisions of the Cayman Islands Companies Act, which applies to us, differs in some material respects from laws generally applicable
to U.S. corporations and shareholders, including the provisions relating to shareholder lawsuits.
Our amended and restated memorandum
and articles of association contain a provision by virtue of which we and our shareholders waive any claim or right of action
that they have, both individually and on our behalf, against any director or officer in relation to any action or failure to take action
by such director or officer, except in respect of any fraud or dishonesty of such director or officer. Class actions and derivative actions
generally are available to shareholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions
not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’
fees incurred in connection with such action. Although this provision does not preclude our shareholders to bring federal securities claims
against us, it may be difficult or impossible for our shareholders to bring an action against us or against any director or officer in
the United States in the event that our shareholders believe that their rights have been infringed under the United States federal securities
laws or otherwise. Even if the Shareholder are successful in bringing an action of this kind, the laws of the Cayman Islands and of China
may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
As a result of these differences,
investors could have more difficulty protecting their interests than would shareholders of a corporation incorporated in the United States.
Certain judgments obtained against us by
our shareholders may not be enforceable.
We are a Cayman Islands company
and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted
in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States.
Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible
for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights
have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind,
the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors
and officers.
We are an emerging growth company within
the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging
growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to
other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result,
if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may
deem important.
The JOBS Act also
provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date
that a private company is otherwise required to comply with such new or revised accounting standards. We do not plan to “opt out”
of such exemptions afforded to an emerging growth company. As a result of this election, our financial statements may not be comparable
to companies that comply with public company effective data.
We qualify as a foreign private issuer and,
as a result, we are not subject to U.S. proxy rules and are subject to Exchange Act reporting obligations that permit less detailed
and less frequent reporting than that of a U.S. domestic public company.
We report under the Exchange
Act as a non-U.S. company with foreign private issuer status. Because we qualify as a foreign private issuer under the Exchange
Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including
(i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security
registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the
rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial
and other specified information, or current reports on Form 8-K upon the occurrence of specified significant events. In addition, our
officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions
of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers,
directors and principal shareholders purchase or sell our ordinary shares. In addition, foreign private issuers are not required to file
their annual report on Form 20-F within four months after the end of each fiscal year, while U.S. domestic issuers that are accelerated
filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers
also are exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information.
As a result of the above, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
If we lose our status as a
foreign private issuer, we would be required to comply with the Exchange Act reporting and other requirements applicable to
U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required
to make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory and compliance costs
to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may
be significantly higher than the cost we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private
issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly.
We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it
more difficult and expensive for us to obtain and maintain directors’ and officers’ liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more
difficult for us to attract and retain qualified members of our board of directors.
As a foreign private
issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly
from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if
we complied fully with corporate governance listing standards.
As a foreign private issuer,
we are permitted to take advantage of certain provisions in the Nasdaq rules that allow us to follow our home country law for certain
governance matters. Certain corporate governance practices in our home country, the Cayman Islands, may differ significantly from corporate
governance listing standards. We choose to follow home country practice with respect to our corporate governance, therefore, our shareholders
may be afforded less protection than they would otherwise enjoy under the Nasdaq corporate governance listing standards applicable to
U.S. domestic issuers. See Item 16G “Corporate Governance”.
There can be no
assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year,
which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.
A non-U.S. corporation will
be a PFIC for any taxable year if either (1) at least 75% of its gross income for such year consists of certain types of “passive”
income; or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is
attributable to assets that produce passive income or are held for the production of passive income (the “asset test”). Based
on our current and expected income and assets (taking into account the expected cash proceeds and our market capitalization), we do not
presently expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard
because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual basis that depends, in
part, upon the composition of our income and assets. In addition, there can be no assurance that the Internal Revenue Service, or IRS,
will agree with our conclusion or that the IRS would not successfully challenge our position. Fluctuations in the market price of our
ordinary shares may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose
of the asset test may be determined by reference to the market price of our ordinary shares. The composition of our income and assets
may also be affected by how, and how quickly, we use our liquid assets and the cash raised in our initial public offering. If we were
to be or become a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares, certain adverse U.S. federal income
tax consequences could apply to such U.S. Holder. See “Taxation— Passive Foreign Investment Company Consequences.”
The economic substance
legislation of the Cayman Islands may adversely impact the Company or its operations.
The Cayman Islands, together
with several other non-European Union jurisdictions, have introduced legislation aimed at addressing concerns raised by the Council of
the European Union as to offshore structures engaged in certain activities which attract profits without real economic activity. With
effect from January 1, 2019, the International Tax Co-operation (Economic Substance) Law, 2018 (the “ES Law”) and issued related
Regulations and Guidance Notes came into force in the Cayman Islands introducing certain economic substance requirements for “relevant
entities” which are engaged in certain “relevant activities,” which in the case of exempted companies incorporated before
January 1, 2019, will apply in respect of financial years commencing July 1, 2019, onwards. A “relevant entity” includes
an exempted company incorporated in the Cayman Islands; however, it does not include an entity that is tax resident outside the Cayman
Islands. Accordingly, for so long as the Company is a tax resident outside the Cayman Islands, it is not required to satisfy the
economic substance test. Although it is presently anticipated that the ES Law will have little material impact on the Company or its operations,
as the legislation is new and remains subject to further clarification and interpretation it is not currently possible to ascertain the
precise impact of these legislative changes on the Company.
We may be exposed to liabilities under the
Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act or Chinese anti-corruption law
could have a material adverse effect on our business.
We are subject to the Foreign
Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials
and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. Chinese
anti-corruption law also strictly prohibits bribery of government officials. We have operations, agreements with third parties and make
sales in China, where corruption may occur. Our activities in China create the risk of unauthorized payments or offers of payments by
one of the employees, consultants, sales agents or distributors of our Company, even though these parties are not always subject to our
control. It is our policy to implement safeguards to prevent these practices by our employees. However, our existing safeguards and any
future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may
engage in conduct for which we might be held responsible.
Violations of the FCPA or
other anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition. In addition, the United States government may seek to hold our Company
liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
We rely on internal models to manage risk,
to provide accounting estimates and to make other business decisions. Our results could be adversely affected if those models do not provide
reliable estimates or predictions of future activity.
We rely heavily on internal
models in making a variety of decisions crucial to the successful operation of our business, including the allowance for doubtful accounts
and other accounting estimates. It is therefore important that our models are accurate, and any failure in this regard could have a material
adverse effect on our results. Models are inherently imperfect predictors of actual results because they are based on historical data
available to us and our assumptions about factors such as credit demand, payment rates, default rates, delinquency rates and other factors
that may overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the
limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying
the models, the need for adjustments in response to rapid changes in economic and health conditions. In particular, models are less dependable
when the economic environment is outside of historical experience, as has been the case recently.
The relative lack of public company experience
of our management team may put us at a competitive disadvantage.
Our management team lacks
U.S. public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed
by the Sarbanes-Oxley Act. Our senior management does not have experience managing a U.S. publicly traded company and lacks knowledge
about the Sarbanes-Oxley Act. Such responsibilities include complying with federal securities laws and making required disclosures on
a timely basis. Our senior management are unable to implement programs and policies in an effective and timely manner or that adequately
respond to the increased legal, regulatory and reporting requirements associated with being a U.S. publicly traded company. Our failure
to comply with all applicable requirements could lead to the imposition of fines and penalties, distract our management from attending
to the management and growth of our business, result in a loss of investor confidence in our financial reports and have an adverse effect
on our business and stock price.
We may be exposed to potential risks relating to our internal
controls over financial reporting.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX
404, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over
financial reporting in their annual reports. Under current law, the auditor attestation will not be required as long as our filing status
remains as a smaller reporting company, but we may cease to be a smaller reporting company in future years, in which case we will be subject
to the auditor attestation requirement. We were subject to management report for the fiscal year ended March 31, 2021, and a report of
our management for the 2021 fiscal year is included under Item 15 of this annual report concluding that, as of March 31, 2021, our internal
controls over financial reporting were not effective. If we cannot remediate the material weakness identified in a timely
manner, investors and others may lose confidence in the reliability of our financial statements, which could adversely affect the price
of our ordinary shares.
Our
ordinary shares are very thinly traded, and there can be no assurance that there will be an active market for our ordinary shares in
the future.
Our
ordinary shares are very thinly traded, and the price if traded may not reflect our value. There can be no assurance that there will
be an active market for our ordinary shares in the future. The market liquidity will be dependent on the perception of our operating
business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that
there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price
that reflects the value of the business. If a more active market should develop, the price may be highly volatile. Because there may
be a low price for our ordinary shares, many brokerage firms may not be willing to effect transactions in the securities. Even if an
investor finds a broker willing to effect a transaction in our ordinary shares, the combination of brokerage commissions, transfer fees,
taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of
such ordinary shares as collateral for any loans.
You
may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal
or impractical to make them available to you.
Under
Cayman Islands law, we may only pay dividends out of our profits or share premium account subject to our ability to pay our debts as
they fall due in the ordinary course of our business. Our ability to pay dividends will therefore depend on our ability to generate sufficient
profits. On July 31, 2020, the Board of the Company declared a special cash dividend of $0.015 per Ordinary Shares. The dividend, equal
to $375,000 in the aggregate, was fully paid on August 17, 2020. However, we cannot give any assurance that we will declare dividends
of any amounts, at any rate or at all in the future. Future dividends, if any, will be paid at the discretion of our board of directors,
subject to requirements under Cayman Islands law and our memorandum and articles of association, as amended and restated from time to
time, and will depend upon our future operations and earnings, capital expenditure requirements, general financial conditions, legal
and contractual restrictions and other factors that our board of directors may deem relevant.
We
may be subject to penny stock regulations and restrictions and you may have difficulty selling our ordinary shares.
The
SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our ordinary shares becomes
a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the “Penny Stock Rule”. This
rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers
and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000,
or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in
the secondary market.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market
in penny stock.
There
can be no assurance that our ordinary shares will qualify for exemption from the Penny Stock Rule. In any event, even if our ordinary
shares were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would
be in the public interest.
ITEM 4.
|
INFORMATION
ON THE COMPANY
|
|
A.
|
History and development
of the company.
|
We
were formed under the name of “Happiness Biotech Group Limited” on February 9, 2018, under the laws of the Cayman Islands.
Our registered office is at Harnes Fiduciary (Cayman) Limited, with its offices located at 4th Floor, Harbour Place, 103 South
Church Street, P.O. Box 10240, Grand Cayman, KY1-1002M Cayman Islands. Our principal executive offices are located at No. 11, Dongjiao
East Road, Shuangxi, Shunchang, Nanping City, Fujian Province, People’s Republic of China. Our telephone number at that address
is + 86-0599-782-8808. Our company website is http://www.fjxfl.com.
Happiness
Biotech is the sole shareholder of Happiness Hong Kong, incorporated in Hong Kong on March 5, 2018, which is the sole shareholder of
Happiness Nanping. Happiness Nanping was incorporated on June 1, 2018 under the laws of the People’s Republic of China, as a wholly-owned
subsidiary of Happiness Hong Kong and a wholly foreign-owned entity under the PRC laws. Neither Happiness Biotech, Happiness Hong Kong
nor Happiness Nanping is currently engaged in any active business other than acting as holding companies. We conduct our business mainly
through Fujian Happiness, a wholly-owned subsidiary of Happiness Nanping and incorporated on November 19, 2004 under the PRC laws. Fujian
Happiness holds all of the equity or ownership of Shunchang Happiness Nutraceutical Co., Ltd (“Shunchang Happiness”). Through
Fujian Happiness and Shunchang Happiness, the Company is a biotech company that specializes in research, development, production and
selling of nutraceutical and dietary supplements made of Ganoderma spore powder and others mainly in China.
On
October 25, 2019, our ordinary shares commenced trading on Nasdaq under the symbol “HAPP.”
On July 17, 2020, Happy Buy (Fujian) Internet Technology Co., Limited,
or “Happy Buy”, was incorporated under the laws of People’s Republic of China and is a wholly owned subsidiary of Happiness
Nanping. Happy Buy controls two subsidiaries, Happy Unicorn and Hangzhou C'est la vie both of which 51% of the equity interest is owned
by Happy Buy. Happy Unicorn (Fujian) Network Technology Co., Limited, or “Happy Unicorn”, was incorporated under the laws
of People’s Republic of China on June 1, 2021. Hangzhou C’est La Vie Interactive Technology Co., Limited was incorporated
under the laws of People’s Republic of China on August 26, 2020. Happy Buy was incorporated in order to develop our e-commerce
business. Our e-commerce business focuses on providing e-commerce solutions and services for small and medium-sized enterprises. Our mission
for the e-commerce business is to enable small and medium-sized enterprises to fully leverage the power of e-commerce to grow rapidly.
On April 27, 2021, Taochejun (Fujian) Auto Sales Co., Limited, “Taochejun”,
was incorporated under the laws of People’s Republic of China and 51% of it is owned by Happiness Nanping. We launched this B2B
(Business-to-Business) platform for sales of automobiles. Our automobile sales business was formerly under the brand name of “Happy
Auto”, and was rebranded to “Taochejun” in June 2021. Taochejun mainly focuses on building a network among car dealers
in China to offer better overall sales experience and services to purchasers, and to streamline the automotive industry transaction. China
is one of the world’s largest automobile markets, both in terms of demand and supply. Through Taochejun, we plan to utilize our
dealer network to distribute the inventories and used cars from large 4S stores, online car hailing platforms and car makers to third
and fourth tier cities, which serves as a great solution to the over-supply issues in first tier cities. Meanwhile, new energy vehicles
will also be one of Taochejun’s focuses. At present, electric vehicles are mostly concentrated in the first tier cities. In the
future, we believe that new energy vehicles will start to popularize in lower tier cities and car makers will spend more resources on
developing these markets.
The
Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration
statements and other information with the SEC. The Company’s reports, registration statements and other information can be inspected
on the SEC’s website at www.sec.gov and such information can also be inspected and copies ordered at the public reference facilities
maintained by the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us at http://www.fjxfl.com.
However, information contained on our website does not constitute a part of this annual report.
Our business currently has three revenue streams: nutraceutical and
dietary supplements business, e-commerce business and automobile sale business. We are an innovative nutraceutical and dietary supplements
producer focused on the research, development, manufacturing, marketing and sales of a variety of products made from Chinese herbal and
animal extracts in China. We conduct our business through our wholly-owned subsidiaries, mainly Fujian Happiness. Founded in 2004, Fujian
Happiness focuses on providing nutraceutical solutions made from Chinese herbal extracts. During the outbreak of COVID-19 in China, we
have produced portable hand sanitizer and daily protective masks to supplement our herbal extracts sales but they are not our main products.
We believe enhanced consumer awareness and demand for nutraceutical and dietary supplements, rising health care costs, aging populations,
coupled with our effective sales have been the primary reasons for our growth throughout our 16 years of operating history.
We are one of the leading
companies in Fujian Province specializing in research, development, manufacturing, and marketing of nutraceutical and dietary supplements
authorized by Nutraceutical Association of Fujian Province. Our products are mainly made of Lucidum spore powder (also known as Ganoderma
spore powder or Ganoderma Lucidum spore powder), Cordyceps mycelia, Ejiao, other traditional Chinese herbal and animal extracts, vitamins,
minerals and amino acids. Our brand, “Happiness”, is a well-known trademark in Fujian Province and well-recognized in the
nutraceutical industry in China. Headquartered in Fuzhou, the provincial capital of Fujian Province, and Nanping, our products are sold
throughout China. In February 2020, we set up four production lines to produce portable hand sanitizer and daily protective masks to supplement
our herbal extracts sales to combat the spreading of COVID-19 in China. The production lines ceased in August 2020.
In addition, we started two new revenue streams in the year ended
March 31, 2021. We engaged in e-commerce business via Happy Buy in September 2020. Our e-commerce
platform “Happy Buy” mainly focuses on providing small and middle size business with professional product marketing
and e-commerce agency operation services. We also provide e-commerce solutions, internet information and advertising service to the small
online stores or small manufactures in China in fiscal year ended March 31, 2021, leveraging our resources and experiences in marketing
and in the e-commerce industry to provide efficient solutions to promote and sell products of our customers.
We began our automobile sale
in November 2020. Our automobile sales platform “Happy Auto”, which later
upgraded to “Taochejun”, focuses on empowering the automotive supply chain by building a network to connect different
car dealers and offer better overall sales experience and services to purchasers, and to streamline the automotive industry transaction.
Products
and Services
Nutraceutical
and dietary supplements
Currently
we market and sell approximately 23 kinds of nutraceutical and dietary supplements products through over 100 distributors in
18 different provinces and 17 experience stores in China. We categorize our products into six groups: Lucidum spore powder products,
Cordyceps mycelia products, Ejiao solution products, vitamins and dietary supplements products, American ginseng products, and others.
For the years ended March 31, 2021, 2020, and 2019, our sales from Lucidum spore powder products, Cordyceps mycelia products and Ejiao
solution products, approximately amounted 18.7%, 66.6% and 63.1% of our gross sales, respectively.
As
in Administrative Measures for Nutraceutical Products promulgated by National Health Commission of PRC, nutraceutical and dietary supplements
products are a category of food targeted to specific population with general health benefits for daily wellness. Nutraceutical and dietary
supplements products are not intended to treat any specific diseases and must not cause any acute, subacute or chronic harm to the human
body. With the requirements of nutraceutical and dietary supplements being met and approved by the
State Food and Drug Administration (the “CFDA”), the predecessor of the NMPA, under regulations for nutraceutical
and dietary supplements, herbal and animal extracts used as both nourishment food and traditional Chinese medicine can be included into
raw materials of nutraceutical and dietary supplements products.
We
mainly use herbal and animal extracts as raw materials of our Lucidum spore powder products, Cordyceps mycelia products, Ejiao solution
products and others. These herbal and animal extracts have been used as both daily nourishment food and traditional Chinese medicine
in China for a long time. Approved by CFDA under regulations for nutraceutical and dietary supplements, 32 kinds of our products are
nutraceutical and dietary supplements products labeled with “Blue Caps.” All our products are produced in compliance with
the regulations of food industry.
In
February 2020, we began the production of disinfectants for combatting the COVID-19 pandemic, including 75% alcohol disinfectant and
hand sanitizer, after obtaining the Sanitation License of Disinfection Product Manufacture (the “Sanitation License”) issued
by Fujian Provincial Health Commission. The production of disinfectants ceased in August 2020 and we do not anticipate to resume the
production in any near future.
Automobile
Sales
In
November 2020, the Company began its automobile sales business. The Company has entered into agreements with automobile companies to
purchase cars and obtain authorization to distribute the cars in different cities in China including Xiamen, Zhangzhou and Hangzhou.
The Company utilizes its online platform of “Taochejun” on WeChat, as a WeChat Mini Program (微信小程序),
to link comprehensive automobile trade and resource providers, and provide vehicle source solutions for automobile dealers. It can display
and sell the car source of the resource business alliance on the platform, and also help the comprehensive auto trade to solve its own
car source demand.
Ecommerce
Online
Stores
In
2020, the Company has begun the online store business on several different platforms. The Company focuses on providing e-commerce overall
services, internet promotion, agency operations, supply chain resources and logistics services for all types of enterprises. The company's
main business forms are community group buying and cross-border e-commerce. The company has a delivery and optimization department, a
procurement department, and a live streaming team, and has established a comprehensive business support center and management team.
Internet
Information and Advertising Service
In 2021, the Company began
to provide internet information and advertising service to small online stores or small manufacturers in China.
Suppliers
We
consider our suppliers whose sales to us accounted for more than 10% of our overall purchases in any given period to be our major suppliers
of such period. We have one such vendors of our advertising services during fiscal years ended March 31, 2021. This top 1 vendor accounted
for approximately 16.8% of our overall purchases and our top 5 vendors accounted for 43.0% of our overall purchases, respectively.
We
purchase other types of raw materials for our dietary supplements products and engage services from a variety of suppliers at the market
price. We believe these types of raw materials and services are widely available, and therefore if we were unable to purchase from our
primary suppliers, we do not expect we would face difficulties in locating another supplier at substantially the same price. We have
stable access to all the raw materials and services necessary for our operation. We believe our relationships with our suppliers are
strong.
Sales
and Marketing
As
for our nutraceutical and dietary supplements products, we currently have two sales models, namely traditional distribution model and
experience store model.
The
main way we sell our dietary supplements products is through regional distributors and large-scale chain drugstores, malls and supermarkets.
In selecting our regional distributors, we consider factors including capital strength, network coverage, marketing ability and etc.
We are responsible for the training of distributors and their sales consultants. Our regional distributors focus on expanding sales network,
distributing and promoting our products. Regional distributors directly sell our products to customers in retail sales terminals through
their sales consultants after receiving training on marketing and basic information of our products. These consultants are not licensed
medical professionals and not required to be licensed. At the sales terminals, customers can receive information on the efficacy and
usage of our products provided by the sales consultants. Sales terminals are one of the main conduits through which we market our marketing
and sales activities.
Our
customers of dietary supplements products also include well-known chain drugstores, malls and supermarkets. Customers who fall under
this category tend to have established cross-regional sales networks, strong sales capabilities, well-recognized brands and good reputation
among the consumers. We tend to establish direct business partnership with this type of customers. We provide marketing plan, sales support,
personnel training and after sales services to them.
The
aforementioned two kinds of customers are together referred to as the traditional distribution model. Through our efforts for the past
16 years, we have successfully built our traditional distribution channel, as well as established a leading sales system in the industry.
As of March 31, 2021, we had over 100 distributors with more than 20,000 sales terminals in 18 different provinces in China, and
established close business relationships with them. With our expansive sales network and quality after-sales service, we have effectively
promoted our sales and enhanced our brand image.
Traditional
sales model face challenges when consumers start to demand high quality individualized health services. In 2017, we started to open experience
stores to stimulate our sales. We enter into experience store agreements with participating distributors, who own and operate retail
stores in popular tourist sites. Pursuant to such agreements, we provide consulting services to the distributors with respect to store
site selection, equipment purchase, store decoration and design. As part of such agreement, we will coach the distributor to design a
high-tech exhibition store of approximately 2,000 square meters (approximately 21,500 square feet). Further, we provide professional
trainings to sales consultants employed by these exclusive distributors, so that these consultants are able to provide individualized
nutrition tips to consumers. We also provide training to the personnel employed by the distributors so that such personnel are able to
function as commentators to give in-depth presentation of the origin, tradition and history of our products in the background of the
tourist sites.
The
key difference between sales terminals operated by traditional distributors and the experience stores are that we provide more support
to them and the experience stores are located in tourist sites where the sales consultants gave in-depth presentation of the origin,
tradition and history of our products and as a result, the price at such stores are higher than those sold in the sales terminals operated
by traditional distributors. The experience stores are presented by the tourists’ sites operators as part of its cultural offerings.
The tourists are guided to enjoy a presentation of traditional Chinese herb culture offered by the distributors in the experience store.
At the end of the presentation, the tourists are led to the counters and be presented with our products. We estimate about 50% of the
tourists visited our experience stores will purchase our products in such stores.
As
of March 31, 2021, we had 17 exclusive distributors in Xiamen, Chaozhou, Guilin and other touristic cities in China, with a customer
conversion rate of approximately 50%.
Our
e-commerce solutions services aim to offer IT and advertising services to the small to medium sized businesses, assisting them to reach
target customers via social media. Happy Buy, through its subsidiaries, uses domestic plus cross-border platforms, establishes internal
front desk, middle desk, back-office systems and departments, forming a commercial closed loop, which greatly reduces the marketing costs
and improving marketing efficiency. It also links factories, logistics, brands and sales together to provide an overall e-commerce solution
for the small and middle sized businesses.
Our
automobile sales platform Taochejun commits to develop more sales channels for car dealers in the future to connect the upstream and
downstream channel network of automobile distribution. Currently, we have developed a WeChat Mini Program for Taochejun, on which we
provide car dealers with real and high-quality car sources as well as safe and efficient transaction services.
Competition
We
compete with other top-tier dietary supplement producers in China. Many of our competitors also manufacture and sell products similar
to ours. Furthermore, many of these companies entered into the market earlier than us, and thus they are more established than we are
and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors
have greater name recognition and a larger customer base. Those competitors may be able to respond more quickly to new opportunities,
market changes or changes of customer preferences, and may be able to undertake more extensive promotional activities, offer more attractive
terms to distributors, and adopt more aggressive pricing policies.
Some
of our competitors, including Shouxiangu Pharmaceutical Co., Ltd. and Xianzhilou Biotechnology Co., Ltd., also sell dietary supplement
products made of Lucidum spores. Some of our competitors are high-profile and large-scale companies along with some companies that have
huge production and storage capacity to influence the market price. Despite that, we believe we are well positioned to compete in this
fast-developing market with our diversified product portfolio, proven research and development and in-licensing capabilities, established
sales and marketing network and management experiences.
Since
we started our in e-commerce business and automobile sale in 2020, which are both highly competitive and rapidly evolving industries
in China, we are making great efforts to improve our competitiveness in both industries and attempting new business models to distinguish
us from our competitors.
Trademarks,
Copyrights, Patents and Domain Names
We
regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success,
and we rely on trademark and trade secret law and confidentiality and invention assignment with our employees and others to protect our
proprietary rights.
Trademark
“Happiness”
is a Well-Known Trademark and well recognized by consumers in Southeastern China. “Happiness” was registered as a Well-Known
Trademark in China by State Administration of Industry and Commerce of PRC in 2010 and Famous Brand in Fujian by Fujian Administration
of Industry and Commerce in 2007. Our brand is also widely recognized in the nutraceutical industry in China as one of the most famous
brands. It is especially recognized in Fujian Province where it was originated and provinces nearby, such as Zhejiang, Jiangsu and Guangdong.
Patent
We
rely on our in-house research and development team to upgrade current products and invent new products. We were granted an award of “Outstanding
Research and Development Companies” by Nanping Intellectual Property Office on October 16, 2017. We currently have 24 employees
dedicated to research and development.
Domain
Names
Our
intellectual property includes our domain names of http://www.fjxfl.com., and https://www.happgo.net/.
Sources
and Availability of Raw Materials
Property,
Plant and Equipment
There
is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. We were
granted land use rights for our facilities in Nanping. Following is a list of our properties, all of which we own the land use rights
to:
No.
|
|
Property
|
|
Duration
of Land
Use Rights(1)
|
|
Space
(m2)
|
|
|
Ground
Floor
Area (m2)
|
|
1
|
|
No.
134 Freight Yard Road, Shuangxi, Shunchang
|
|
January 30,
2016 -
January 29, 2066
|
|
|
12,120
|
|
|
|
16,038.22
|
|
2
|
|
No. 11
Dongjiao East Road, Shuangxi, Shunchang
|
|
May 12, 2006 -
May 11, 2056
|
|
|
17,600
|
|
|
|
9,520.4
|
(2)
|
(1)
|
We have the option to renew these land use rights agreement
with the government.
|
(2)
|
The certificate of the real estate is under processing.
|
Our
headquarters and manufacturing facility is located at No.11 Dongjiao East Road, Shuangxi, Shunchang, Naping City, Fujian Province, PRC
and No.134 Feight Yard Road, Shuangxi, Shuangchang, Nanping City, Fujian Province, PRC. At these locations, we have a variety of heavy
equipment required to customize the products and laboratory equipment for research and development. None of our properties are encumbered
by debt, and we are not aware of any environmental concerns or limitations on the use of our properties for the purposes we currently
use them or intend to use them in the future.
In
addition, our cooperation partners lease spaces from different real estate entities for our experience stores. Currently, the average
lease term for flagship stores is five years and for the general stores is three years.
Research and Development
Nutraceutical and Dietary Supplements Products
We rely on our in-house research
and development team to upgrade current products and invent new products. We were granted an award of “Outstanding Research and
Development Companies” by Nanping Intellectual Property Office on October 16, 2017. We currently have 24 employees dedicated to
research and development and we hold a total of 18 patents as of the date of this report.
Mr. Xianfu Wang and Mr. Zongwei
Zhang, our key technician, both have over twenty-six years of experiences in the nutraceutical industry. They lead our research team in
the process of applying patents for the Company. Dr. Junsheng Fu joined the company as a consultant in June 2018 to assist our technical
manager Yujing Zheng, who has over fourteen years of experiences in the food manufacturing industry, to rebuild our Research and Development
team. Dr. Fu holds Doctorate degree in Microbiology from Fujian Agriculture and Forestry University, and is currently as a professor at
the same University. He established our general research and development strategy to use modern technology to improve the production process
and continue developing newly advanced products to meet the highest quality standards. We believe that our research and development team
holds a leading position in the nutraceutical and dietary supplements industry. We will continue to sharpen our advantages and expect
to develop new advanced products in the foreseeable future. A detailed development process of our new products is as following:
|
●
|
Start-up of a project: feasibility study on the formula, production process and technical requirements of the new product;
|
|
●
|
Lab test of the formula and production process on small scale;
|
|
●
|
Pilot production test of the formula and production process on medium scale;
|
|
●
|
Make further modification on the formula and production process of the new product based on the results of lab test and pilot test to meet current technical requirements and quality standards of nutraceutical and diet supplements;
|
|
●
|
Assessment on safety and general health benefits of the new product: the assessment covers hygienic testing, toxicological testing and functional testing on safety, stability and health benefits of the products. The assessment reports are required and reviewed by CFDA to make sure the product can not cause any acute, subacute or chronic harm to the human body. We mainly rely on third party assessment agencies authorized by CFDA to perform the assessment of the safety, stability and general health benefits of the new products.
|
|
●
|
Submit the materials to CFDA for registration or record-filing process of the new product (for a detailed discussion on the materials needed, see section “Regulation”);
|
|
●
|
Approved by CFDA and get the official approval and “Blue Cap” label of the new product: CFDA shall review the materials for registration or record-filing and perform on-site verification of the production process to confirm whether the products meet the requirements of nutraceutical and dietary supplements products. With the requirements of nutraceutical and dietary supplements being met, CFDA will issue the official approvals of the products to the manufacturers.
|
Hygienic testing of nutraceutical
and dietary supplements products includes various trials on the functional ingredients of the products to assess whether the products
meet the hygienic requirements for nutraceutical and dietary supplements products and whether the products contain ingredients harmful
to human body, such as Lead, Arsenic and Mercury. Toxicological testing of nutraceutical and dietary supplements products includes experiments
on the ingredients to ensure the product must not cause any acute, subacute or chronic harm to the human body. In the condition of the
hygienic testing and toxicological testing being qualified, functional testing provide assessments to verify the specified functions of
the products. Functional testing includes experiments on animals or human beings (if necessary) for the specific functions of the products.
According to the Technical Standards for Testing &Assessment of Health Food promulgated by National Health Commission of PRC, functions
of these nutraceutical and dietary supplements products must be covered by the 27 kinds of general health benefits listed in the standard,
such as boosting the immune system, improvement of sleep etc.
Insurance
As required by laws and regulations
in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including
housing, pension, medical insurance and unemployment insurance programs. The Company is required under Chinese law to make contributions
to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount
specified by the local government from time to time. We have contributed to the basic and minimum social insurance plan. While we believe
we have made adequate provision of such outstanding amounts of contributions to such plans in our financial statements, any failure to
make sufficient payments to such plans would be in violation of applicable PRC laws and regulations and, if we are found to be in violation
of such laws and regulations, we could be required to make up the contributions for such plans as well as to pay late fees and fines.
Seasonality
The sale of nutraceutical
and dietary supplements product is slightly subject to seasonal changes, usually sales is higher in winter time due to traditional Chinese
dietary culture. In addition, there are peak and low season period for various attractions with experience stores, which may lead to volatility
of sales for different stores.
There is no seasonality impact
to the business of automobile sales, online store or internet information and advertising services.
Employees
We currently have 215 full-time
employees. We have employment contracts with all of our employees in China in accordance with relevant PRC laws. Our employees are not
represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
We have contributed to the
basic and minimum social insurance plan. While we believe we have made adequate provision of such outstanding amounts of contributions
to such plans in our financial statements, any failure to make sufficient payments to such plans would be in violation of applicable PRC
laws and regulations and, if we are found to be in violation of such laws and regulations, we could be required to make up the contributions
for such plans as well as to pay late fees and fines.
Management, Culture and Training
We are guided by a philosophy
that recognizes customer service and the importance of delivering optimal performance, allowing us to identify and reward teams that meet
our high performance standards.
We provide professional trainings
to sales consultants employed by these exclusive distributors, so that these consultants are able to provide individualized nutrition
tips to consumers. We also provide training to the personnel employed by the distributors so that such personnel are able to function
as commentators to give in-depth presentation of the origin, tradition and history of our products in the background of the tourist sites.
We also provide all employees with appropriate workplace safety training.
Competitive Advantage
We believe our principal competitive strengths
of our dietary supplements products are as follows:
Recognized Brand Name
“Happiness” is
a Well-Known Trademark and well recognized by consumers in Southeastern China. “Happiness” was registered as a Well-Known
Trademark in China by State Administration of Industry and Commerce of PRC in 2010 and Famous Brand in Fujian by Fujian Administration
of Industry and Commerce in 2016. Our brand is also widely recognized in the nutraceutical industry in China as one of the most famous
brands. It is especially recognized in Fujian Province where it was originated and provinces nearby, such as Zhejiang, Jiangsu and Guangdong.
Provider of a Wide Range of Nutraceutical
and Dietary Supplements Products
We are a nutraceutical manufacturer
producing a wide range of nutraceutical and dietary supplements products. We make products from ingredients such as Lucidum spore powder,
Cordyceps mycelia, Ejiao, vitamins and minerals, American ginseng, and others. A broad product portfolio allows us to attract consumers
with different preferences and to gain competitive advantages in our products.
Strong Research and Development Capability
We have established a strong
research and development team (“R&D Team”) of 16 talented researchers as of the date of this prospectus. Our R&D Team
has demonstrated its success of developing new products and technologies that lend us an edge over our major competitors. Our R&D
Team has developed several products that were successfully launched with positive consumer feedback, including melatonin tablets, calcium
tablets, ginseng tea powders, and supplemental tablets with immune-boosting efficacy. Further, we cooperate with Fujian Agriculture and
Forestry University and Academy of Chinese Medical Sciences on product research. We believe that our research and development capabilities,
in addition to our partnership with scientific research institutions, allow us to provide steady pipeline of innovative dietary supplement
solutions that fulfill our customers’ needs.
Experienced and accomplished leadership team
with a proven track record.
We have an experienced management
team. For example, Mr. Xianfu Wang, our Chairman of the Board, has over twenty-five years of experiences in the dietary supplement industry.
Mr. Zongwei Zhang, our key technician, have over twenty-five years of experience in the nutraceutical industry. We believe that our leadership
team is well-positioned to lead us through clinical development, regulatory approval and commercialization of our product candidates.
Collectively, our management team has extensive experience in the research and development, manufacturing, and commercialization of nutraceutical
and dietary supplement products. Experienced in managing fast-growing enterprises, our entrepreneurial management team takes the initiative
to adapt our business strategies to market, industry and therapeutic trends. Our management team has successfully established a steady
product pipeline and built an integrated research and development, production, sales and marketing infrastructure. Our success in product
development and branding reflects the experiences that our management team has in their areas of expertise and their in-depth knowledge
of the regulatory framework in China.
For our e-commerce business,
we compete primarily on the basis of the following factors: (i) our ability to attract, incubate and empower high-quality key opinion
leaders, or KOLs, in growing numbers; (ii) our strong network with small and middle size business in China; (iv) the superiors shopping
experience on our platform; (v) pricing of products sold on our platform; (vi) our ability to attract and retain merchants;
and (vii) product quality and selection.
For our automobile sale business,
we believe our primary competitive advantages are: (i) the internet-based and digitized sales model empowered the resource car dealers
and comprehensive auto trade, fully improving the operation efficiency of the industry; (ii) the strong relationship with resourceful
car dealers and (iv) the standardized service process, including car hailing services and potentially financing and insurance services.
Licenses, Permits and Government Regulations
License
Dietary Supplement Production License and Official Approvals
In China, food and nutritious
supplement manufacturers are required to comply with the certain quality control, safety requirement and obtain “Food Production
License” from CFDA for full compliance with the safety requirements set forth in Food Safety Law of People’s Republic of China.
Besides, each nutraceutical product is required to obtain the official approval of manufacturing from CFDA, which is the commonly known
as the “Blue Caps”. Currently 23 of our products are approved by CFDA. The approvals of our main products are listed in the
below chart.
No.
|
|
Product Name
|
|
Code
|
|
Expiration Date
|
|
Owner
|
1
|
|
“Happiness” Lucidum Spore Powder Capsule
|
|
No.346(1998)
|
|
not applicable
|
|
Fujian Happiness
|
2
|
|
“Daguangrong” Cordyceps Mycelia Oral Liquid
|
|
No.220(1997)
|
|
not applicable
|
|
Shunchang Happiness
|
3
|
|
“Happiness” Ejiao Astragalus Oral Liquid
|
|
G20040107
|
|
not applicable
|
|
Fujian Happiness
|
4
|
|
“Happiness” Iron and Zinc Amino Acids Oral Liquid
|
|
G20060704
|
|
8/13/2025
|
|
Fujian Happiness
|
5
|
|
“Happiness” American Ginseng Capsule
|
|
G20050572
|
|
7/8/2025
|
|
Fujian Happiness
|
6
|
|
Lishi Jinjin Qingzhi Capsule
|
|
No.0288(2003)
|
|
not applicable
|
|
Fujian Happiness
|
7
|
|
“Happiness” Fenglingbao Capsule
|
|
No.0064(2003)
|
|
not applicable
|
|
Fujian Happiness
|
8
|
|
“Happiness” American Ginseng Original Grain Tea bag
|
|
No.0291(2003)
|
|
not applicable
|
|
Fujian Happiness
|
9
|
|
“Happiness” American Ginseng Oral Liquid
|
|
G20040182
|
|
not applicable
|
|
Shunchang Happiness
|
10
|
|
“Happiness” Taurine Zinc Oral Liquid
|
|
G20120537
|
|
1/6/2025
|
|
Fujian Happiness
|
11
|
|
“Happiness” Spirulina Tablets
|
|
G20050573
|
|
8/13/2025
|
|
Fujian Happiness
|
12
|
|
“Happiness” Sleeping Capsule
|
|
No.0198(2002)
|
|
not applicable
|
|
Fujian Happiness
|
13
|
|
“Happiness” Tablets
|
|
G20140404
|
|
5/22/2026
|
|
Fujian Happiness
|
14
|
|
“Happiness” American Ginseng Chicken Essence Tonic
|
|
G20040889
|
|
not applicable
|
|
Fujian Happiness
|
15
|
|
“Happiness” Calcium Iron Zinc Multidimensional Oral Liquid (pregnant type)
|
|
G20100149
|
|
6/2/2022
|
|
Fujian Happiness
|
16
|
|
“Happiness” Little Pigeon Oral Liquid
|
|
No.0487(1998)
|
|
not applicable
|
|
Fujian Happiness
|
17
|
|
“Happiness” Drink
|
|
G20140393
|
|
3/31/2019
(under renewal)
|
|
Fujian Happiness
|
18
|
|
“Happiness” Fish Oil Vitamin E Soft Capsule
|
|
G20100155
|
|
9/4/2024
|
|
Fujian Happiness
|
19
|
|
“Happiness” Vitamin E Soft Capsule
|
|
G20090458
|
|
6/1/2022
|
|
Fujian Happiness
|
20
|
|
“Happiness” Calcium Tablets
|
|
G202035000761
|
|
not applicable
|
|
Fujian Happiness
|
21
|
|
“Happiness” Selenium tablets
|
|
G201935001306
|
|
not applicable
|
|
Fujian Happiness
|
22
|
|
“Happiness” Calcium Oral Liquid
|
|
G201935000766
|
|
not applicable
|
|
Fujian Happiness
|
23
|
|
“Happiness” Coenzyme Q10 Capsule
|
|
G202135100829
|
|
not applicable
|
|
Fujian Happiness
|
According to CFDA regulations,
“Blue Caps” approvals granted prior to July 1, 2005 do not have any expiration date, “Blue Caps” approvals obtained
after July 1, 2005 have a term of 5 years and maybe renewed. Our research and development team monitors the approval status of our products.
For all of our products that require approval renewal, we have already submitted to CFDA the renewal applications, which are currently
under review. Pending the renewal applications, as long as the renewal requests have been filed with CFDA, we are still permitted to sell
these products despite their approvals expired.
PRC Laws and Regulations Relating to Our Business
Registration and Approval of Dietary Supplements
Pursuant to the Food Safety
Law of PRC, which was amended on April 24, 2015 and became effective on October 1, 2015, the producers and business operators of
dietary supplements shall obtain licensing and shall carry out production and operation in accordance with food safety standards.
On February 26, 2016, CFDA
promulgated the Administrative Measures for the Registration and Record-filing of Dietary Supplements which became effective on July 1, 2016.
In accordance with the Administrative Measures for the Registration and Record-filing of Dietary Supplements, dietary supplements that
use raw materials other than those included in the catalogue of raw materials for dietary supplements shall be registered with CFDA.
To
apply for the registration, the applicant shall submit the following materials:
|
●
|
The application
form for registration and written legal liability undertaking that the applicant shall be responsible for the truthfulness of the
application material;
|
|
●
|
Photocopies of the supporting
documents on the registration of the registration applicant;
|
|
●
|
The research and development
reports of the dietary supplement, covering the research and development personnel, research and development time, development processes,
validation data for tests at and above the level of intermediate pilot experiments, Non-catalogue Raw Materials, demonstration reports
and relevant scientific bases for the safety, health benefits and quality controllability of the dietary supplements, product technical
requirements determined in a comprehensive manner according to the research and development results;
|
|
●
|
Materials on the formula
of the dietary supplement, including the names and dosage of raw materials and auxiliary materials, production processes and quality
standards; where necessary, the bases for use of certain raw materials, descriptions on the parts used, certificates of inspection
conformity, variety appraisal reports, etc. shall also be provided in accordance with relevant provisions;
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Materials on the production
process of the dietary supplement, covering the diagram and descriptions of the production processes, key process control points
and descriptions;
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Materials on the assessment
of the safety and health benefits of the dietary supplement, covering assessment materials on the safety and health benefits tests
of Non-catalogue Raw Materials and the dietary supplements, assessment materials on the consumption of the dietary supplement by
human beings, testing reports on the effective ingredients or symbolic ingredients, hygiene, stability, strain identification, strain
virulence, etc. of the dietary supplement, as well as testing reports involving stimulants, ingredients of illegal substances;
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The types, names, relevant
standards, etc. concerning the packaging materials in direct contact with the dietary supplement;
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Labels and instruction
manual sample texts of the dietary supplement, and search materials proving that the generic names in the name of the dietary supplement
are not the same as the names of any registered drug;
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Samples of the dietary
supplement in three minimum sales packages; and
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Other materials related
to the assessment of the registration of the dietary supplement.
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The CFDA shall send all application
materials to the Assessment Agency within three c upon acceptance of the application. The Assessment Agency shall organize assessment
experts to examine application materials, organize Verification Agency to conduct on-site verification according to actual needs, and
organize the inspection agency to carry out review inspection. The Assessment Agency shall put forward the suggestions on the supplement
that the said product is scientific and safe, and has the claimed health benefits, that production processes of the said product are
reasonable, feasible and controllable in terms of quality, and that the technical requirements and inspection methods of the said product
are scientific and rational. After making comprehensive assessment conclusions and suggestions, the Assessment Agency shall submit the
same to the CFDA within five business days. The CFDA shall examine the legality, standardization and integrity of assessment procedures
and conclusions and suggestions within 20 business days upon acceptance of the comprehensive assessment conclusions and suggestions on
the dietary supplement, and make a decision to register or not to register the said product.
In
the event the registrant of a dietary supplement transfers relevant technology, the transferee shall submit a new application for registration
of the dietary supplement under the guidance of the transferor, and the technical requirements, etc. of the dietary supplement shall
remain consistent with the original application materials. In addition to the application materials for registration, the transferee
shall also submit the notarized transfer contract. Where pertinent requirements are met, the CFDA will issue a new registration certificate
of the dietary supplement to the transferee upon verification, and deregister the dietary supplement registration of the transferor.
Where
the registration certificate of a dietary supplement that has already been manufactured for sale needs to be renewed upon expiry, the
registrant of the dietary supplement shall apply for renewal six months prior to the expiry. The food and drug administration that receives
an application for renewal of the registration of a dietary supplement shall make a decision on whether to approve the renewal application
prior to the expiry of the registration certificate of the dietary supplement. The failure of the food and drug administration to make
a decision within the prescribed time period shall be deemed as approval of renewal. Where renewal of registration is approved, a new
registration certificate of dietary supplement shall be issued, and the original registration certificate of dietary supplement shall
be deregistered at the same time.
Record-filing
of Dietary Supplements
Pursuant
to the Administrative Measures for the Registration and Record-filing of Dietary Supplement, dietary supplements whose raw materials
used have been included in the catalogue of raw materials for dietary supplements shall be subject to record-filing.
To
apply for the record-filing of a dietary supplement, a record-filing party shall submit the following materials:
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The record-filing and registration
form for the dietary supplements, and written legal liability undertaking that the record-filing party shall be responsible for the
truthfulness of the materials submitted;
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Photocopies of the supporting
documents on the registration of the record-filing party;
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Materials on the formula
of the dietary supplement, including the names and dosage of raw materials and auxiliary materials, production processes and quality
standards; where necessary, the bases for use of certain raw materials, descriptions on the parts used, certificates of inspection
conformity, variety appraisal reports, etc. shall also be provided in accordance with relevant provisions;
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Materials on the production
process of the dietary supplement, covering the diagram and descriptions of the production processes, key process control points
and descriptions;
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Materials on the assessment
of the safety and health care functions of the dietary supplement, covering assessment materials on the safety and health benefits
tests of Non-catalogue Raw Materials and the dietary supplement, assessment materials on the consumption of the dietary supplements
by human beings, testing reports on the effective ingredients or symbolic ingredients, hygiene, stability, strain identification,
strain virulence, etc. of the dietary supplements, as well as testing reports involving stimulants, ingredients of illegal substances;
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The types, names, relevant
standards, etc. concerning the packaging materials in direct contact with the dietary supplement;
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Labels and instruction
manual sample texts of the dietary supplement, and search materials proving that the generic names in the name of the dietary supplement
are not the same as the names of any registered drug;
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Materials on the technical
requirements of the dietary supplement;
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An all-item inspection
report issued by a duly qualified inspection agency that the dietary supplement meets product technical requirements; and
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Other materials demonstrating
the safety and health benefits of the dietary supplement.
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Upon
receipt of record-filing materials, CFDA shall process record-filing on the spot if such materials meet relevant requirements; and, where
the record-filing materials fail to meet the relevant requirements, the food and drug administration shall inform the record-filing party
concerned to make all necessary corrections/submit all necessary supplementary materials at one time.
Under
the above laws and regulations, we have obtained Food Production License in December 2017 from Nanping Food and Drug Administration,
and we also have obtained the registration and record-filing of dietary supplements that we produced.
Safety
Standards relating to Dietary Supplements
Pursuant
to the Food Safety Law of PRC, which was amended on April 24, 2015 and became effective on October 1, 2015, the producers and business
operators of dietary supplements shall obtain licensing and shall carry out production and operation in accordance with food safety standards.
According to ‘National Food Safety Standards: Nutraceutical Food’ (GB 16740-2014) by National Health Commission of PRC (formerly
known as National Health and Family Planning Commission of PRC), dietary supplements shall meet the standard in the aspect of raw materials,
physical-chemical properties, provisions on the quantitative limits of polluting substances, mycotoxin, and microorganisms, as well as
food additives and nutrient supplement. According to the Administrative Measures for the Registration and Record-filing of Dietary Supplements,
which became effective on July 1, 2016, to apply for the registration of dietary supplements, the applicant shall submit the research
and development reports, materials on the formula of the dietary supplement, relevant standards concerning the packaging materials and
other materials relating to the registration which are sufficient to prove the dietary supplement meets the standard provided by law
and National Food Safety Standards. Under the laws and regulations on nutraceutical and dietary supplements, we have obtained the registration
or record-filing of each nutraceutical and dietary supplements product that we produced and all of the products we produced meet the
food safety standards.
Packages
of Dietary Supplement
In
accordance with the Administrative Measures for the Registration and Record-filing of Dietary Supplement, the labels and texts of the
instruction manuals of dietary supplement shall cover the name, raw materials and auxiliary materials of the said product, its effective
ingredients or symbolic ingredients and the contents thereof, the suitable and unsuitable groups, health care functions, consumption
volume and methods, specifications, storage methods and shelf life of the said product, precautions and other relevant contents, as well
as relevant formula bases and descriptions, etc. The labels and the main contents of the instruction manuals, of a dietary supplement
shall not involve any disease prevention or treatment function, and shall include the statement that “This product is not a substitute
for medication”.
Key
Differences between Regulations on Dietary Supplements and on traditional Chinese Medicine
According
to the Food Safety Law of PRC, the producers and business operators of dietary supplements shall obtain Food Production License. Pursuant
to the Administrative Measures for the Registration and Record-filing of Dietary Supplements, dietary supplements that use raw materials
other than those included in the catalogue of raw materials for dietary supplements shall be registered with CFDA. Furthermore, dietary
supplements whose raw materials used have been included in the catalogue of raw materials for dietary supplements shall be subject to
record-filing. Under the laws and regulations on nutraceutical and dietary supplements, we have obtained Food Production License in 2017
from Nanping Food and Drug Administration and the registration or record-filing of each nutraceutical and dietary supplements product
that we produced, and there is no need to apply for additional permits from Nanping Food and Drug Administration in order to manufacture
or sell our products.
According
to the Food Safety Law of PRC, the State encourages enterprises engaging in food production and operation to meet the requirements of
good manufacturing practice (“GMP”), and thus the GMP we obtained in 2005 does not need to be renewed.
According
to the Law of the PRC on traditional Chinese Medicine, the traditional Chinese medicine is the umbrella term for the medicine of all
ethnic groups in China; it is a medicine system with a long history and unique theoretical and technical methods. The State encourages
the exchanges, mutual enhancement and coordinated development of the traditional Chinese medicine and Western medicine. In China, nutraceutical
industry belongs to food manufacturing industry and is subject to laws and regulations pertaining to the food manufacturing industry,
while traditional Chinese medicine products are subject to various PRC laws and regulations pertaining to the pharmaceutical industry.
The
Law of the PRC on the Administration of Pharmaceuticals provides the basic legal framework for the administration of the production and
sale of pharmaceuticals in China and covers the manufacturing, distribution, packaging, pricing and advertising of pharmaceutical products.
A pharmaceutical manufacturer, including a traditional Chinese Medicine products manufacturer, must obtain a pharmaceutical manufacturing
permit from the CFDA’s relevant provincial branch. This permit is valid for five years and is renewable for an additional five-year
period upon its expiration.
In
addition, a pharmaceutical manufacturer, including a traditional Chinese Medicine products manufacturer, must meet the Good Manufacturing
Practice (“GMP”) standards for each of its production facilities in China for each form of pharmaceutical product it produces.
GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production
management, quality assurance and customer complaint administration. Furthermore, the staff qualifications set quality standards that
the manufacturer should have an adequate number of management and operation personnel with the necessary qualifications. Premises, facilities
and equipment must aim to minimize the risk of contamination, cross-contamination and permit effective cleaning operation and maintenance.
As a part of quality management system, quality assurance system should be established by manufacturers, and integrated document system
is required to ensure system effective operation. A reporting and supervising management system for drug adverse reactions are required
by customer complaint administration and a person should be designated responsible for handling the complaints and deciding the measures
to be taken; all complaint, investigation information shall be informed to a qualified person. If a manufacturer meets the GMP standards,
the CFDA will issue to the manufacturer a GMP certificate with a five-year validity period. The New GMP Standards became effective on
March 1, 2011 and pharmaceutical manufacturers (except manufacturers of injectable, blood products or vaccines, which have a three-year
grace period) had a five-year grace period to upgrade existing facilities to comply with the new standards.
Manufacturers
and vendors of defective products in the PRC may incur liability for losses and injuries caused by such products. Under the General Principles
of the Civil Laws of the PRC, which became effective on January 1, 1987 and were amended on August 27, 2009, manufacturers or retailers
of defective products that cause property damage or physical injury to any person will be subject to civil liability.
In
1993, the General Principles of the PRC Civil Law were supplemented by the Product Quality Law of the PRC (as amended in 2000 and 2009)
and the Law of the PRC on the Protection of the Rights and Interests of Consumers (as amended in 2009), which were enacted to protect
the legitimate rights and interests of end-users and consumers and to strengthen the supervision and control of the quality of products.
If our products are defective and cause any personal injuries or damage to assets, our customers have the right to claim compensation
from us.
Regulations on E-commerce
On August 31, 2018, the Standing
Committee of the National People’s Congress (the “SCNPC”) promulgated the PRC E-Commerce Law, or the E-Commerce Law,
which became effective on January 1, 2019. The E-Commerce Law establishes the regulatory framework for the e-commerce sector in the PRC
for the first time by laying out certain requirements on e-commerce operators, including e-commerce platform operators like us. Pursuant
to the E-Commerce Law, e-commerce platform operators are required to (i) take necessary actions or report to relevant competent government
authorities when such operators notice any illegal production or services provided by merchants on the e-commerce platforms; (ii) verify
the identity of the business operators on the platforms; (iii) provide identity and tax related information of merchants to local branches
of State Administration of Market Regulation and tax bureaus; or (iv) record and preserve goods and service information and transaction
information on the e-commerce platform. The E-Commerce Law also specifically stipulates that e-commerce platform operators shall not impose
unreasonable restrictions or conditions on the transactions of their business operators on the platforms. According to the E-Commerce
Law, failures to comply with these requirements may subject the e-commerce platform operators to administrative penalties, fines and/or
suspension of business. In addition, for goods and services provided via e-commerce platforms and pertinent to the life and health of
consumers, e-commerce platform operators shall bear relevant responsibilities, which may give rise to civil or criminal liabilities if
the consumers suffered damages due to the e-commerce platform operators’ failure to duly verify the qualifications or the licenses
of the business operators on the platforms or to duly perform their safety protection obligations as required by the E-Commerce Law.
Moreover, the E-Commerce Law
imposes a requirement on operators of e-commerce platforms to assist in tax collection with respect to income generated by sellers from
transactions conducted on e-commerce platforms, including among others, submitting to the tax authority information on the identities
of sellers on e-commerce platforms and other information relating to tax payment. Failure to comply with the requirement may result in
operators of e-commerce platform being subject to fines and, in severe circumstances, suspension of business operations of e-commerce
platforms.
On January 26, 2014, the State
Administration for Industry and Commerce, which is the predecessor of the SAMR, promulgated the Administrative Measures for Online Trading,
or the Online Trading Measures, which became effective on March 15, 2014, to regulate all operating activities for product sales and services
provision via the internet (including mobile internet). It stipulates the obligations of online product operators and services providers
and certain special requirements applicable to third-party platform operators. On March 15, 2021, the SAMR promulgated the revised vision
of the Online Trading Measures, which took into effect on May 1, 2021. The revision makes further provisions with regard to emerging models
of online trading (such as online social networking and online live streaming), consumer rights protection, personal information protection,
etc. It also imposes new obligations on the e-commerce platform operators, such as verifying and registering the identity of trading parties
on the platform either that are required to registered with SAMR or that are exempted from such registration, regular reporting of prescribed
information of trading parties on the platform to the relevant branch of SAMR, establishing a system of inspection and monitoring of information
on the goods sold or services provided on the platform.
Regulations on Consumer Protection
On October 31, 1993, the Standing
Committee of the National People’s Congress, or SCNPC, promulgated the Law on the Protection of Rights and Interests of Consumers,
or the Consumer Protection Law, which was amended on August 27, 2009 and October 25, 2013. Pursuant to the Consumer Protection Law, the
business operators must ensure that the commodities they sell satisfy the safety requirements, provide consumers with authentic information,
and guarantee the quality, function, term of use of the commodities. Failure to comply with the Consumer Protection Law may subject business
operators to liabilities such as refund, returns, repairs, and payment of damages. If business operators infringe the legal rights and
interests of consumers, they may be subject to criminal liabilities. The amended Consumer Protection Law launched in October 2013 further
enhances consumer protection and intensifies the obligations imposed on online trading platform and business operators.
The Tort Liability Law, which
was promulgated by the SCNPC on December 26, 2009 and became effective on July 1, 2010, provides that if an online services provider is
aware that an online user is engaged in infringing activities, such as selling counterfeit products through its internet services, but
fails to take necessary measures, it shall be held jointly liable. If the online service provider receives any notice from the infringed
party on any infringing activities, the online service provider shall take necessary measures, including removing, blocking and unlinking
the infringing content, in a timely manner. Otherwise, it shall be held jointly liable with the relevant online user.
On May 31, 2010, the SAIC
(the predecessor of the State Administration of Market Regulation) adopted the Interim Administrative Measures for the Online Commodities
Trading and Relevant Services. According to these measures, enterprises or other operators which engage in online commodities trading
and other services that have been registered with SAIC or its local branches must make the information available to the public in their
business licenses, either through physical copies or electronic links. Operators that provide platform services for online trading shall
review the identities of companies or individuals that apply for provision of commodities and services through online trading platform,
conclude agreements with the aforesaid parties as well as establish relevant internal rules to provide necessary and reliable transaction
environment and transaction service, and maintain order of online trading.
On January 26, 2014, the SAIC
promulgated the Administrative Measure for the Online Trading, or the Online Trading Measures, which became effective as of March 15,
2014 and replaced the above measures. The online trading platform operators are obligated to examine the legal status of the third-party
merchants and make the information such third-party merchants available to the public through business licenses, either through displaying
the information specified in their business licenses or electronic links to their business licenses. The online trading platform operators
must distinguish between their own products and those of third-party merchants on the platform, as applicable. Subsequent to the Online
Trading Measures, the SAIC issued the Guidelines for the Performance of Social Responsibilities by Online Trading Platform Operators on
May 28, 2014 to regulate online product trading and the relevant services, guide online trading platform operators to actively perform
social responsibilities, protect the lawful rights and interests of consumers and business operators and promote the sustainable and healthy
development of online economy. These guidelines aim at enhancing the social responsibilities of online trading platforms.
On January 6, 2017, the SAIC
promulgated the Interim Measures for 7-day Unconditional Return of Online Purchased Goods, which was effective as of March 15, 2017. Under
such measures, customers are entitled to return goods without cause, subject to certain exceptions. For example, these measures shall
not apply to customized goods, newspapers or periodicals, perishable goods, audio-visual products, computer software and other digital
products, products downloaded from the internet or products whose packages have been opened by customers. Online trading platform operators
should guide and supervise the merchants who use the platform to perform the duties of “7-day Unconditional Return,” conduct
inspections, and provide technical support.
Regulations on Advertising
On October 27, 1994, the SCNPC
promulgated the Advertising Law, which was amended on April 24, 2015. Under the Advertising Law, advertisers refer to any legal persons,
economic organizations or individuals that, directly or through agents, design, produce and publish advertisements to promote products
or services. Advertisement operators refer to those legal persons, economic organizations or individuals consigned to provide advertisement
content design, production and agency services. Advertisement publishers refers to those legal persons or other economic organizations
that publish advertisements for the advertisers or for those advertisement operators which are consigned by the advertisers. An advertisement
should present distinct and clear descriptions of the product’s function, place of origin, quality, price, manufacturer, validity
period, warranties or the contents, forms, quality, price or promises of the services offered. False advertising that may mislead consumers
and compromise legal rights and interests of consumers shall subject the advertiser to civil liabilities. Where the advertising operator
or advertising publisher is unable to provide the real name, address or valid contact information of the advertiser, the consumers may
require the advertising operator or advertising publisher make compensation in advance. For false advertisements of goods or services
other than those stipulated in the preceding paragraph which caused harm to consumers, where the advertising operator, advertising publisher
and advertising spokesperson knew or should have known the falsity yet still provided design, production, agency or publishing services,
or provide recommendation or endorsement, they shall bear joint and several liability with the advertiser.
On July 4, 2016, the SAIC
promulgated the Interim Measures for the Administration of Internet Advertising, or the Internet Advertising Measures, which became effective
as of on September 1, 2016. The Internet Advertising Measures set forth further compliance requirements for online advertising business
in addition to those in the Advertising Law. Pursuant to the Internet Advertising Measures, Internet Advertising refers to the commercial
advertising for direct or indirect marketing goods or services in the form of text, image, audio, video, or others means through websites,
webpages, internet apps, or other internet media. Major additional compliance requirements are: (i) advertisements must be identifiable
and marked with the word “advertisement,” enabling consumers to distinguish them from non-advertisement content; (ii) publishing
advertisements on the Internet through a pop-up page or in other forms shall provide a prominently marked “CLOSE” button to
ensure “one-click closure”; (iii) sponsored search results must be clearly distinguished from organic search results; (iv)
it is forbidden to send advertisements or advertisement links by email without the recipient’s permission or induce Internet users
to click on an advertisement in a deceptive manner; and (v) internet information service providers that do not participate in the operation
of internet advertisements should stop publishing illegal advertisements if they know or should know that the advertisements are illegal.
Regulations on Automobile Sales
Pursuant to the Administrative
Measures on Automobile Sales promulgated by the Ministry of Commerce, or the MOFCOM on April 5, 2017, which became effective on July 1,
2017, automobile suppliers and dealers are required to file with relevant authorities through the information system for the national
automobile circulation operated by the competent commerce department within 90 days after the receipt of a business license. Where there
is any change to the information concerned, automobile suppliers and dealers must update such information within 30 days after such change.
Regulations on the Recall of Defective Automobiles
On October 22, 2012, the State
Council promulgated the Administrative Provisions on Defective Automotive Product Recalls, which became effective on January 1, 2013.
The product quality supervision department of the State Council is responsible for the supervision and administration of recalls of defective
automotive products nationwide. Pursuant to the administrative provisions, manufacturers of automobile products are required to take measures
to eliminate defects in products they sell. A manufacturer must recall all defective automobile products. Failure to recall such products
may result in an order to recall the defective products from the quality supervisory authority of the State Council. If any operator conducting
sales, leasing, or repair of vehicles discovers any defect in automobile products, it must cease to sell, lease or use the defective products
and must assist manufacturers in the recall of those products. Manufacturers must recall their products through publicly available channels
and publicly announce the defects. Manufacturers must take measures to eliminate or cure defects, including rectification, identification,
modification, replacement or return of the products. Manufacturers that attempt to conceal defects or do not recall defective automobile
products in accordance with relevant regulations will be subject to penalties, including fines, forfeiture of any income earned in violation
of law and revocation of licenses.
Pursuant to the Implementation
Rules on the Administrative Provisions on Defective Automotive Product Recalls which was promulgated by the QSIQ on November 27, 2015
and became effective on January 1, 2016, if a manufacturer is aware of any potential defect in its automobiles, it must investigate in
a timely manner and report the results of such investigation to the QSIQ. Where any defect is found during the investigations, the manufacturer
must cease to manufacture, sell, or import the relevant automobile products and recall such products in accordance with applicable laws
and regulations.
Policies Relating to Incentives for Electric
Vehicle Charging Infrastructure
On January 11, 2016, the MOF, the MOST, the MIIT,
the NDRC and the National Energy Administration, or the NEA, jointly promulgated the Circular on Incentive Policies on the Charging Infrastructures
of New Energy Vehicles and Strengthening the Promotion and Application of New Energy Vehicles during the 13th Five-year Plan Period, which
became effective on January 1, 2016. Pursuant to such circular, the central finance department is expected to provide certain local governments
with funds and subsidies for the construction and operation of charging facilities and other relevant charging infrastructure.
On November 29, 2016, the State Council promulgated
Notice on the National Strategic Emerging Industry Plan during the 13th Five-year Plan. The State Council further encouraged the application
of new energy and new energy vehicles, and intended to develop and construct these industries as pillar industries of the nation. Pursuant
to the Notice, municipal governments include Anhui, Henan, and Sichuan Province, released development plans to promote the development
of new energy vehicle industry. These measures range from constructing charging infrastructures to encouraging expansion of new energy
sales market and sales of new energy vehicles.
Certain local governments have also implemented
incentive policies for the construction and operation of charging infrastructure. For example, pursuant to the Supporting Measures on
Encouraging the Development of Charging Infrastructures of the Electric Vehicles in Shanghai, builders of certain non-self-use charging
infrastructure may be eligible for subsidies for up to 30% of its investment cost, and the operator of certain non-self-use charging infrastructure
may be eligible for subsidies calculated based on electricity output.
All the above incentives are expected to facilitate
acceleration of development of public charging infrastructure, which will consequently offer more accessible and convenient EV charging
solutions to purchasers of electric vehicles.
Regulation
on Foreign Exchange Control
Foreign
exchange in China is primarily regulated by:
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The Foreign Currency Administration
Regulations (1996), as amended on January 14, 1997 and August 5, 2008; and
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The Administration Rules
of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
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Under
the Foreign Currency Administration Regulations, the Renminbi is convertible for current account items, including the distribution of
dividends, interest payments and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency
for capital account items, such as, loans, investment in securities and repatriation of investments, however, remains subject to the
registration of the SAFE or its local counterparts as required by law. Under the Administration Rules, foreign-invested enterprises may
buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions for settlement of current account
transactions after providing valid commercial documents and, in the case of capital account item transactions, only after registration
with the SAFE and, as the case may be, other relevant PRC government authorities as required by law. Capital investments directed outside
of China by foreign-invested enterprises are also subject to restrictions, which include registration filing with MOFCOM. If the investment
is made to the sensitive countries, districts, or industries, it needs to be approved by MOFCOM.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s
political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates
set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi
to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain
foreign currencies. We receive a significant portion of our revenue in Renminbi, which is not a freely convertible currency. Under our
current structure, our income will be primarily derived from dividend payments from our subsidiaries in China. Even though we may remit
the income from China to anywhere we want, the fluctuation of exchange rate may be a disadvantage to us if Renminbi depreciated.
Regulation
on Foreign Exchange Registration of Offshore Investment by PRC Residents
The
Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, promulgated by SAFE on July 14, 2014 and designed to replace the former circular commonly
known as “Notice 75”, requires registration of PRC residents with local branches of SAFE with respect to their direct establishment
or indirect control of an offshore entity (referred to in Notice 37 as “special purpose vehicle.”), where such offshore entity
are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally owned assets
or equity into such entity.
Notice
37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle capitalization
or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off).
Regulation
on Dividend Distributions
Our
PRC subsidiary, Happiness Nanping is a wholly foreign-owned enterprise under the PRC law. The principal regulations governing the distribution
of dividends paid by wholly foreign-owned enterprises include:
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Corporate Law (1993) as
amended in 2005 and 2013;
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The Wholly Foreign-Owned
Enterprise Law (1986), as amended in 2000;
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The Wholly Foreign-Owned
Enterprise Law Implementation Regulations (1990), as amended in 2001; and
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The Enterprise Income Tax
Law (2007) and its Implementation Regulations (2007).
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Under
these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, as determined
in accordance with PRC accounting standards and regulations. In addition, an enterprise in China is required to set aside at least 10%
of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds
reaches 50% of its registered capital. Our Company’s reserve fund has not yet reached this level. The board of directors of a wholly
foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its employee welfare and bonus funds. These
reserve funds, however, may not be distributed as cash dividends.
On
March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State
Council issued the Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008.
Under this law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor
who is a non-resident enterprise will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with the PRC that provides for a lower withholding tax rate.
M&A
Rules and Regulation on Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, MOFCOM, the State Assets Supervision and Administration Commission, the State Administration
for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly adopted the Regulation on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006. The M&A Rules
purport, among other things, to require that offshore SPVs that are controlled by PRC companies or individuals and that have been formed
for overseas listing purposes through acquisitions of PRC domestic interests held by such PRC companies or individuals, obtain the approval
of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published
a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their
overseas listings.
While
the application of the M&A Rules remains unclear, our PRC counsel, Tian Yuan Law Firm, have advised us that, based on their understanding
of the current PRC laws and regulations as well as the notice announced on September 21, 2006:
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the
CSRC currently has not issued any definitive rule or interpretation concerning whether offerings such as our offering are subject
to the CSRC approval procedures under the M&A Rules; and
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despite
the lack of any definitive rule or interpretation from CSRC, the main purpose of the M&A rule is for national security and national
industrial policy and so far none of the Chinese companies that have completed their public listing in the U.S. have obtained such
approval; and
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Our
business operations in China do not belong to a prohibited industry by foreign investment; and
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Our
M&A to our Chinese subsidiary companies have all obtained properly the approval from local governmental authorizations; and
|
|
●
|
Our
PRC WOFE was established as a foreign-invested enterprise by means of direct investment at the time of their respective incorporation
and not through a “merger with or acquisition of the equity or assets of any PRC domestic enterprise” as such term is
defined under the M&A Rules.
|
Our
PRC counsel also advises us, however, that there is still uncertainty as to how the M&A Rules will be interpreted and implemented.
Restriction
on Foreign Ownership
The
principal regulation governing foreign ownership of businesses in the PRC is Foreign Investment Industries Guidance Catalog (2017), which
was amended by the NDRC and the MOFCOM and became effective on July 28, 2017 (the “Catalogue”). The Catalogue classifies
the various industries into three categories: encouraged, restricted and prohibited. Our company’s primary products, nutraceutical
products, are encouraged industries for foreign investors.
Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An
offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment.
Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China,
which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual
Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on
the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change
of Registered Capital of Foreign-Invested Enterprises.
Under
the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval
by or registration with the original approval authority of its establishment. In addition, the increase of registered capital and total
investment amount shall both be registered with SAIC.
Shareholder
loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes,
which debts are subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim
Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation
rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under
these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with
SAFE. Furthermore, the total amount of foreign debts that can be incurred by such PRC subsidiaries, including any shareholder loans,
shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of
which are subject to governmental approval.
Regulations
on Trademarks
Trademarks
are protected by the PRC Trademark Law adopted in 1982, as subsequently amended, as well as the Implementation Regulations of the PRC
Trademark Law adopted by the State Council in 2002 and 2013. The Trademark Office under the SAIC handles trademark registrations. Trademarks
can be registered for a term of ten years and can be extended for another ten years if requested upon expiration of the first or any
renewed ten-year term. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration.
Where a trademark for which a registration application has been made is identical or similar to another trademark which has already been
registered or been subject to a preliminary examination and approval for use on the same type of or similar commodities or services,
the application for such trademark registration may be rejected. Any person applying for the registration of a trademark may not prejudice
the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another
party and has already gained a “sufficient degree of reputation” through such other party’s use. Trademark license
agreements must be filed with the Trademark Office or its regional offices. Meanwhile, we have successfully obtained 38 trademarks.
Regulations
on Patents
The
PRC Patent Law provides for patentable inventions, utility models and designs, which must meet three conditions: novelty, inventiveness
and practical applicability. The State Intellectual Property Office is responsible for examining and approving patent applications. A
patent is valid for a term of twenty years in the case of an invention patent and a term of ten years in the case of utility models and
designs. We have obtained 18 patents, all of which we have ownership of, including a number of those that were originally under
the ownership of certain individuals affiliated with our Company through ownership transfer.
PRC
Enterprise Income Tax Law and Individual Income Tax Law
Under
the Enterprise Income Tax Law or EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident
enterprises typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its “de
facto management bodies” located within the PRC is considered a “resident enterprise,” meaning that it can be treated
in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementation rules of the EIT Law define “de
facto management body” as a managing body that in practice exercises “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the enterprise.
The
SAT Circular 82 issued by the SAT in April 2009 provides certain specific criteria for determining whether the “de facto management
body” of a PRC-controlled offshore incorporated enterprise is located in China. Pursuant to the SAT Circular 82, a PRC-controlled
offshore incorporated enterprise has its “de facto management body” in China only if all of the following conditions are
met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly
in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the
PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings
are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights
habitually reside in the PRC. The SAT Bulletin 45, in effect from September 2011, provides more guidance on the implementation of
the SAT Circular 82 and provides for procedures and administration details on determining resident status and administration on
post-determination matters. Although the SAT Circular 82 and the SAT Bulletin 45 only apply to offshore enterprises controlled
by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals, the determining criteria
set forth there may reflect the SAT’s general position on how the “de facto management body” test should be applied
in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise
groups or by PRC or foreign individuals.
Due
to the lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment
of a foreign company controlled by individuals. We may be classified as a PRC “resident enterprise” for PRC enterprise income
tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material
adverse effect on our results of operations and the value of your investment.
Employment
Laws
In
accordance with the PRC National Labor Law, which became effective in January 1995, and the PRC Labor Contract Law, which became effective
in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees in order to
establish an employment relationship. All employers must compensate their employees equal to at least the local minimum wage standards.
All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide
employees with appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social
insurance plan and the housing fund plan for employees. We have contributed to the basic and minimum social insurance plan. While we
believe we have made adequate provision of such outstanding amounts of contributions to such plans in our financial statements, any failure
to make sufficient payments to such plans would be in violation of applicable PRC laws and regulations and, if we are found to be in
violation of such laws and regulations, we could be required to make up the contributions for such plans as well as to pay late fees
and fines.
Taxation
Income
Tax
The
New Income Tax Law was promulgated by NPC on March 16, 2007 and came into effect on January 1, 2008. The Chinese domestic enterprises
and FIEs are treated equally on the income tax rate, and the enterprise income tax rate shall be 25%. Enterprise Income Tax law grants
preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs
are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for HNTE status every three years. In accordance
with the New Income Tax Law and its implementing regulations, the non-resident enterprise which has not set up institutions or establishments
in China, or has set up institutions or establishments but the income has no relationship with such institutions or establishments, it
shall pay enterprise income tax on such income sourced from China, and the income tax rate shall be 20%, subject to reduction as provided
by any applicable double taxation treaty, unless the relevant income is specially exempted from tax under the applicable tax laws, regulations,
notices and decisions which relate to FIEs and their investors.
The
enterprises that were approved and established prior to the promulgation hereof and that, in accordance with the effective tax laws and
administrative regulations, enjoy a special lower tax rate shall, in accordance with the provisions of the State Council, progressively
transit to the tax rate specified herein within 5 years following the implementation hereof. Those enterprises that enjoy a fixed-term
tax exemption or tax reduction shall, in accordance with the provisions of the State Council, continue to enjoy such exemption or reduction
after the implementation hereof until the expiration of the term of such exemption or reduction. However, if an enterprise did not enjoy
such preferential treatment because it has not yet achieved profitability, the term of such preferential treatment shall be calculated
from January 1, 2008 until the expiration of the term of such exemption or reduction.
According
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprise (Circular Guoshuihan
[2009] No. 698) implemented on January 1, 2008, except for the purchase and sale of equity through a public securities market, where
a foreign corporate investor indirectly transfers the equity of a PRC resident enterprise by disposing the equity of an overseas holding
company (the “Indirect Transfer”) located in a tax jurisdiction that (i) has an effective tax rate of less than 12.5%, or
(ii) does not tax its residents on their foreign income, the foreign corporate investor shall report the Indirect Transfer to the competent
PRC tax authority within 30 days from the date when the equity transfer agreement was made. In this case, the PRC tax authority will
examine the true nature of the Indirect Transfer. Should it deem the foreign investor to have made the Indirect Transfer without reasonable
commercial purpose and in order to avoid the PRC tax, the PRC tax authority may disregard the existence of the overseas holding company
that is used for tax planning purpose and re-characterize the Indirect Transfer. As a result, gains derived from such Indirect Transfer
by the foreign investor may be subject to the EIT Law.
Value-Added
Tax
Pursuant
to the Provisional Regulations on Value-added Tax of PRC, last amended on November 5, 2008 and took effect from January 1, 2009, and
its implementation rules which were revised on December 15, 2008 and took effect from January 1, 2009, all entities or individuals in
PRC engaging in the sale of goods, the provision of processing services, repairs and replacement services, and the import of goods are
required to pay value-added tax (“VAT”). The amount of VAT payable in the sale or import of goods except as otherwise provided
by paragraph (2) and paragraph (3) of Article 2 of the Provisional Regulations on Value-added Tax of PRC. Before May 1, 2018, the
applicable VAT rate was 17%, while after May 1, 2018 and before April 1, 2019, the Company is subject to a VAT rate of 16%. After April
1, 2019, the Company is subject to a VAT rate of 13% based on the new Chinese tax law.
In
November 2011, the Ministry of Finance (“MOF”) and the State Administration of Tax (“SAT”) promulgated the Pilot
Plan for Imposition of Value-Added Tax to Replace Business Tax (the “Pilot Plan”). Since January 1, 2012, the PRC government
has been implementing a pilot program in certain provinces and municipalities, to levy a 6% VAT on revenue generated from certain kinds
of services in lieu of the 5% business tax. According to the Notice Regarding the Nationwide Implementation of B2V Transformation Pilot
Program in respect of Transportation and Certain Modern Service Industries jointly issued by the MOF and SAT effective from August 1,
2013 (the “B2V Circular 37”), such policy has been implemented nationwide. In addition, the MOF and SAT released the Notice
on Including Railway Transportation and Postal Services Sectors into the Pilot Scheme on Switching from Business Tax to VAT on December
12, 2013, which further expanded the scope of taxable services for value-added tax and replaced the B2V Circular 37 as of January 1,
2014.
Business
Tax
Pursuant
to the Interim Regulation of the People’s Republic of China on Business Tax (“Business Tax Regulation”) last amended
on November 10, 2008 and took effect from 1 January, 2009, business that provide services (including entertainment business), assign
intangible assets or sell immovable property became liable to business tax at a rate ranging from 3% to 20% of the charges of the services
provided, intangible assets assigned or immovable property sold, as the case may be.
Tax
on Dividends from PRC Enterprise with Foreign Investment
According
to the New Income Tax Law and the Implementation Rules, income such as dividends and profits distribution from the PRC derived from a
foreign enterprise which has no establishment in the PRC is subject to a 10% withholding tax, subject to reduction as provided by any
applicable double taxation treaty.
Stamp
Duty
Under
the PRC Interim Regulations on Stamp Duty promulgated by the State Council on August 6, 1988 and amended in January 6, 2011, for building
property transfer instruments, including those in respect of property ownership transfer, the duty rate shall be 0.03% of the amount
stated therein; for permits and certificates relating to rights, including real estate title certificates and land use right certificates,
stamp duty shall be levied on an item basis at an annual rate of RMB5 per item.
Urban
Maintenance Tax
Under
the PRC Interim Regulations on Urban Maintenance Tax promulgated by the State Council on February 8, 1985 and amended on January 8, 2011,
any taxpayer, whether an individual or otherwise, of product tax, value-added tax or business tax shall be required to pay urban maintenance
tax. The tax rate shall be 7% for a taxpayer whose domicile is in an urban area, 5% for a taxpayer whose domicile is in a county and
a town, and 1% for a taxpayer whose domicile is not in any urban area or county or town.
Wholly
Foreign-Owned Enterprise
WFOE
is governed by the Law of the People’s Republic of China Concerning Enterprises with Sole Foreign Investments, which was promulgated
on April 12, 1986 and was subsequently amended on October 31, 2000, and its Implementation Regulations promulgated on December 12, 1990
and was subsequently amended on April 12, 2001 (together the “Foreign Enterprises Law”).
Procedures
for Establishment of a WFOE
The
establishment of a WFOE will have to be approved by Ministry of Commerce (or its delegated authorities) (the “MOC”). If two
or more foreign investors jointly apply for the establishment of a WFOE, a copy of the contract between the parties must also be submitted
to MOC (or its delegated authorities) for its record. A WFOE must also obtain a business license from the State Administration of Industry
and Commerce (or its delegated authorities) before it can commence business.
Nature
A
WFOE is a limited liability company under the Foreign Enterprise Law. It is a legal entity which may independently assume civil obligations,
enjoy civil rights and has the right to own, use and dispose of property. It is required to have a registered capital contributed by
the foreign investor(s). The liability of the foreign investor(s) is limited to the amount of registered capital contributed. The foreign
investor may make its contributions by installments and the registered capital must be contributed within the period as approved by the
MOC (or its delegated authorities) in accordance with relevant regulations.
Profit
Distribution
The
Foreign Enterprise Law provides that after payment of taxes, a WFOE must make contributions to a reserve fund and at least 10% of the
after-tax profits must be allocated to the reserve fund. If the accumulative amount of allocated reserve funds reaches 50% of an enterprise’s
registered capital, the WFOE will not be required to make any additional contribution. The WFOE is prohibited from distributing dividends
unless the losses (if any) of previous years have been made up.
In
accordance with the Notice of the Ministry of Finance on the Issue of Handling Financial Issues by Relevant Enterprises after the Implementation
of the Company Law promulgated by the Ministry of Finance on March 15, 2006 and effective April 1, 2006, from January 1, 2006 on, enterprises
established in accordance with the Company Law shall distribute profits pursuant to Article 167 of the Company Law and shall no longer
make contributions to the reserve fund. After an enterprise ceases to make contributions to the reserve fund, it may continue to make
contributions to the employee bonus and welfare fund as decided by the board of directors if the purpose, use conditions, and procedures
thereof shall be made clear, and such funds shall be manage as debts.
Company
Law
The
establishment and operation of corporate entities in China is governed by the PRC Company Law, which was promulgated by the Standing
Committee of the NPC on December 29, 1993 and became effective on July 1, 1994 (“1993 PRC Company Law”). It was subsequently
amended on December 25, 1999, August 28, 2004, October 27, 2005 and December 28, 2013.
The
PRC Company Law generally governs 2 types of companies — limited liability companies and joint stock limited companies. Both types
of companies have the status of legal persons, and the liability of a company to its debtors is limited to the value of assets owned
by the company. Liabilities of shareholders of a limited liability company are limited to the amount of registered capital they have
contributed.
The
amendments to the PRC Company Law adopted in October 2005 seek to reform various aspects of the 1993 PRC Company Law and simplify the
establishment and operation of companies incorporated in China by lowering capitalization requirements, increasing shareholder and creditor
protection, improving corporate governance, and relaxing rules regarding the establishment of subsidiaries. Further, the restriction
relating to the total investment of a company in other entities exceeding 50% of its net assets has been removed, the incorporation of
one shareholder limited liability companies in addition to wholly State-owned enterprises is permitted, and the Chinese Company Law shall
apply to foreign invested limited liability companies. Where laws on foreign investment have other stipulations, such stipulations shall
apply.
The
amendments to the PRC Company Law adopted in December 2013 took effect on March 1, 2014. These amendments cover three aspects: (a) replacing
the paid-up capital registration system by subscribed capital registration system; (b) relaxing the requirements for registered capital
registration; and (c) streamlining the registration items and requirements for registration documents.
PRC
Laws and Regulations Relating to Foreign Investment
On
October 31, 2007, the National Development and Reform Commission (“NDRC”) and MOC, jointly promulgated the Catalogue of Industries
for Guiding Foreign Investment (as amended in 2007), which came into effect on December 1, 2007 (the “Catalogue”), as amended
on December 24, 2011 and came into effect on January 30, 2012. The Catalogue lists out the industries and economic activities which are
encouraged, restricted or prohibited by the PRC government for foreign investment. The Catalogue does not specify which business activities
are in the permitted category. Instead, if the business activities are not listed in any of the encouraged, restricted or the prohibited
categories, they shall be construed as being in the permitted category. Pursuant to the Catalogue, the wholesale of refined oil falls
under the restricted category. None of our Group’s business activities are listed in the prohibited category.
Labor
Law
Pursuant
to the Labor Law of the PRC promulgated by Standing Committee of the NPC on July 5, 1994 and was subsequently amended on August 27, 2009,
the Labor Contract Law of the PRC promulgated by Standing Committee of the NPC on June 29, 2007 and was subsequently amended on December
28, 2012 and the Labor Contract Law Implementation Rules of the PRC promulgated by the State Council on September 18, 2008, companies
must enter into employment contracts with their employees, based on the principles of equality, consent and agreement through consultation.
Companies must establish and effectively implement system of ensuring occupational safety and health, educating employees on occupational
safety and health, preventing work-related accidents and reducing occupational hazards. Companies must also pay for their employees’
social insurance premium.
Social
Insurance Law
Employers
in China are required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension
insurance, unemployment insurance, basic medical insurance, work-related injury insurance, maternity insurance, and housing provident
funds. These payments are made to local administrative authorities and an employer who fails to contribute may be fined and be ordered
to make-up for the missed contributions. The various laws and regulations that govern the employers’ obligation to contribute to
the social security funds include PRC Social Insurance Law promulgated by the Standing Committee of the NPC on October 28, 2010 and became
effective July 1, 2011; the Interim Regulations on the Collection and Payment of Social Security Funds, which were promulgated by the
State Council and became effective on January 22, 1999; the Interim Measures concerning the Maternity Insurance, which were promulgated
by the Ministry of Labor on December 14, 1994 and became effective on January 1, 1995; the Regulations on Occupational Injury Insurance,
which were promulgated by the State Council on April 27, 2003 and became effective on January 1, 2004 and was amended on December 20,
2010; the Regulations on Management of the Housing Provident Fund, which were promulgated and became effective on April 3, 1999 and was
amended on March 24, 2002.
Where
the enterprises fail to pay the full amount of the social insurance premiums, the relevant department aforesaid has the authority to
check and decide on the amount of social insurance premiums that the enterprises should pay as the supplementary payment. If the enterprises
does not pay for the social insurance premiums after the relevant department has charged the full amount of the supplementary payment,
the relevant department is authorized to either inquire about the deposit account of such enterprises, or apply to the related department
at or above the county level for making the decision of the allocation of social insurance premiums. The relevant department can also
inform the bank or other financial institution to execute the allocation by written notice. If the amount of the deposit account is smaller
than the amount of social insurance premiums required to pay by the enterprises, the enterprises may provide a security and delay the
date to pay the social insurance premiums. If the amount of the deposit account is smaller than the amount of the social insurance premiums
needed to pay by the enterprises, and the enterprises fails to provide a security, the relevant department shall apply to the court for
the levying, sealing and auctioning of the property of such enterprises.
If
the enterprises do not pay the full amount of social insurance premiums as scheduled, the social insurance premium collection institution
shall order them to make the payment or make up the difference within a stipulated period and impose a daily fine equivalent to 0.05%
of the overdue payment from the date on which the payment is overdue. If payment is not made within the stipulated period, the relevant
administration department shall impose a fine from one to three times the amount of overdue payment.
Corporate
Information
Our
principal executive offices are located at No. 11, Dongjiao East Road, Shuangxi, Shunchang, Nanping City, Fujian Province, People’s
Republic of China, where we owned the land use rights till 2056.
Our
telephone number at that address is + 86-0599-782-8808. Our company website is http://www.fjxfl.com.
C.
Organizational structure
The
chart below presents our corporate structure as of the date of this report.
D.
Property, Plants and Equipment
Information
regarding our property, plants and equipment is described “Item 4. B. Business Overview.”
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
required.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
information in this report contains forward-looking statements. All statements other than statements of historical fact made in this
report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial
position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,”
“estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,”
“expects,” “may,” “will,” or “should” or other variations or similar words. No assurances
can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect
management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s
expectations.
The
following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should
not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached
herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment
of our management.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information,
the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could
differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences
include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.” All amounts included herein
with respect to the fiscal years ended March 31, 2021, 2020 and 2019 are derived from our audited consolidated financial statements included
elsewhere in this prospectus. The audited consolidated financial statements for the fiscal years ended March 31, 2021, 2020 and 2019
have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or US GAAP.
Overview
Incorporated on February 9, 2018, under the laws of Cayman Islands,
Happiness Biotech currently has three business revenue streams: nutraceutical and dietary supplements, e-commerce and automobile
sales. Happiness conducts its nutraceutical and dietary supplements business in China primarily through its wholly-owned subsidiary, Fujian
Happiness. Founded in 2004, Fujian Happiness aims to make the world healthier and happier by developing and selling nutraceutical solutions
for consumers looking to enhance their daily health performance. We believe enhanced consumer awareness and demand for our products due
to trends such as the global awareness for health, increasing healthcare costs, increasing aging populations, and increasing needs of
nutraceutical, coupled with the effectiveness of our distribution model and authorized experience store model have been the primary reasons
for our success throughout our 16-year operating history.
We
are one of the leading companies in Fujian which specialize in research, development, manufacturing, and marketing of nutraceutical and
dietary supplements authorized by Nutraceutical Association of Fujian Province. Our products are mainly made of Lucidum spore powder,
Cordyceps mycelia, Ejiao, vitamins, minerals, amino acids and others. Headquartered in Fuzhou, the provincial capital of Fujian Province,
and Nanping, our products are sold throughout China.
Our
objective is to provide the high-quality products to our consumers. We seek to accomplish this goal through execution of significant
investments in quality control, scientific personnel, product testing, and self-manufacturing of our products. Our objective is rooted
in using quality ingredients from traceable sources coupled with the continuous control during the manufacturing process of our products.
We produce most of the products by ourselves without any outsource subcontracting.
Currently, we have mainly
two kinds of sales channels for our dietary supplements products, which are traditional distribution channel and experience stores channel.
Traditional distributors including regional distributors and large-scale chain drugstores, malls and supermarkets are our main sales
channels and their sales terminals are the core resources of our marketing network and the main way to achieve sales. For well-known
chain drugstores, malls and supermarkets customers, we tend to establish direct business partnership with them, rather than through our
regional distributors. Experience store model is our new attempt in 2017 to boost our market share and the key point of our development
strategy.
As of the date of this report, we have over 100 distributors and 17
experience stores in 18 different provinces in China for our nutraceutical and dietary supplements. Meanwhile, we have also built up our
online sales, which also becomes our important distribution channel. We categorize our products into four groups: Healthcare products,
e-commerce products, automobile and Internet information advertising services.
We
started our online store business in September 2020. Our online store platform “Happy Buy” focuses
on providing small and medium-sized enterprises with professional product sales and e-commerce agency operation services. The
online store sales have grown steadily as the live streaming e-commerce industry, a form of online shopping that has developed rapidly
in recent years, has been expanding its market scale in China.
We
began our Internet information advertising services to individuals or small companies who want to get more exposure to expand their market
in October 2020. We used our strength in this industry to provide them the more cost-effective information service.
In
November 2020, we engaged in selling automobiles. Our auto sales platform “Happy Auto”, was later upgraded to “Taochejun”.
Taochejun mainly focuses on building a network among car dealers in China. Currently, it operates an online platform of “Taochejun”
on WeChat, as a WeChat Mini Program (微信小程序), where we and the car dealers can post information of
available automobiles for sale. By utilizing our dealer network, the inventories and used cars from large 4S stores, the cars posted
on Taochejun have competitive selling prices and Taochejun is able to provide services including car hailing in connection with the automobile
sales. We plan to focus on the sales in small cities in China, and on the sales of new energy vehicles.
In
summary, we generated a revenue and net income of $71,484,703 and $691,956, respectively, for the year ended March 31, 2021, representing
an increase of 9.9% and decrease of 94.5% respectively, compared with the fiscal year ended March 31, 2020, during which we generated
$65,061,953 and $12,688,035, respectively. We generated a revenue and
net income of $65,061,953 and $12,688,035, respectively, for the year ended March 31, 2020, representing an increase of 1.8% and decrease
of 32.2% respectively, compared with the fiscal year ended March 31, 2019, during which we generated $63,936,185 and $18,721,979, respectively.
Critical
Accounting Policies
We
believe it is helpful to investors to understand the critical accounting policies underlying our financial statements and the following
discussion of our company’s financial condition and results of operations.
Use
of Estimates
In
preparing the consolidated financial statements in conformity with US GAAP, management makes 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 period. These estimates are based on information as of the date
of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the
valuation of accounts receivable, prepayments, and other receivables, useful lives of property and equipment and intangible assets, the
recoverability of long-lived assets and provision necessary for contingent liabilities. Actual results could differ from those estimates.
Accounts
Receivable, net
Accounts
receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The Company
determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The
Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect
amounts due. The allowance is based on management's best estimates of specific losses on individual exposures, as well as a provision
on historical trends of collections. Based on management of customers’ credit and ongoing relationship, management makes conclusions
whether any balances outstanding at the end of the period will be deemed uncollectible on an individual basis and on aging analysis basis.
The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the consolidated statements
of income and comprehensive income. Delinquent account balances are written-off against the allowance for doubtful accounts after management
has determined that the likelihood of collection is not probable.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost of inventories is determined using the weighted-average method. In addition
to cost of raw materials, work in progress and finished goods include direct labor costs and overheads. The Company periodically assesses
the recoverability of all inventories to determine whether adjustments are required to record inventories at the lower of cost or market
value. Inventories that the Company determines to be obsolete or in excess of forecasted usage are reduced to its estimated realizable
value based on assumptions about future demand and market conditions. If actual demand is lower than the forecasted demand, additional
inventory write-downs may be required.
No
inventories write-downs for the year ended March 31, 2021. The write-downs of inventories for the year ended March 31, 2020 were $117,753.
Value-added
Tax
Value-added
taxes (“VAT”) collected from customers relating to product sales and remitted to governmental authorities are presented on
a net basis. VAT collected from customers is excluded from revenue. The Company is generally subject to the value added tax (“VAT”)
for selling merchandise. Before May 1, 2018, the applicable VAT rate was 17%, while after May 1, 2018, the Company is subject to a VAT
rate of 16% based on the new Chinese tax law. After April 1, 2019, the Company is subject to a VAT rate of 13% based on the new Chinese
tax law
Revenue
Recognition
The
Company generates its revenue mainly from sales of nutraceutical and dietary supplements, automobile, online store selling and providing
Internet information and advertising service.
The
Company allows its customers to return products within some range. The range was limited to 3% of the customer’s yearly payment
amount for the year. The transportation fee is bear by the customers in the condition of products return. There was less than 1% products
return of online sales incurred for the year ended March 31, 2021 and no products return incurred for the years ended March 31 and 2020.
The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue Recognition. Sales revenue is recognized at the
date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably assured. The Company adopted the new guidance of ASC Topic
606, Revenue from Contracts with Customers (“Topic 606”), which supersedes the revenue recognition requirements in ASC Topic
605, Revenue Recognition on April 1, 2020. Topic 606 requires the Company to recognize revenue upon transfer of control of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services.
The
Company sells nutraceutical and dietary supplements to distributors and experience stores. For all sales, the Company requires a signed
contract and sales order, which specifies pricing, quantity and product specifications. Under ASC 606, the Company recognizes revenue
upon the satisfaction of its performance obligation, which is to transfer the control of the promised products to customers in an amount
that reflects the consideration to which the Company expects to be entitled to in exchange for those products, excluding amounts collected
on behalf of third parties (e.g. value-added taxes). The transfer of control of the products is satisfied at a point in time, which is
the delivery of the products to customers’ premises and evidenced by signed customer acknowledgment and the transfer of control
of the advertising is on the settlement date. The selling price, which is specified in the signed sales orders, is fixed. The Company
has unconditional right to receive full payment of the sales price, upon the delivery of the products to customers and the signing of
the customer acknowledgment. Customers are required to pay under the customary payment terms, which is generally less than six months.
Income
Taxes
The
Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized
when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial
statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those 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 income in the period including the enactment date. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
The
provisions of ASC 740-10, “Accounting for Uncertainty in Income Taxes”, prescribe a more-likely-than-not threshold for consolidated
financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation
also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets
and liabilities, accounting for interest and penalties associated with tax positions, and related disclosures. The Company does not believe
that there was any uncertain tax position at March 31, 2021, 2020 and 2019.
To
the extent applicable, the Company records interest and penalties as a general and administrative expense. All of the tax returns of
the Company and its subsidiaries remain subject to examination by PRC tax authorities for five years from the date of filing.
The
Company is subject to Chinese tax laws. We are not subject to U.S. tax laws and local state tax laws. Our income and our related entities
must be computed in accordance with Chinese and foreign tax laws, as applicable, and we are subject to Chinese tax laws, all of which
may be changed in a manner that could adversely affect the amount of distributions to shareholders. There can be no assurance that Income
Tax Laws of China will not be changed in a manner that adversely affects shareholders. In particular, any such change could increase
the amount of tax payable by us, reducing the amount available to pay dividends to the holders of our ordinary shares.
Foreign
Currency Translation
The
Company and its subsidiaries’ principal country of operations is the PRC. The financial position and results of its operations
are determined using RMB, the local currency, as the functional currency. The Company’s consolidated financial statements are reported
using U.S. Dollars. The consolidated statements of income and comprehensive income and cash flows denominated in foreign currency are
translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional
currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based
on the average rate of exchange, amounts related to assets and liabilities reported on the consolidated statements of cash flows will
not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising
from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive
income (loss) included in consolidated statements of changes in shareholders’ equity. Gains and losses from foreign currency transactions
are included in the consolidated statement of income and comprehensive income.
Results
of Operations
Comparison
of Fiscal Years Ended March 31, 2021, 2020 and 2019
The
following table presents an overview of our results of operations for the years ended March 31, 2021, 2020 and 2019:
(All
amounts, other than percentages, in thousands of U.S. dollars)
|
|
For
the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
71,484,703
|
|
|
$
|
65,061,953
|
|
|
$
|
63,936,185
|
|
Cost of revenues
|
|
|
(53,309,102
|
)
|
|
|
(34,642,649
|
)
|
|
|
(31,689,117
|
)
|
Gross
profit
|
|
|
18,175,601
|
|
|
|
30,419,304
|
|
|
|
32,247,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
9,958,886
|
|
|
|
9,179,160
|
|
|
|
6,291,228
|
|
General and administrative
|
|
|
5,030,899
|
|
|
|
3,482,459
|
|
|
|
1,951,259
|
|
Research
and development
|
|
|
1,660,100
|
|
|
|
2,358,968
|
|
|
|
2,161,708
|
|
Total
operating expenses
|
|
|
16,649,885
|
|
|
|
15,020,587
|
|
|
|
10,404,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,525,716
|
|
|
|
15,398,717
|
|
|
|
21,842,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
131,901
|
|
|
|
74,929
|
|
|
|
42,038
|
|
Interest expense
|
|
|
(111,799
|
)
|
|
|
(98,086
|
)
|
|
|
(83,549
|
)
|
Other
income
|
|
|
105,522
|
|
|
|
156,562
|
|
|
|
103,771
|
|
Total
other income
|
|
|
125,624
|
|
|
|
133,405
|
|
|
|
62,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,651,340
|
|
|
|
15,532,122
|
|
|
|
21,905,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(959,384
|
)
|
|
|
(2,844,087
|
)
|
|
|
(3,183,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
691,956
|
|
|
$
|
12,688,035
|
|
|
$
|
18,721,979
|
|
Year
Ended March 31, 2021 Compared to Year Ended March 31, 2020
Revenues
We generated $71,484,703
in revenues for the fiscal year ended March 31, 2021, representing an increase of $6,422,750 or 9.9%, as compared with $65,061,953 for
the fiscal year ended March 31, 2020. The increase was primarily due to the new goods or service provided including online sale, automobile
sale and advertising service in 2021.
Our sales from the healthcare
products had dropped down significantly from $65,061,953 in the fiscal year 2020 to $45,389,702 during the fiscal year 2021 due to the
adverse impact of COVID-19 starting from January 2020. As travelling is restricted in January to March 2020 in China, and continuous spreading
of COVID-19 in different provinces in China, the performance of our experience stores were greatly impaired. During the year ended March
31, 2021, we closed 10 experience stores due to their poor performance to avoid further losses. Meanwhile, we tried to enhance our online
sale model to increase our sales.
In September 2020, we started
our online store sales, the revenue of which for the fiscal year ended March 31, 2021 was $13,473,626. In addition to the online sales,
we also focus on providing e-commerce solutions and services for small and medium-sized enterprises in China. As Chinese young generations
are used to consume online rather than offline, the online store sales got successfully soon. We will continue to invest in this revenue
stream in the next few years.
In October 2020, we began
providing the internet information and advertising service to individuals or small companies whose businesses need exposure online. We
used our strength in the e-commerce industry to provide them the more cost-effective internet information and advertising service. For
the year ended March 31, 2021, the information service revenue reached $9,245,019.
In November 2020, we started
engaging in selling automobiles to companies or individual customers under the brand of “Taochejun”. The demand for automobile
is huge in China. Through Taochejun, we aim to build a network among car dealers in China, especially in the third- and fourth-tier
cities, and provide the purchasers with streamline services relating to the automobile sale. The unit price ranged from $8,000 to $512,066
for different brands of cars. In the fiscal year ended March 31, 2021, the revenue of selling automobile is $3,376,356. We are looking
forward to this market and will continue to invest in it.
Cost
of Revenues
Total
cost of revenues was $53,309,102 for the fiscal year ended March 31, 2021, representing an increase of $18,666,453 or 53.9%, compared
with $34,642,649 for the fiscal year ended March 31, 2020. The gross margin ratio of our company was 25.4% for the fiscal year ended
March 31, 2021, representing a decrease of 21.3%, compared with 46.8% for the fiscal year ended March 31, 2020. The decrease of gross
margin ratio was mainly due to the lower gross margin of our new revenue streams.
The
gross margin ratio of healthcare products was 37.9% for the fiscal year ended March 31, 2021, representing a decrease of 8.9%, compared
with 46.8% for the fiscal year ended March 31, 2020. The decrease was mainly due to lower margin of lucidum spore powder raw material
products. The gross margin ratio of other healthcare products was 42.6% for the fiscal year ended March 31, 2021.
The
gross margin ratio of online sell was 5.3% for the fiscal year ended March 31, 2021. This is a normal gross profit margin in this industry
as there is less operating expenses such as the rental expenses.
The gross margin ratio of
information service and selling of automobile was 2.6% and 1.1% for the fiscal year ended March 31, 2021. As we are newcomer in these
two industries and we were trying to grow our scale and retain a good customer base in a short period. Thus, our gross profit margin
is lower.
All
the above facts result in the significant drop in the gross profit margin ratio for the fiscal year ended March 31, 2021 compared to
the fiscal year ended March 31, 2020.
Selling
and Marketing Expenses
We
incurred $9,958,886 in selling and marketing expenses for the fiscal year ended March 31, 2021, representing an increase of $779,726
or 8.5%, compared with $9,179,160 for the fiscal year ended March 31, 2020. The increase was primarily due to increases in higher advertising
costs, and subsidy to our experience store operators.
General
and Administrative Expenses
We incurred $5,030,899 in general and administrative expenses for the
fiscal year ended March 31, 2021, representing an increase of $1,548,440 or 44.5%, compared with $3,482,459 for the fiscal year ended
March 31, 2020. The increase was primarily attributable to the shares granted to our employees from April 1, 2020 through March 31, 2021,
as well as the service charges by internet search engine of key words, brand promotion costs of the online sales.
Research
and Development Expenses
We
incurred $1,660,100 in research and development expenses for the fiscal year ended March 31, 2021, representing a decrease of $698,868
or 29.6%, compared with $2,358,968 for the fiscal year ended March 31, 2020. The decrease was primarily due to reduce of R&D lab
equipment expenses. Our research and development expenses may increase in the future, for more sophisticated products as a result of
more intensive consumer preference among all market participants.
Income
from Operations
As
a result of the factors described above, our operating income was $1,525,716 for the fiscal year ended March 31, 2021, compared with
operating income of $15,398,717 for the fiscal year ended March 31, 2020, representing a decrease of $13,873,001 or approximately 90.1%.
Interest
income
Our
interest income of $131,901 for the fiscal year ended March 31, 2021, compared with interest income of $74,929 for the fiscal year ended
March 31, 2020, which was primarily due to the average cash balance deposit in commercial bank.
Interest
expense
Our
interest expense of $111,799 for the fiscal year ended March 31, 2021, compared with interest expense of $98,086 for the fiscal year ended
March 31, 2020, which was mainly due to the increase of the interest rate.
Other
Income (Expenses)
Our
other income of $105,522 for the fiscal year ended March 31, 2021, compared with other income of $156,562 for the fiscal year ended March
31, 2020, which was primarily government grants of compensation for our research and development efforts.
Income
Tax
We
incurred income tax expense of $959,384 for the fiscal year ended March 31, 2021, representing a decrease of $1,884,703 or 66.3%, compared
with $2,844,087 for the fiscal year ended March 31, 2020. The decrease was primary attributable to less total income before corporate
income tax for fiscal year ended March 31, 2021. Our effective income tax rates for the years ended March 31, 2021 and 2020 are 22.4%
and 18.3%, respectively, mainly due to difference to include tax non-deductible cost for this reporting period.
Net
Income
As
a result of the factors described above, our net income for the fiscal year ended March 31, 2021 was $691,956, representing a decrease
of $11,996,079 or 94.5%, compared with net income of $12,688,035 for the fiscal year ended March 31, 2020 due to the lower operating
profit margin in the year ended March 31, 2021.
Foreign
Currency Translation
Our
consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. Results
of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the
unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting
from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive
income (loss). Our foreign currency translation income (loss) for the fiscal year ended March 31, 2021 and 2020 was $6,113,570 and $(3,356,032),
respectively. The fluctuation was primarily due to the appreciation or depreciation of RMB against the U.S. dollars for the
year ended March 31, 2021 and 2020.
Year
Ended March 31, 2020 Compared to Year Ended March 31, 2019
Revenues
We
generated $65,061,953 in revenues for the fiscal year ended March 31, 2020, representing an increase of $1,125,768 or 1.8%, as compared
with $63,936,185 for the fiscal year ended March 31, 2019. The increase was primarily due to the increase in sales of Lucidum spore powder
and related products, and other products, offset by the decrease in sales of Cordyceps mycelia products, Ejiao solution products, Vitamins
and dietary supplements products and American ginseng products.
Our
sales from the Lucidum spore powder products had grown significantly during fiscal year 2020 due to development of Lucidum enriched related
products plus Lucidum raw material products. Lucidum spore powder and related products are our best-selling products line and the key
emphases of our future development. Revenue from this category for the year ended March 31, 2020 increased $8,346,748 or 42.0% compared
with revenue for the year ended March 31, 2019 and accounted for 43.4% of our total revenue. Revenue from other products for year ended
March 31, 2020 increased by $1,495,880 or 2.1% compared with the revenue for the year ended March 31, 2019. The increase of revenue was
mainly from growth in sales of Spirulina Tablet and functional beverage products. Other products accounted for 17.8% of the total revenue
for the year ended March 31, 2020.
Our
sales from the Cordyceps mycelia products, Ejiao solution products and American ginseng products dropped slightly by 3.4%, 5.4%, and
3.9% respectively during fiscal year 2020 compared with the sales of the same period in 2019, mainly due to inadequate market growth
for these products. Revenue generated from the sales of Cordyceps mycelia products for the year ended March 31, 2020 decreased $2,028,581
or 3.4% from the revenue for the year ended March 31, 2019. Cordyceps mycelia products accounted for 13.6% of the total revenue for the
year ended March 31, 2020, and still was our third best-selling product line. Revenue generated from the sales of Ejiao solution products,
for the year ended March 31, 2020, decreased $3,317,163 or 5.4%, compared with the revenue for the year ended March 31, 2019, and accounted
for 9.6% of our total revenue. Vitamins and dietary supplements products sales accounted for 9.6% of the total revenue for the year ended
March 31, 2020, which decreased $2,380,777 or 3.9%, compared with the revenue for the year ended March 31, 2019. Revenue generated from
the sales of American ginseng products for the year ended March 31, 2020 decreased $990,340 or 1.7% from the revenue for the year ended
March 31, 2019, and accounted for 6.0% of our total revenue.
Cost
of Revenues
Total
cost of revenues was $34,642,649 for the fiscal year ended March 31, 2020, representing an increase of $2,953,532 or 9.3%, compared with
$31,689,117 for the fiscal year ended March 31, 2019. Total cost of revenue as a percentage of revenue increased by 3.6% to 53.2% for
the fiscal year ended March 31, 2020 compared with 49.6% for the fiscal year ended March 31, 2019. The gross margin ratio of our company
was 46.8% for the fiscal year ended March 31, 2020, representing a decrease of 3.6%, compared with 50.4% for the fiscal year ended March
31, 2019. The decrease of gross margin ratio was partly due to the lower gross margin of Lucidum spore powder raw material sales, and
partly due to impairment losses of cordyceps mycelia culture, both squeezed gross margin as a result.
The
gross margin ratio of Lucidum spore powder products was 51.9% for the fiscal year ended March 31, 2020, representing a decrease of 8.7%,
compared with 60.6% for the fiscal year ended March 31, 2019. The decrease was mainly due to lower margin of lucidum spore powder raw
material products, which is about 51.9%. In addition, the Lucidum spore powder enriched ‘Daily Care’ products have less margins
as those of Lucidum spore powder nutrition products. The gross margin ratio of other products was 35.8% for the fiscal year ended March
31, 2020, representing a decrease of 2.9%, compared with 38.7% for the fiscal year ended March 31, 2019. The slight decrease was mainly
due to a little higher raw material prices.
Selling
and Marketing Expenses
We
incurred $9,179,160 in selling and marketing expenses for the fiscal year ended March 31, 2020, representing an increase of $2,887,932
or 45.9%, compared with $6,291,228 for the fiscal year ended March 31, 2019. The increase was primarily due to increases in higher allowance
costs, advertising costs, and subsidy to our experience store operators supporting their continuity of insufficient business for the
prolonged COVID-19 period.
General
and Administrative Expenses
We
incurred $3,482,459 in general and administrative expenses for the fiscal year ended March 31, 2020, representing an increase of $1,531,200
or 78.5%, compared with $1,951,259 for the fiscal year ended March 31, 2019. The increase was primarily attributable to service charges
by internet search engine of key words, brand promotion costs for company online sales start up, and donation for the COVID-19 to local
society hospital.
Research
and Development Expenses
We
incurred $2,358,968 in research and development expenses for the fiscal year ended March 31, 2020, representing an increase of $197,260
or 9.1%, compared with $2,161,708 for the fiscal year ended March 31, 2019. The increase was primarily due to higher expense of R&D
materials and some new lab equipment. Our research and development expenses may increase continuously in the future, for more sophisticated
products as a result of more intensive consumer preference among all market participants.
Income
from Operations
As
a result of the factors described above, our operating income was $15,398,717 for the fiscal year ended March 31, 2020, compared with
operating income of $21,842,873 for the fiscal year ended March 31, 2019, representing a decrease of $6,444,155 or approximately 29.5%.
Other
Income (Expenses)
Our
interest income and expenses were $74,929 and $ 98,086, respectively, for the fiscal year ended March 31, 2020, compared with interest
income and expenses of $42,038 and $83,549, respectively, for the fiscal year ended March 31, 2019. We also had other income of $156,562
for the fiscal year ended March 31, 2020 compared with other income of $103,771 for the fiscal year ended March 31, 2019, which was primarily
government grants of compensation for our research and development efforts.
Income
Tax
We
incurred income tax expense of $2,844,087 for the fiscal year ended March 31, 2020, representing a decrease of $339,067 or 10.7%, compared
with $3,183,154 for the fiscal year ended March 31, 2019. The decrease was primary attributable to less total income before corporate
income tax for fiscal year ended March 31, 2020. Our effective income tax rates for the years ended March 31, 2020 and 2019 are 18.3%
and 14.5%, respectively, mainly due to time difference to include tax- deductible cost for this reporting period.
Net
Income
As
a result of the factors described above, our net income for the fiscal year ended March 31, 2020 was $12,688,035, representing a decrease
of $6,033,944 or 32.2%, compared with net income of $18,721,979 for the fiscal year ended March 31, 2019 as a result of lower operating
profit margin and lower revenue for the first quarter in 2020.
Foreign
Currency Translation
Our
foreign currency translation loss for the fiscal year ended March 31, 2020 was $3,356,032, representing an increase of $370,446, compared
with a foreign currency loss of $2,985,586 for the fiscal year ended March 31, 2019. The increase was primarily due to the
accelerated depreciation of RMB against the U.S. dollars for the year ended March 31, 2020.
Liquidity
and Capital Resources
The
following table presents an overview of cash flows for the periods indicated:
|
|
For the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Net cash provided by operating activities
|
|
$
|
2,904,466
|
|
|
$
|
10,777,843
|
|
|
$
|
6,544,879
|
|
Net cash used in investing activities
|
|
|
(13,222,847
|
)
|
|
|
(1,159,355
|
)
|
|
|
(277,158
|
)
|
Net cash provided by financing activities
|
|
|
10,672,219
|
|
|
|
10,404,718
|
|
|
|
271,105
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
2,550,149
|
|
|
|
(1,169,213
|
)
|
|
|
(622,883
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
2,903,987
|
|
|
$
|
18,853,993
|
|
|
$
|
5,915,943
|
|
As
of March 31, 2021, 2020 and 2019, we had cash and cash equivalents of $36,558,752, $33,654,765 and $14,800,772, respectively. We did
not have any other short-term investments. As of March 31, 2021, 2020 and 2019, our current assets were approximately $95.1 million,
$70.0 million and $54.8 million, respectively, and our current liabilities were approximately $15.1 million, $5.5 million and $4.7 million,
respectively. The Company has historically generated sufficient funds from its operating activities to finance its operations and there
has been little need for external financing.
Operating
Activities
Net cash provided by operating activities for the year ended March
31, 2021 was approximately $2.9 million, adjusted for non-cash items for approximately $1.7 million and adjustments for changes in working
capital approximately $0.6 million. Net cash generated from operating activities for the year ended March 31, 2020 was approximately $10.8
million, which was primarily attributable to a net profit approximately $12.7 million, adjusted for non-cash items for approximately $0.8
million and adjustments for changes in working capital approximately $2.7 million.
The decrease in the year ended March 31, 2021 was mainly due to the
business expansion for the automobile sales and e-commerce business, which caused the operating income decreased from $15.4 million to
$1.5 million.
Net
cash provided by operating activities for the year ended March 31, 2020 was approximately $10.8 million, which was primarily attributable
to a net profit approximately $12.7 million, adjusted for non-cash items for approximately $0.8 million and adjustments for changes in
working capital approximately $2.7 million. In additional, compared with the year ended March 31, 2019, net cash provided by operating
activities increased approximately $4.2 million, or approximately 64.7% for the year end March 31, 2020. The increase in net cash provided
by operating activities was primarily attributable to:
|
●
|
Accounts
receivable decreased by approximately $0.4 million for the year ended March 31, 2020, compared with an increase of approximately
$1.6 million for the year ended March 31, 2019.
|
|
|
|
|
●
|
Prepaid
expensed decreased approximately $1.5 million for the year ended March 31, 2020, compared with an approximately $6.0 million increase
for the year ended March 31, 2019, net of difference is approximately $7.5 million; The prepaid expense are mostly related to our
Lucidum spore powder raw material contracts.
|
And
offset by the following factors:
|
●
|
The decrease of net income
to approximately $12.7 million for the year ended March 31, 2020 as compared to net income of approximately $18.7 million for the
year ended March 31, 2019;
|
|
●
|
Other payables and accrued
liabilities decreased by approximately $0.5 million for the year ended March 31, 2020, compared with an decrease of $61,303 for the
year ended March 31, 2019;
|
|
●
|
Income
tax payable decreased by approximately $0.3 million for the year ended March 31, 2020, compared with an increase of $176,107 for
the year ended March 31, 2019. The lower taxable payable is mainly a result of the drop company revenue in the first quarter of 2020
than that of the same period in 2019;
|
|
|
|
|
●
|
Other
assets increased by approximately $4.4 million for the year ended March 31, 2020. As of March 31, 2020, other assets mainly consisted
of approximately $6.2 million allowance to all experience stores operators, in supporting for a more encouraging shopping surroundings
of experience stores. Usually the company has several agreements with all experience store operators to ensure all allowance are
for the use of advertising and marketing of company brand and products.
|
Investing
Activities
Net cash used in investing activities were $13,222,847, $1,159,355
and $277,158 for the year ended March 31, 2021, 2020 and 2019, respectively. For the year ended March 31, 2021, the increase was primarily
attributable to an increase of fixed assets of approximately $2.78 million, the purchase of software used for management of approximately
$1.05 million and deposits paid for business acquisitions for approximately $9.31 million. For the year ended March 31, 2020, the increase
was primarily attributable to an increase of fixed assets of approximately $1.15 million.
Financing
Activities
Net
cash provided by financing activities was approximately $0.3 million for the year ended March 31, 2019. It was primarily attributable
to capital contributions of $0.6 million from issuance of new ordinary shares, and the proceeds from short-term bank borrowings for an
amount of approximately $1.4 million, offset by the repayments to short-term bank borrowings for an amount of approximately $1.8 million.
Net
cash provided by financing activities was approximately $10.4 million for the year ended March 31, 2020. It was primarily attributable
to capital contributions of net proceeds $9.3 million from IPO issuance of new ordinary shares, In terms of bank loans, the proceeds
from short-term bank borrowings was approximately $3.1 million and the repayments to short-term bank borrowings was approximately $2.1
million.
Net
cash provided by financing activities was approximately $10.7 million for the year ended March 31, 2021. It was primarily attributable
to capital contributions of net proceeds $11.0 million from issuance of new ordinary shares. In terms of bank loans, the proceeds from
short-term bank borrowings was approximately $2.2 million and the repayments to short-term bank borrowings was approximately $2.1 million.
Dividend paid in 2021 was $0.4 million.
Capital
Expenditures
Our
capital expenditures consist primarily of expenditures for the construction of facilities, purchase of fixed assets and intangible assets
as a result of our business growth. Our capital expenditures amounted to $3,834,578, $1,159,355 and $283,100 for the years ended March
31, 2021, 2020 and 2019, respectively.
Contractual
Obligations
There
were no contractual obligations and commercial commitments as of March 31, 2021 and 2020.
Off-balance
Sheet Commitments and Arrangements
There
were no off-balance sheet arrangements for the fiscal years ended March 31, 2021, 2020 and 2019, or that in the opinion of management
are likely to have, a current or future material effect on our financial condition or results of operations.
Related
Party Transactions
In
addition to the executive officer compensation arrangements discussed in “Executive Compensation,” below we describe transactions
since April 1, 2016, to which we have been a participant, in which the amount involved in the transactions is material to us or
the related party.
From
time to time, we receive cash advances from the related parties. Due to related party had a balance of approximately $0.84 million at
March 31, 2020. The balance was owed by Happiness Biotech Group Limited for services incurred by the Company but paid by Mr. Xuezhu Wang
during 2020. No balance of due to related parties as of March 31, 2021.
Future
Related Party Transactions
We
will apply all rules about related party transactions as a listing company, and the Corporate Governance Committee of our Board of Directors
(consist solely of independent directors) must approve all related party transactions. All related party transactions will be made or
entered into on terms that are no less favorable to use than can be obtained from unaffiliated third parties. Related party transactions
that we have previously entered into were not approved by independent directors, as we had no independent directors at that time.
Holding
Company Structure
We
are a holding company with no material operations of our own. We conduct our operations through our subsidiaries in China. As a result,
our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by our subsidiaries. Under applicable PRC
regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance
with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least
10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such
reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested
enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed
to equity owners except in the event of liquidation. Under PRC law, RMB is currently convertible into U.S. Dollars under a company’s
“current account,” which includes dividends, trade and service-related foreign exchange transactions, without prior approval
of the State Administration of Foreign Exchange (SAFE), but is not from a company’s “capital account,” which includes
foreign direct investments and loans, without the prior approval of the SAFE.
As
of March 31, 2021, our PRC subsidiaries had an aggregate retained earnings of approximately RMB 440.5 million (US$65.5 million) under
PRC GAAP. With respect to retained earnings accrued after such date, our Board of Directors may declare dividends after taking into account
our operations, earnings, financial condition, cash requirements and availability and other factors as it may deem relevant at such time.
Any declaration and payment, as well as the amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S.
state and federal laws and regulations, including the approval from the shareholders of each subsidiary which intends to declare such
dividends, if applicable.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
Our
directors and executive officers are as follows:
Name
|
|
Age
|
|
|
Position
|
Xuezhu
Wang
|
|
|
37
|
|
|
Chief
Executive Officer, Chairman of the Board
|
Jiong
Bian
|
|
|
53
|
|
|
Chief
Financial Officer
|
Wenhui
Lin
|
|
|
58
|
|
|
Director
|
Wanhe
Zhang
|
|
|
46
|
|
|
Director
|
Rui
Qiang
|
|
|
58
|
|
|
Director
|
John
Levy
|
|
|
65
|
|
|
Director
|
Below
is a summary of the business experience of each of our executive officers and directors:
Xuezhu
Wang
Mr.
Xuezhu Wang has been our Chief Executive Officer since August 28, 2018, and Executive Director since February 9, 2018. He has been the
Chief Executive Officer of Fujian Happiness, our Chinese subsidiary since 2015. As the CEO of Fujian Happiness, he was responsible for
procurement and formulating a cost-effective strategy for purchasing goods and services. Mr. Xuezhu Wang studied the courses of
Executive MBA in Peking University in 2013 and obtained an MBA degree from University of Wales in 2015. Mr. Xuezhu Wang received his
college degree from Minjiang University in 2006.
Jiong
Bian
Mr.
Jiong Bian has been our Chief Financial Officer since August 26, 2018. From January 2013 to October 2017, Mr. Bian served as the Chief
Financial Officer of CWZ China Flowers AG, formerly known as XinRuiKe, responsible for managing the China Flowers’ finances, including
financial planning, management of financial risks, record-keeping and financial reporting. From 2008 to 2012, Mr. Bian was a vice president
for Viscardi AG. China Division where he was responsible for introducing Frankfurt stock exchange listing incentives and the company’s
scope of service to local companies, encouraging Chinese companies to have an IPO on the German equity market. From 2005 to 2007, Mr.
Bian served as the Chief Financial Officer for Jiangsu Huadu Tongyi Co. Limited. Mr. Bian obtained a bachelor degree in economics from
Shanghai University of Finance and Economics. He is also a CFA Charter holder in the U.S.
Wenhui
Lin
Mr.
Wenhui Lin was appointed as our director on November 13, 2020 and the Vice General Manager since 2007. Mr. Zhang served as the Deputy
director of workshop at Shunchang Fubao Industrial Co., Ltd from March 1991 to March 2007. As the Vice General Manager, his responsibilities
included supporting Mr. Xuezhu Wang to maintain a smooth process of purchase and production. Mr. Lin graduated from Jilin University
in pharmaceutical specialty.
Wanhe
Zhang
Mr.
Wanhe Zhang was appointed as our director upon closing of our initial public offering on October 25, 2019. He has served as the General
Manager of Fujian share my way Restaurant Development Co., Ltd. where he has been in charge of the overall operation of the company since
2010. Mr. Zhang also served as the Financial Manager at Quanzhou Wenbao Light Industry Co., Ltd. from October 1996 to June 2000. As the
Financial Manager, his responsibilities included establishing and maintaining Enterprise Cost Accounting and Control System, warehouse
management, and auditing daily cost. Mr. Zhang obtained a Master’s degree in Business Administration from PRIFYSGOL CYMRU University
of Wales and his bachelor degree in Investment Economics and Management from Jimei University Institute of Finance.
Rui Qiang
Mr. Rui Qiang was appointed
as our director upon closing of our initial public offering on October 25, 2019. Mr. Qiang co-founded Fujian Institute of Smart Products
Entrepreneurship Innovation and currently serves as its President, a position he has held since January 2016. From September 2002 to November
2016, Mr. Qiang served as the Associate Dean for Fuzhou University School of Economics and Management where he is in charge of MBA education
reform and promotion and establishing annual seminars. He also served as a quality control manager for Mindong Motor Group Co., Ltd. where
he was responsible for planning, compiling and supervising total quality management system from July 1985 to February 2017. Mr. Qiang
obtained his Ph.D of Management from Wuhan University of Technology. He also held a Master of Engineering from Tongji University and a
bachelor degree in engineering from Fuzhou University.
John F. Levy
John F. Levy will serve as our independent director starting immediately
upon the effectiveness of our registration statement of which this prospectus is a part. Mr. Levy currently serves as the chief executive
officer and principal consultant for Board Advisory (the “Levy Company”).
He has held this role since May 2005. Mr. Levy is a recognized corporate governance and financial reporting expert with over 30 years
of progressive financial, accounting and business experience; including nine years in public accounting with three national accounting
firms and having served as chief financial officer of both public and private companies for over 13 years. Mr. Levy currently serves on
the board of directors of three other public companies: Applied Minerals, Inc. (since January 2008), whose common stock is quoted on OTC;
Washington Prime Group, Inc. (since June 2016), which is a corporation listed on New York Stock Exchange (“NYSE”)
and which filed for protection under Chapter 11 of the United States Bankruptcy Code on June 13, 2021; and Happiness Biotech Group Ltd.
(since October 2019), which is a company listed on Nasdaq Capital Market. Mr. Levy is a Certified Public Accountant. Mr. Levy is a graduate
of the Wharton School of Business at the University of Pennsylvania, and received his MBA from St. Joseph's University in Philadelphia,
Pennsylvania.
Employment Agreements with Senior Management
On August 28, 2018, we entered
into an employment agreement with our CEO, Xuezhu Wang, effective on October 25, 2019. Pursuant to such agreement, he shall receive a
monthly base salary of approximately $2,200, paid in periodic installments in accordance with the Company’s regular payroll practices,
and such compensation is subject to annual review and adjustment by the Board. Mr. Wang is also eligible for bonus, benefits and reasonable
expenses reimbursement. Under this employment agreement, Mr. Wang is employed as our CEO for a term of five years, which automatically
renews for additional one year terms unless previously terminated on three months written notice by either party. We may terminate the
employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, such as conviction or plea
of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. In
such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination,
and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We may also terminate
an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are
required to provide compensation to the executive officer, including (1) a lump sum cash payment equal to 1 months of the Executive’s
base salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated amount of his target annual bonus for
the year immediately preceding the termination, if any; (3) payment of premiums for continued health benefits under the Company’s
health plans for 12 months fo1lowing the termination, if any; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding
equity awards held by Mr. Wang.
Employment Agreement with Jiong Bian
On August 26, 2018, we entered
into an employment agreement with our CFO, Mr. Jiong Bian, effective on October 25, 2019. Pursuant to such agreement, he shall receive
a monthly base salary of approximately $3,200, paid in periodic installments in accordance with the Company’s regular payroll practices,
and such compensation is subject to annual review and adjustment by the Board. Mr. Bian is also eligible for bonus, benefits and reasonable
expenses reimbursement. Under this employment agreement, Mr. Bian is employed as our CFO for a term of five years, which automatically
renews for additional one year terms unless previously terminated on three months written notice by either party. We may terminate the
employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, such as conviction or plea
of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. In
such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination,
and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We may also terminate
an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are
required to provide compensation to the executive officer, including (1) a lump sum cash payment equal to 1 months of the Executive’s
base salary as of the date of such termination; (2) a lump sum cash payment equal to a pro-rated amount of his target annual bonus for
the year immediately preceding the termination, if any; (3) payment of premiums for continued health benefits under the Company’s
health plans for 12 months fo1lowing the termination, if any; and (4) immediate vesting of 100% of the then-unvested portion of any outstanding
equity awards held by Mr. Bian.
Mr. Bian may terminate the
employment at any time with a one-month prior written notice to the Company, if (1) there is a material reduction in Mr. Bian’s
authority, duties and responsibilities, or (2) there is a material reduction in Mr. Bian’s annual salary. Upon the Executive’s
termination of the employment due to either of the above reasons, the Company shall provide compensation to the Mr. Bian equivalent to
one month of his base salary that he is entitled to immediately prior to such termination. In addition, Mr. Bian may resign prior to the
expiration of the agreement if such resignation is approved by the Board or an alternative arrangement with respect to the employment
is agreed to by the Board.
B. Compensation
Directors and Executive Compensation
The
following table represents compensation earned by our executive officers in the fiscal year ended March 31, 2021:
Name
and Principal Position
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Award
($)
|
|
|
Other
Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuezhu
Wang (CEO and Chairman)
|
|
|
25,857
|
|
|
|
1,709
|
|
|
|
306,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,566
|
|
Jiong Bian (CFO)
|
|
|
40,152
|
|
|
|
-
|
|
|
|
12,648
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,800
|
|
Wenhui Lin (Director)
|
|
|
17,495
|
|
|
|
1,348
|
|
|
|
31,267
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,110
|
|
Wanhe Zhang (Director)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rui Qiang (Director)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
John Levy (Director)
|
|
|
50,000
|
|
|
|
-
|
|
|
|
10,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,200
|
|
Grants of Plan Based Awards
From April 1, 2020 through
the date of this annual report, we have issued a total of 613,025 Ordinary Shares to employees, directors and consultants.
Pension Benefits
None of the named executives
currently participates in or has account balances in qualified or nonqualified defined benefit plans sponsored by us.
Nonqualified Deferred Compensation
None of the named executives
currently participates in or has account balances in nonqualified defined contribution plans or other deferred compensation plans maintained
by us.
Other than as disclosed above,
we have not entered into any agreements or arrangements with our executive officers or directors, and have not made any agreements to
provide benefits upon termination of employment.
C. Board Practices
Committees of the Board of Directors
We have established an audit
committee, a compensation committee and a nominating and governance committee. Each of the committees of the Board has the composition
and responsibilities described below.
Audit Committee
Wanhe Zhang, Rui Qiang and
John Levy are members of our Audit Committee, where John Levy, serves as the chairman. All members of our Audit Committee satisfy the
independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.
We have adopted and approved
a charter for the Audit Committee prior to consummation of our initial public offering. In accordance with our Audit Committee Charter,
our Audit Committee performs several functions, including:
|
●
|
evaluates the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;
|
|
●
|
approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to be provided by the independent auditor;
|
|
●
|
monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
|
|
●
|
reviews the financial statements to be included in our Annual Report on Form 20-F and Quarterly Reports on Form 6-K and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
|
|
●
|
oversees all aspects our systems of internal accounting control and corporate governance functions on behalf of the board;
|
|
●
|
reviews and approves in advance any proposed related-party transactions and report to the full Board on any approved transactions; and
|
|
●
|
provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley Act implementation, and makes recommendations to the Board regarding corporate governance issues and policy decisions.
|
It is determined that John
Levy, possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert”
as defined by the rules and regulations of the SEC.
Compensation Committee
We
have established the Compensation Committee in October, 2019. Wanhe Zhang, Rui Qiang, and John Levy are
members of our Compensation Committee and Rui Qiang is the chairman. All members of our Compensation Committee
are qualified as independent under the current definition promulgated by NASDAQ. We have adopted a charter for the Compensation Committee
prior to consummation of this offering. In accordance with the Compensation Committee’s Charter, the Compensation Committee is responsible
for overseeing and making recommendations to the Board regarding the salaries and other compensation of our executive officers and general
employees and providing assistance and recommendations with respect to our compensation policies and practices.
Nominating and Governance Committee
Wanhe Zhang, John Levy and
Rui Qiang are the members of our Nominating and Governance Committee where Wanhe Zhang serves as the chairman. All members of our Nominating
and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ. The Board of Directors adopted
and approved a charter for the Nominating and Governance Committee prior to consummation of this offering. In accordance with the Nominating
and Governance Committee’s Charter, the Nominating and Corporate Governance Committee is responsible to identify and propose new
potential director nominees to the Board of Directors for consideration and review our corporate governance policies.
Code of Conduct and Ethics
On October 24, 2019, we adopted
a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws
and NASDAQ rules.
Corporate Governance
Our board of directors has
adopted a code of business conduct and ethics, which is applicable to all of our directors, officers and employees. We will make our code
of business conduct and ethics publicly available on our website prior to the initial closing of this offering.
Insider Trading Policy
On October 24, 2019, our Board
of Directors adopted an insider trading policy that applies to our directors, officers and employees.
Director Independence
In conformity with Nasdaq’s
Corporate Governance Rules, the Company, as a foreign private issuer, has opted not to comply with Nasdaq’s independence requirements.
Accordingly, our Board of Directors has determined that three of our directors, Wanhe Zhang, Rui Qiang and John Levy qualify as independent
directors pursuant to the rules of the Nasdaq Marketplace.
D. Employees
As of March 31, 2021, we have
a total of 215 full-time employees, all of whom are located in the PRC. We do not experience any significant seasonal fluctuations in
our number of employees.
None of our employees are
represented by a union. We believe that our relationship with our employees has historically been good and this is expected to continue.
The functional distribution
of our full-time employees as of March 31, 2021 is as follows:
Function
|
|
Number
|
|
Management
|
|
|
13
|
|
Sales and marketing
|
|
|
28
|
|
Research and Development
|
|
|
24
|
|
Finance and administration
|
|
|
36
|
|
E-commerce operation and logistics
|
|
|
114
|
|
|
|
|
|
|
Total
|
|
|
215
|
|
E. Share Ownership
The following table sets forth
information regarding the beneficial ownership of our ordinary shares as of July 17, 2020:
|
●
|
each person known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares;
|
|
●
|
each of our executive officers and directors; and
|
|
●
|
all our executive officers and directors as a group.
|
The beneficial ownership of
ordinary shares is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises
sole or shared voting or investment power. For purposes of the table below, we deem shares subject to options, warrants or other exercisable
or convertible securities that are exercisable or convertible currently or within 60 days of July 17, 2020, to be outstanding and
to be beneficially owned by the person holding the options, warrants or other currently exercisable or convertible securities for the
purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the
percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named in the table have sole
voting and investment power with respect to their shares, except to the extent authority is shared by spouses under community property
laws.
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Amount of
|
|
|
Outstanding
|
|
|
|
Beneficial
|
|
|
Ordinary
|
|
Name and
Address of Beneficial Owner(1)
|
|
Ownership
|
|
|
Shares(2)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Xuezhu Wang, Chief Executive Officer,
Chairman of the Board
|
|
|
12,195,100
|
|
|
|
40.01
|
%(3)
|
Jiong Bian, Chief Financial
Officer
|
|
|
6,200
|
|
|
|
*
|
|
Wenhui Lin, Director
|
|
|
15,327
|
|
|
|
*
|
|
Wanhe Zhang, Director
|
|
|
345,000
|
|
|
|
1.13
|
%
|
Rui Qiang, Director
|
|
|
9,000
|
|
|
|
*
|
|
John Levy, Director
|
|
|
5,000
|
|
|
|
*
|
|
All directors and
executive officers as a group (six individuals)
|
|
|
12,575,627
|
|
|
|
41.26
|
%
|
*
|
Less
than 1%.
|
|
|
(1)
|
Unless
otherwise noted, the business address for each of our beneficial owners is c/o Happiness
Biotech Group Limited, NO. 11, Dongjiao East Road, Shuangxi, Shunchang Nanping City, Fujian,
China.
|
|
(2)
|
The percentage of shares beneficially
owned is based on 30,481,580 ordinary shares outstanding as of March 31, 2021.
|
|
(3)
|
Mr. Xuezhu Wang indirectly owns
39.52% of our issued and outstanding shares through
his holding in Happy Group Inc.
|
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to Item 6 “Directors,
Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
In addition to the executive
officer and director compensation arrangements discussed in “Directors and Executive Compensation,” below we describe transactions
since April 1, 2016, to which we have been a participant, in which the amount involved in the transactions is material to us or the related
party.
From time to time, we receive
cash advances from the related parties. The Company has repaid all related party balance during the year ended
March 31, 2021.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial
Information
Financial Statements
We have appended consolidated
financial statements filed as part of this report. See Item 18 “Financial Statements.”
Legal Proceedings
We are currently not a party
to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and
proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the
outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
Dividends
On July 31, 2020, the Board
of the Company declared a special cash dividend of $0.015 per Ordinary Shares. The dividend, equal to $375,000 in the aggregate, was fully
paid on August 17, 2020.
B. Significant Changes
Not applicable.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Our ordinary shares are currently
trading under the ticker symbol “HAPP.” The shares began trading on October 25, 2019 on the NASDAQ Capital Market.
B. Plan of Distribution
Not applicable.
C. Markets
Our ordinary shares are currently
traded on the NASDAQ Capital Market
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not Applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following description
of our memorandum and articles of association, as amended and restated from time to time, are summaries and do not purport to be complete.
Reference is made to our first amended memorandum and articles of association, effective on October 25, 2019 (respectively, the “Memorandum”
and the “Articles”). We were incorporated as an exempted company with limited liability under the Companies Law (2018 Revision)
of the Cayman Islands, (“Cayman Companies Law”), on February 9, 2018. A Cayman Islands exempted company:
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is a company that conducts its
business mainly outside the Cayman Islands;
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is prohibited from trading in
the Cayman Islands with any person, firm or corporation except in furtherance of the business of the exempted company carried on outside
the Cayman Islands (and for this purpose can effect and conclude contracts in the Cayman Islands and exercise in the Cayman Islands all
of its powers necessary for the carrying on of its business outside the Cayman Islands);
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does not have to hold an annual
general meeting;
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does not have to make its register
of members open to inspection by shareholders of that company;
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may obtain an undertaking against
the imposition of any future taxation;
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may register by way of continuation
in another jurisdiction and be deregistered in the Cayman Islands;
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may register as a limited duration
company; and
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may register as a segregated
portfolio company.
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All of our issued and outstanding
Ordinary Shares are fully paid and non-assessable. Our Ordinary Shares are issued in registered form, and are issued when registered in
our register of members. Unless and until the directors resolve to issue share certificates, no share certificate shall be issued, and
the records of the shareholdings of each shareholder shall be in uncertified book entry form. Our shareholders who are non-residents of
the Cayman Islands may freely hold and vote their Ordinary Shares. We may not issue shares or warrants to bearer.
As of the date of this report,
the authorized share capital of the Company is US $50,000 divided into 100,000,000 Ordinary Shares of US $0.0005 par value each. The Articles
provide that our authorized share capital is US$50,000 divided into 90,000,000 Ordinary Shares with a par value of US$0.0005 each and
10,000,000 Preferred Shares with a par value of US$0.0005 each. Subject to the provisions of the Cayman Companies Law and the provisions,
if any, of the Articles, and any directions given by any ordinary resolution and the rights attaching to any class of existing shares,
the directors may issue, allot, grant options over or otherwise dispose of shares (including any fractions of Shares) and other securities
of our company at such times, to such persons, for such consideration and on such terms as the directors may determine. Such authority
could be exercised by the directors to allot shares which carry rights and privileges that are preferential to the rights attaching to
Ordinary Shares provided that if such operates to vary the rights of holders of Ordinary Shares then the sanction of a special resolution
of the affected class is required. No share may be issued at a discount except in accordance with the provisions of the Cayman Companies
Law. The directors may refuse to accept any application for shares, and may accept any application in whole or in part, for any reason
or for no reason.
Ordinary Shares
General. The
unissued shares of the Company shall be at the disposal of the Board, under its absolute discretion, at such times and for such consideration
and upon such terms and conditions and for any reason, without limitation, but so that no shares shall be issued at a discount to par
value. Except as otherwise expressly provided in the resolution or resolutions providing for the establishment of any class or series
of preferred shares, no vote of the holders shall be a prerequisite to the issuance of any shares of any class or series of the preferred
shares authorized by and complying with the conditions of the Memorandum and Articles of Association. The board may issue options, warrants,
convertible securities or other similar nature securities.
Dividends. The
holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our
shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors.
Voting Rights. Subject
to any special rights or restrictions as to voting attached to any shares, every shareholder who is present in person and every person
representing a shareholder by proxy shall have one vote for each share of which he or the person represented by proxy is the holder. All
votes at meetings of members shall be by way of poll. In addition, all shareholders holding shares of a particular class are entitled
to vote at a meeting of the holders of that class of shares. Votes may be given either personally or by proxy.
Transfer of Ordinary Shares.
Subject to these Articles, any Member may transfer all or any of his shares by an instrument of transfer in the usual or common form or
in a form prescribed by the NASDAQ or in any other form approved by the Board and may be under hand or, if the transferor or transferee
is a clearing house or a central depository house or its nominee(s), by hand or by machine imprinted signature or by such other manner
of execution as the Board may approve from time to time. Our board of directors may, in its absolute discretion, and without assigning
any reason, refuse to register any transfer of any ordinary share which is not fully paid up or upon which our company has a lien. Our
directors may also decline to register any transfer of any ordinary share unless (a) a fee of such maximum sum as the NASDAQ may
determine to be payable or such lesser sum as the Board may from time to time require is paid to the Company in respect thereof; (b) the
instrument of transfer is in respect of only one class of shares; (c) the instrument of transfer is lodged at the Office or such other
place at which the Register is kept in accordance with the Law or the Registration Office (as the case may be) accompanied by the relevant
share certificate(s) and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer
(and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do); and (d) if
applicable, the instrument of transfer is duly and properly stamped.
If our directors refuse to
register a transfer they shall, within one months after the date on which the instrument of transfer was lodged, send to each of the transferor
and the transferee notice of such refusal. The registration of transfers may, on fourteen (14) days’ notice being given by
advertisement in an appointed newspaper or any other newspapers or by any other means in accordance with the requirements of the NASDAQ
to that effect, be suspended at such times and for such periods (not exceeding in the whole thirty (30) calendar days in any year) as
our directors may determine.
Winding-Up/Liquidation.
If we are wound up, the shareholders may, subject to the articles and any other sanction required by the Cayman Companies Law, pass a
special resolution voluntarily winding up the company. Upon being appointed, a liquidator may do either or both of the following with
the authority of a special resolution:
(a) divide in specie among
the shareholders the whole or any part of our assets and, for that purpose, to value any assets and to determine how the division shall
be carried out as between the shareholders or different classes of shareholders; and
(b) vest the whole or any
part of the assets in trustees for the benefit of shareholders as the liquidator thinks fit.
The directors have the authority
to present a petition for our winding up to the Grand Court of the Cayman Islands on our behalf without the sanction of a resolution passed
at a general meeting.
Calls on Ordinary Shares
and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid
on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares
that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption of Shares.
We may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such
manner as may be determined by our Board of Directors.
Inspection of Books and
Records. The accounting records shall be kept at the office or, at such other place or places as the board decides and shall always
be open to inspection by the directors. No member, non-director, shall have any right of inspecting any accounting record or book or document
of the company except as conferred by the law or authorized by the board or the members in general meeting.
Issuance of Additional
Shares. Our Memorandum and Articles authorize our Board of Directors to issue additional Ordinary Shares from time to time as our
Board of Directors shall determine, to the extent there are available authorized but unissued shares.
Our Memorandum and Articles
also authorizes our Board of Directors to establish from time to time one or more series of preferred shares and to determine, subject
to compliance with the variation of rights of shares provision in the Memorandum and Articles, with respect to any series of preferred
shares, the terms and rights of that series, including:
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the designation of the series;
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the number of shares of the
series;
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the dividend rights, dividend
rates, conversion rights, voting rights; and
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the rights and terms of redemption
and liquidation preferences.
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Our Board of Directors may,
issue preferred shares without action by our shareholders to the extent there are authorized but unissued shares available.
General Meetings of Shareholders
and Shareholder Proposals.
As a Cayman Islands exempted
company, we are not obligated by the Cayman Companies Law to call shareholders’ annual general meetings; however, our articles provide
that the Company shall hold a general meeting as an annual general meeting in each year other than the year in which the Articles are
adopted. Any annual general meeting held shall be held at such time and place as may be determined by our board of directors. All general
meetings other than annual general meetings shall be called extraordinary general meetings.
The directors may convene
general meetings whenever they think fit. Upon the written request of shareholders holding 20% or more of the issued share capital of
the Company carrying the right to vote in respect of the matter for which the meeting is requisitioned, any one or more of the directors
shall forthwith proceed to convene a meeting of shareholders. The written request of shareholders to requisition a meeting must state
the objects of the meeting and must be signed by the shareholders requisitioning the meeting. The written request must be lodged at the
principal place of business of the Company (with a copy to the registered office) and may be delivered in counterpart. If our board of
directors do not within 21 calendar days, proceed to convene a meeting of shareholders within a further 21 days, the requisitionists,
or any of them together holding at least half of the total voting rights of all of them may convene the general meeting but any meeting
so convened shall not be held after the expiration of three months after the expiration of the second 21 calendar days.
At least ten (10) clear days’
notice of a meeting shall be given to shareholders entitled to attend and vote at such meeting where such meeting is convened by the directors.
Subject to the Cayman Companies
Law, a general meeting may be convened on shorter notice, if
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In the case of an annual general
meeting, by all the Members entitled to attend and vote thereat; and
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(b)
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In the case of any other meeting,
by a majority in number of the Members having the right to attend and vote at the meeting, being a majority together holding not less
than ninety-five per cent (95%) in nominal value of the issued shares giving that right.
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The presence of one or more
shareholders entitled to vote, whether in person or represented by proxy or (if a corporation) by its duly appointed representative representing
not less than one-third in nominal value of the total issued voting shares in the Company throughout the meeting, shall constitute a quorum
at a general meeting.
If, within 30 minutes (or
such longer time not exceeding one hour as the chairman of the meeting may determine to wait) from the time appointed for the meeting
a quorum is not present, the meeting, shall stand adjourned to the same day in the next week at the same time and place or to such other
time and place as is determined by the directors and if at the adjourned meeting a quorum is not present within half an hour from the
time appointed for the meeting the meeting shall be dissolved.
The chairman may, with the
consent of a meeting at which a quorum is present, adjourn the meeting. When a meeting is adjourned for fourteen days or more, at least
seven (7) clear days’ notice of the adjourned meeting shall be given specifying the time and place of the adjourned meeting but
it shall not be necessary to specify in such notice the nature of the business to be transacted at the adjourned meeting.
At any general meeting a resolution
put to the vote of the meeting shall be decided by poll by the affirmative vote of the majority of issued shares held by persons present
in person or by proxy at the meeting entitled to vote and each shareholder shall be entitled to one vote in respect of each fully paid
share held. A declaration by the chairman that a resolution has been carried, or carried unanimously, or by a particular majority, or
not carried by a particular majority, or lost, and an entry to that effect made in the minute book of the Company, shall be conclusive
evidence of the facts without proof of the number or proportion of the votes recorded for or against the resolution.
In the case of an equality
of votes, on a poll, the chairman of the meeting at shall be entitled to a second or casting vote in addition to any other votes he may
have.
Register of Members
Under Cayman Islands law,
we must keep a register of members and there should be entered therein:
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the names and addresses of the members, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member;
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the date on which the name of any person was entered on the register as a member; and
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the date on which any person ceased to be a member.
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Under Cayman Islands law,
the register of members of our Company is prima facie evidence of the matters set out therein (i.e. the register of members will raise
a presumption of fact on the matters referred to above unless rebutted) and a member registered in the register of members is deemed as
a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members. Once our register
of members has been updated, the shareholders recorded in the register of members are deemed to have legal title to the shares set against
their name.
If the name of any person
is incorrectly entered in, or omitted from, our register of members, or if there is any default or unnecessary delay in entering on the
register the fact of any person having ceased to be a member of our Company, the person or member aggrieved (or any member of our Company
or our Company itself) may apply to the Cayman Islands Grand Court for an order that the register be rectified, and the Court may either
refuse such application or it may, if satisfied of the justice of the case, make an order for the rectification of the register.
Indemnification of Directors and Executive
Officers and Limitation of Liability
Cayman Islands law does not
limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Our Memorandum and Articles require us to indemnify our officers and directors
for actions, costs, charges, losses, damages, and expenses (“Indemnified Losses”) incurred in their capacities as such unless
such Indemnified Losses arise from dishonesty or fraud of such directors or officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling
us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Differences in Corporate Law
The Companies Law is derived,
to a large extent, from the older Companies Acts of England, but does not follow recent United Kingdom statutory enactments, and accordingly
there are significant differences between the Companies Law and the current Companies Act of England. In addition, the
Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary
of certain significant differences between the provisions of the Companies Law applicable to us and the comparable provisions of the laws
applicable to companies incorporated in the State of Delaware and their shareholders.
Mergers and Similar Arrangements. The
Companies Law permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman
Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and
the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a “consolidation”
means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and
liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors
of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (i) a special resolution
of the shareholders of each constituent company and (ii) such other authorization, if any, as may be specified in such constituent company’s
articles of association. The plan of merger or consolidation must be filed with the Registrar of Companies together with a
declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company
and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent
company and that notification of the merger will be published in the Cayman Islands Gazette. Dissenting shareholders have the
right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court)
if they follow the required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation
effected in compliance with these statutory procedures.
In addition, there are statutory
provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in
number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths
in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy
at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be
sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the
view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
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the statutory provisions as
to the required majority vote have been met;
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the shareholders have been fairly
represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests
adverse to those of the class;
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the arrangement is such that
may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
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the arrangement is not one that
would more properly be sanctioned under some other provision of the Companies Law.
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When a take-over offer is
made and accepted by holders of 90.0% of the shares affected (within four months after they marking the offer), the offeror may, within
a two-month period commencing on the expiration of such four months period, require the holders of the remaining shares to transfer such
shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to
succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction
is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be
available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined
value of the shares.
Shareholders’ Suits. In
principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule a derivative action
may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive
authority in the Cayman Islands, the Cayman Islands courts can be expected to apply and follow common law principles so that a non-controlling
shareholder may be permitted to commence a class action against the company or a derivative action in the name of the company to challenge
certain acts, including the following:
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an act which is ultra vires
the company or illegal and is therefore incapable of ratification by the shareholders;
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an act which, although not ultra
vires, could only be effected if duly authorized by a resolution with a qualified or special majority (i.e., more than a simple majority)
that has not been obtained; and
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an act which constitutes a “fraud
on the minority” where the wrongdoers are themselves in control of the company.
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Indemnification of Directors
and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s
memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision
may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the
consequences of committing a crime.
Our Memorandum and Articles
provide that our directors and officers shall be indemnified against all actions, proceedings, costs, charges, expenses, losses, damages
or liabilities incurred or sustained by such director or officer, other than by reason of such person’s own dishonesty, willful
default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment)
or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the
foregoing, any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise)
any civil proceedings concerning our company or its affairs in any court whether in the Cayman Islands or elsewhere. This standard
of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition,
we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with
additional indemnification beyond that provided in our Memorandum and Articles.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing
provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Directors’ Fiduciary
Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and
its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of
care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under
this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a
significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in
the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This
duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence
over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In
general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one
of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the
procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands
law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered
that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make
a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position
where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director
of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director
need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his
or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard
to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written
Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written
consent by amendment to its certificate of incorporation. As permitted by Cayman Islands law, our Memorandum and Articles provide
that the shareholders may not take any required or permitted action at any annual or extraordinary general meetings of the Company by
written resolution without a meeting.
Shareholder Proposals. Under
the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided
it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors
or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law provides
shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal
before a general meeting. However, these rights may be provided in a company’s articles of association.
Our Memorandum and Articles
provide that general meetings shall be convened on the written requisition of one or more of the shareholders entitled to attend and vote
at our general meetings who (together) hold not less than twenty percent (20%) of the issued share capital of the Company as at that date
carries the right of voting at general meetings of the Company, specifying the purpose of the meeting and signed by each of the shareholders
making the requisition. If the directors do not convene such meeting for a date not later than twenty-one clear days’ after the
date of receipt of the written requisition, those shareholders who requested the meeting may convene the general meeting themselves within
three months after the end of such period of twenty-one clear days in which case reasonable expenses incurred by them as a result of the
directors failing to convene a meeting shall be reimbursed by us. Our articles provide no other right to put any proposals before annual
general meetings or extraordinary general meetings. As a Cayman Islands exempted company, we are not obligated by law to call shareholders’
annual general meetings. However, our corporate governance guidelines require us to call such meetings every year. Cumulative Voting. Under
the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate
of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders
on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions
in relation to cumulative voting under Cayman Islands law, but Memorandum and Articles do not provide for cumulative voting. As
a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors.
Under the Delaware General
Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of
the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under Cayman Islands law the office
of director shall be vacated, if the director:
(a) resigns his office by
notice in writing to the company
(b) becomes bankrupt or has
a receiving order made against him or suspends payment or makes an arrangement or composition with his creditors generally;
(c) is found to be or becomes
of unsound mind;
(d) without special leave
of absence from the Board, is absent from meetings of the Board for six consecutive months and the Board resolves that his office be vacated;
or;
(e) is prohibited from the
law from being a Director; or
(f) ceases to be a Director
by virtue of any provision of any Statutes or is removed from office pursuant to these Articles.
Transactions with Interested
Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations
whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation,
it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following
the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who
or which owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the
effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be
treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an
interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person
becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms
of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no
comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination
statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders,
it does provide that such transactions must be entered into bona fide in the best interests of the company for a proper corporate purpose
and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding up. Under
the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware
corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated
by the board of directors. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman
Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution
of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in
the opinion of the court, just and equitable to do so.
Under the Companies Law of
the Cayman Islands, our company may be dissolved, liquidated or wound up voluntarily by a special resolution, or by an ordinary resolution
on the basis that we are unable to pay our debts as they fall due.
Variation of Rights of
Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval
of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our
Memorandum and Articles, and as permitted by Cayman Islands law, if our share capital is divided into more than one class of shares, we
may vary the rights attached to any class either with the written consent of the holders of two-thirds of the issued shares of that class
or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Amendment of Governing
Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the
approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under
Cayman Islands law, our memorandum and articles of association may only be amended by special resolution.
Inspection of Books and
Records. Under the Delaware General Corporation Law, any shareholder of a corporation may for any proper purpose inspect
or make copies of the corporation’s stock ledger, list of shareholders and other books and records.
Holders of our shares will
have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However,
we intend to provide our shareholders with annual reports containing audited financial statements.
Anti-takeover Provisions
in Our Memorandum and Articles of Association. Some provisions of our Memorandum and Articles may discourage, delay or
prevent a change of control of our company or management that shareholders may consider favorable, including a provision that authorizes
our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and
restrictions of such preference shares without any further vote or action by our shareholders.
Such shares could be issued
quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If
our board of directors decides to issue these preference shares, the price of our ordinary share may fall and the voting and other rights
of the holders of our ordinary shares may be materially and adversely affected.
However, under Cayman Islands
law, our directors may only exercise the rights and powers granted to them under our Memorandum and Articles association for a proper
purpose and for what they believe in good faith to be in the best interests of our company.
Rights of Non-resident
or Foreign Shareholders. There are no limitations imposed by our Memorandum and Articles on the rights of non-resident
or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our Memorandum
and Articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
C. Material Contracts
We have not entered into any
material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,”
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” or elsewhere in this annual
report on Form 20-F.
D. Exchange Controls
Cayman Islands
There are currently no exchange control regulations
in the Cayman Islands applicable to us or our shareholders.
The PRC
China regulates foreign currency exchanges primarily
through the following rules and regulations:
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Foreign Currency Administration
Rules of 1996, as amended; and
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Administrative Rules of the
Settlement, Sale and Payment of Foreign Exchange of 1996.
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Renminbi is not a freely convertible
currency at present. Under the current PRC regulations, conversion of Renminbi is permitted in China for routine current-account foreign
exchange transactions, including trade and service related foreign exchange transactions, payment of dividends and service of foreign
debts. Conversion of Renminbi for most capital-account items, such as direct investments, investments in PRC securities markets and repatriation
of investments, however, is still subject to the approval of SAFE.
Pursuant to the above-mentioned
administrative rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions at banks
in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of
valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment
in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China
are subject to limitations and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.
E. Taxation
The following summary of the
material Cayman Islands, PRC and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations
thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary is not intended
to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax considerations. This summary also
does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under
state, local, non-U.S., non-PRC, and non-Cayman Islands tax laws. Investors should consult their own tax advisors with respect to the
tax consequences of the acquisition, ownership and disposition of our ordinary shares.
Cayman Islands Taxation
The Cayman Islands currently
levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature
of inheritance tax or estate duty. There are no other taxes levied by the Government of the Cayman Islands that are likely to be material
to holders of ordinary shares or ordinary shares. The Cayman Islands is not party to any double tax treaties. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
Under the EIT Law, an enterprise
established outside the PRC with a “de facto management body” within the PRC is considered a PRC resident enterprise for PRC
enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income as well as
tax reporting obligations. Under the Implementation Rules, a “de facto management body” is defined as a body that has material
and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties
of an enterprise. In addition, SAT Circular 82 issued in April 2009 specifies that certain offshore-incorporated enterprises controlled
by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if all of the following conditions are met:
(a) senior management personnel and core management departments in charge of the daily operations of the enterprises have their presence
mainly in the PRC; (b) their financial and human resources decisions are subject to determination or approval by persons or bodies in
the PRC; (c) major assets, accounting books and company seals of the enterprises, and minutes and files of their board’s and
shareholders’ meetings are located or kept in the PRC; and (d) half or more of the enterprises’ directors or senior management
personnel with voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued SAT Bulletin 45, which took effect
in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 provides for procedures and
administration details of determination on PRC resident enterprise status and administration on post-determination matters. If the PRC
tax authorities determine that Happiness Biotech Group Limited is a PRC resident enterprise for PRC enterprise income tax purposes, a
number of unfavorable PRC tax consequences could follow. For example, Fujian Happiness may be subject to enterprise income tax at a rate
of 25% with respect to its worldwide taxable income. Also, a 10% withholding tax would be imposed on dividends we pay to our non-PRC enterprise
shareholders and with respect to gains derived by our non-PRC enterprise shareholders from transferring our shares or ordinary shares
and potentially a 20% of withholding tax would be imposed on dividends we pay to our non-PRC individual shareholders and with respect
to gains derived by our non-PRC individual shareholders from transferring our shares or ordinary shares.
It is unclear whether, if
we are considered a PRC resident enterprise, holders of our shares or ordinary shares would be able to claim the benefit of income tax
treaties or agreements entered into between China and other countries or areas. See “Risk Factors — Risk Factors Relating
to Doing Business in China — Under the PRC Enterprise Income Tax Law, we may be classified as a PRC resident enterprise for PRC
enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC Shareholders
and have a material adverse effect on our results of operations and the value of your investment”.
The SAT issued SAT Circular
59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. Both SAT Circular 59 and SAT Circular 698
became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have
enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-PRC resident enterprise.
Under SAT Circular 698, where a non-PRC resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by
disposition of the equity interests of an overseas holding company, and the overseas holding company is located in a tax jurisdiction
that: (1) has an effective tax rate of less than 12.5% or (2) does not impose tax on foreign income of its residents, the non-PRC resident
enterprise, being the transferor, must report to the relevant tax authority of the PRC resident enterprise this Indirect Transfer. Using
a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it
lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains
derived from such Indirect Transfer may be subject to PRC tax at a rate of up to 10%. Although it appears that SAT Circular 698 was not
intended to apply to share transfers of publicly traded companies, there is uncertainty as to the application of SAT Circular 698 and
we and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Circular 698 and we
may be required to expend valuable resources to comply with SAT Circular 698 or to establish that we should not be taxed under SAT Circular
698. See “Risk Factors — Risk Factors Relating to Doing Business in China — We face uncertainty regarding the PRC tax
reporting obligations and consequences for certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny
over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.”
Pursuant to the Arrangement
between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income,
or the Tax Arrangement, where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise directly holds at
least 25% of a PRC enterprise, the withholding tax rate in respect of the payment of dividends by such PRC enterprise to such Hong Kong
resident enterprise is reduced to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority. Pursuant to the
Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or
Circular 81, a resident enterprise of the counter-party to such Tax Arrangement should meet the following conditions, among others, in
order to enjoy the reduced withholding tax under the Tax Arrangement: (i) it must directly own the required percentage of equity interests
and voting rights in such PRC resident enterprise; and (ii) it should directly own such percentage in the PRC resident enterprise anytime
in the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments
under Tax Treaties (For Trial Implementation), or the Administrative Measures, which became effective in October 2009, requires that the
non-resident enterprises must obtain the approval from the relevant tax authority in order to enjoy the reduced withholding tax rate under
the tax treaties. There are also other conditions for enjoying such reduced withholding tax rate according to other relevant tax rules
and regulations. According to Circular 81, if the relevant tax authorities consider the transactions or arrangements we have are for the
primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
United States Federal Income Taxation
The following is a discussion
of United States federal income tax considerations relating to the acquisition, ownership, and disposition of our ordinary shares by a
U.S. Holder, as defined below, that acquires our ordinary shares and holds our ordinary shares as “capital assets” (generally,
property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”). This discussion
is based upon existing United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive
effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect to any United States federal
income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position. This
discussion does not address all aspects of United States federal income taxation that may be important to particular investors in light
of their individual circumstances, including investors subject to special tax rules (such as, for example, certain financial institutions,
insurance companies, regulated investment companies, real estate investment trusts, broker-dealers, traders in securities that elect mark-to-market
treatment, partnerships and their partners, tax-exempt organizations (including private foundations)), investors who are not U.S. Holders,
investors that own (directly, indirectly, or constructively) 10% or more of our voting stock, investors that hold their ordinary shares
as part of a straddle, hedge, conversion, constructive sale or other integrated transaction), or investors that have a functional currency
other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. In addition,
this discussion does not address any tax laws other than the United States federal income tax laws, including any state, local, alternative
minimum tax or non-United States tax considerations, or the Medicare tax. Each potential investor is urged to consult its tax advisor
regarding the United States federal, state, local and non-United States income and other tax considerations of an investment in our ordinary
shares.
General
For purposes of this discussion,
a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United States federal income tax purposes, (i) an
individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for United
States federal income tax purposes) created in, or organized under the laws of, the United States or any state thereof or the District
of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax purposes regardless
of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United States court and which
has one or more United States persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise
elected to be treated as a United States person under the Code.
If a partnership (or other
entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ordinary shares, the tax treatment
of a partner in the partnership will depend upon the status of the partner and the activities of the partnership. Partnerships and partners
of a partnership holding our ordinary shares are urged to consult their tax advisors regarding an investment in our ordinary shares.
The discussion set forth below
is addressed only to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to consult their own tax advisors about
the application of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other
tax consequences to them of the purchase, ownership and disposition of our ordinary shares.
Taxation of Dividends and Other Distributions
on our Ordinary Shares
Subject to the passive foreign
investment company rules discussed below, the gross amount of distributions made by us to you with respect to the ordinary shares (including
the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt
by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under
U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate
U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend
income, provided that (1) the ordinary shares are readily tradable on an established securities market in the United States, or we are
eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information
program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is
paid or the preceding taxable year, and (3) certain holding period requirements are met. Because there is no income tax treaty between
the United States and the Cayman Islands, clause (1) above can be satisfied only if the ordinary shares are readily tradable on an established
securities market in the United States. Under U.S. Internal Revenue Service authority, ordinary shares are considered for purpose of clause
(1) above to be readily tradable on an established securities market in the United States if they are listed on Nasdaq. You are urged
to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ordinary shares, including
the effects of any change in law after the date of this report.
To the extent that the amount
of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles),
it will be treated first as a tax-free return of your tax basis in your ordinary shares, and to the extent the amount of the distribution
exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal
income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution
would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.
Taxation of Dispositions of Ordinary Shares
Subject to the passive foreign
investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of
a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the
ordinary shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder,
who has held the ordinary shares for more than one year, you may be eligible for reduced tax rates on any such capital gains. The deductibility
of capital losses is subject to limitations.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.)
corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share
of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively,
a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined
based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which
it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income
generally includes dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of
a trade or business) and gains from the disposition of passive assets.
Based on the composition of
our assets and the nature of the Company’s income and subsidiaries’ income for our taxable year ended March 31, 2020, we do
not expect to be treated as a PFIC for such year and we do not expect to be one for our taxable year ending March 31, 2021 or become
one in the foreseeable future. Nevertheless, the application of the PFIC rules is subject to ambiguity in several respects and, in addition,
we must make a separate determination each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot
assure you that we will not be a PFIC for the current or any other taxable year. Moreover, although we do not believe we would be treated
as a PFIC, we have not engaged any U.S. tax advisers to determine our PFIC status. In addition, if a U.S. Holder owned our ordinary shares
at any time prior to our acquisition of Elite, such U.S. Holder may be considered to own stock of a PFIC by virtue of the fact that we
may have been a PFIC during the period prior to our acquisition of Elite, unless such U.S. Holder made either a valid and timely QEF election
or a valid and timely mark-to-market election, in each case as described below.
If we are determined to be
a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our shares or redeemable warrants
and, in the case of our shares, the U.S. Holder did not make either a timely qualified electing fund (“QEF”) election for
our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) such shares, a QEF election along with a purging
election, or a mark-to-market election, each as described below, such holder generally will be subject to special rules for regular U.S.
federal income tax purposes with respect to:
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any gain recognized by the U.S.
Holder on the sale or other disposition of its shares or redeemable warrants; and
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any “excess distribution”
made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than
125% of the average annual distributions received by such U.S. Holder in respect of the shares or warrants during the three preceding
taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the shares or warrants).
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Under these rules,
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the U.S. Holder’s gain
or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares or redeemable warrants;
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the amount allocated to the
U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution, or to the period in
the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC, will be taxed as ordinary
income;
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the amount allocated to other
taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect
for that year and applicable to the U.S. Holder; and
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the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.
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In general, if we are determined
to be a PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our shares by making a timely QEF election
(or a QEF election along with a purging election, as described below). Pursuant to the QEF election, a U.S. Holder will be required to
include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary
income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our
taxable year ends. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the
QEF rules, but if deferred, any such taxes will be subject to an interest charge.
A U.S. Holder may not make
a QEF election with respect to its redeemable warrants. As a result, if a U.S. Holder sells or otherwise disposes of a redeemable warrant
(other than upon exercise of the redeemable warrant), any gain recognized generally will be subject to the special tax and interest charge
rules treating the gain as an excess distribution, as described above, if we were a PFIC at any time during the period the U.S. Holder
held the redeemable warrants. If a U.S. Holder that exercises such redeemable warrants properly makes a QEF election with respect to the
newly acquired ordinary shares (or has previously made a QEF election with respect to our shares), the QEF election will apply to the
newly acquired ordinary shares, but the adverse tax consequences relating to PFIC shares, adjusted to take into account the current income
inclusions resulting from the QEF election, will continue to apply with respect to such newly acquired ordinary shares (which generally
will be deemed to have a holding period for purposes of the PFIC rules that includes the period the U.S. Holder held the redeemable warrants),
unless the U.S. Holder makes a purging election with respect to such shares. The purging election creates a deemed sale of such shares
at their fair market value. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating
the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder will increase the adjusted
tax basis in its ordinary shares acquired upon the exercise of the redeemable warrants by the gain recognized and will also have a new
holding period in such ordinary shares for purposes of the PFIC rules.
The QEF election is made on
a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF
election by attaching a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified
Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return
for the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement
with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the
requirements of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor
to provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that we
will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made
a QEF election with respect to our shares and the special tax and interest charge rules do not apply to such shares (because of a timely
QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares or a QEF election,
along with a purge of the PFIC taint pursuant to a purging election, as described above), any gain recognized on the sale or other taxable
disposition of our shares generally will be taxable as capital gain and no interest charge will be imposed. As discussed above, for regular
U.S. federal income tax purposes, U.S. Holders of a QEF are currently taxed on their pro rata shares of the QEF’s earnings and profits,
whether or not distributed. In such case, a subsequent distribution of such earnings and profits that were previously included in income
generally should not be taxable as a dividend to such U.S. Holders. The adjusted tax basis of a U.S. Holder’s shares in a QEF will
be increased by amounts that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above
rules. Similar basis adjustments apply to property if by reason of holding such property the U.S. Holder is treated under the applicable
attribution rules as owning shares in a QEF.
Although a determination as
to our PFIC status will be made annually, the initial determination that we are a PFIC generally will apply for subsequent years to a
U.S. Holder who held shares or redeemable warrants while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent
years, unless such U.S. Holder made a purging election as described below. A U.S. Holder who makes the QEF election discussed above for
our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) our shares, however, will not be subject to the
PFIC tax and interest charge rules discussed above in respect to such shares. In addition, such U.S. Holder will not be subject to the
QEF inclusion regime with respect to such shares for any of our taxable years that end within or with a taxable year of the U.S. Holder
and in which we are not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are
a PFIC and during which the U.S. Holder holds (or is deemed to hold) our shares, the PFIC rules discussed above will continue to apply
to such shares unless the holder files on a timely filed U.S. income tax return (including extensions) a QEF election and a purging election
to recognize under the rules of Section 1291 of the Code any gain that the U.S. Holder would otherwise recognize if the U.S. Holder had
sold our shares for their fair market value on the “qualification date.” The qualification date is the first day of our tax
year in which we qualify as a QEF with respect to such U.S. Holder. The purging election can only be made if such U.S. Holder held our
ordinary shares on the qualification date. The gain recognized by the purging election will be subject to the special tax and interest
charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, the U.S. Holder will
increase the adjusted tax basis in its ordinary shares by the amount of the gain recognized and will also have a new holding period in
the shares for purposes of the PFIC rules.
If a U.S. Holder did not make
a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period such U.S.
Holder held our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect to such U.S. Holder
even if we cease to be a PFIC in a future year, unless such U.S. Holder makes a “purging election” for the year we cease to
be a PFIC. A “purging election” creates a deemed sale of such ordinary shares at their fair market value on the last
day of the last year in which we are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax
and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, such U.S.
Holder will have a new tax basis (equal to the fair market value of the ordinary shares on the last day of the last year in which we are
treated as a PFIC) and tax holding period (which new holding period will begin the day after such last day) in such ordinary shares.
As an alternative to the QEF
election, if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder
may make a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market
election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our shares and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its shares.
Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its shares
at the end of its taxable year over the adjusted tax basis in its shares. The U.S. Holder also will be allowed to take an ordinary loss
in respect of the excess, if any, of the adjusted tax basis of its shares over the fair market value of its shares at the end of its taxable
year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s
adjusted tax basis in its shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale
or other taxable disposition of the shares will be treated as ordinary income. Currently, a mark-to-market election may not be made with
respect to our redeemable warrants.
The mark-to-market election
is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange
Commission, including the NASDAQ Capital Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure
that the market price represents a legitimate and sound fair market value. Although our ordinary shares are listed and traded on the NASDAQ
Capital Market, we cannot guarantee that our shares will continue to be listed and traded on the NASDAQ Capital Market. U.S. Holders should
consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our shares under
their particular circumstances.
If we are a PFIC and, at any
time, have a foreign subsidiary that is classified as a PFIC, a U.S. Holder generally would be deemed to own a portion of the shares of
such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution
from, or dispose of all or part of our interest in, or the U.S. Holder otherwise were deemed to have disposed of an interest in, the lower-tier
PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S. Holder no later than 90 days after the request
the information that may be required to make or maintain a QEF election with respect to the lower-tier PFIC. However, there is no assurance
that we will have timely knowledge of the status of any such lower-tier PFIC, and we do not plan to make annual determinations or otherwise
notify U.S. Holders of the PFIC status of any such lower-tier PFIC. There also is no assurance that we will be able to cause the lower-tier
PFIC to provide the required information. U.S. Holders are urged to consult their own tax advisors regarding the tax issues raised by
lower-tier PFICs.
A U.S. Holder that owns (or
is deemed to own) shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF
election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide such
other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs
and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above.
Accordingly, U.S. Holders of our shares and redeemable warrants should consult their own tax advisors concerning the application of the
PFIC rules to our shares and redeemable warrants under their particular circumstances.
Non-U.S. Holders
Dividends (including constructive
dividends) paid or deemed paid to a Non-U.S. Holder in respect to our securities generally will not be subject to U.S. federal income
tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United
States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder
maintains or maintained in the United States).
In addition, a Non-U.S. Holder
generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our securities
unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United States)
or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other
disposition and certain other conditions are met (in which case, such gain from U.S. sources generally is subject to U.S. federal income
tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that are
effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the United
States) generally will be subject to regular U.S. federal income tax at the same regular U.S. federal income tax rates applicable to a
comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject
to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
The U.S. federal income tax
treatment of a Non-U.S. Holder’s exercise of redeemable warrants, or the lapse of redeemable warrants held by a Non-U.S. Holder,
generally will correspond to the U.S. federal income tax treatment of the exercise or lapse of redeemable warrants by a U.S. Holder, as
described under “ U.S. Holders — Exercise or Lapse of Redeemable Warrants ” above.
Backup Withholding and Information Reporting
Dividend payments with respect
to our ordinary shares and proceeds from the sale, exchange or redemption of our ordinary shares may be subject to information reporting
to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply,
however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal
Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status
generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors
regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not
an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may
obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the
U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders.
However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup withholding),
and such brokers or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives
to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our ordinary shares, subject to
certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial institutions), by attaching
a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in
which they hold ordinary shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Company is subject to
the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and
other information with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s
website at www.sec.gov and such information can also be inspected and copies ordered at the public reference facilities maintained by
the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us at http://www.fjxfl.com. However, information
contained on our website does not constitute a part of this annual report.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
We deposit surplus funds with
Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments
carry loan prime rates plus basis points of interest. Our operations generally are not directly sensitive to fluctuations in interest
rates and we currently do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with
our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into
any hedging transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While
our reporting currency is the U.S. dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated
in RMB. Substantially all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and
results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates
against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will
decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at
the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included
in determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation of
the RMB against the U.S. dollar of 2.4% decreased our comprehensive loss to $0.1 million
based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of March 31, 2021. As of March 31,
2021. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of RMB against the
U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since
July 2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value against
the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations
in RMB exchange rate and lessen intervention in the foreign exchange market.
Inflation
Inflationary factors such
as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future
may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements
pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Results of Operations and Financial Condition
Following are the audited financial results as
of March 31, 2021 and 2020 and for the years ended March 31, 2021, 2020 and 2019 of Happiness Biotech Group Limited.
HAPPINESS BIOTECH GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Happiness Biotech Group Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated
balance sheets of Happiness Biotech Group Limited and its Subsidiaries (collectively, the “Company”) as of March 31, 2021
and 2020, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash
flows for each of the three years in the period ended March 31, 2021, 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 March 31, 2021 and 2020, and the results of their operations and their cash flows for each of the three years in the period ended
March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
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/ Briggs & Veselka Co.
Houston, Texas
We have served as the Company’s auditor since 2018.
Houston, Texas
August 2, 2021
HAPPINESS BIOTECH GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
36,558,752
|
|
|
$
|
33,654,765
|
|
Accounts receivable
|
|
|
34,563,743
|
|
|
|
30,036,448
|
|
Inventories
|
|
|
1,785,379
|
|
|
|
2,029,406
|
|
Prepaid expenses and other current assets
|
|
|
22,189,744
|
|
|
|
4,264,130
|
|
Total current assets
|
|
|
95,097,618
|
|
|
|
69,984,749
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
10,514,031
|
|
|
|
7,896,501
|
|
Intangible assets, net
|
|
|
1,832,099
|
|
|
|
719,722
|
|
Goodwill
|
|
|
162,832
|
|
|
|
-
|
|
Other assets
|
|
|
5,138,105
|
|
|
|
6,496,501
|
|
TOTAL ASSETS
|
|
$
|
112,744,685
|
|
|
$
|
85,097,473
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,841,163
|
|
|
$
|
1,549,255
|
|
Other payables and accrued liabilities
|
|
|
3,694,943
|
|
|
|
512,249
|
|
Due to related party
|
|
|
-
|
|
|
|
844,716
|
|
Income tax payable
|
|
|
334,523
|
|
|
|
568,830
|
|
Short-term bank borrowings
|
|
|
2,237,000
|
|
|
|
2,032,434
|
|
TOTAL LIABILITIES
|
|
|
15,107,629
|
|
|
|
5,507,484
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Ordinary shares, $0.0005 par value, 90,000,000 shares authorized, 30,481,580 and 25,000,000 shares issued and outstanding, respectively
|
|
|
15,241
|
|
|
|
12,500
|
|
Preferred shares, $0.0005 par value, 10,000,000 shares authorized, 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
26,545,384
|
|
|
|
15,044,002
|
|
Statutory surplus reserve
|
|
|
7,622,765
|
|
|
|
2,064,096
|
|
Retained earnings
|
|
|
61,475,891
|
|
|
|
66,623,204
|
|
Accumulated other comprehensive loss
|
|
|
(913,621
|
)
|
|
|
(4,153,813
|
)
|
Total Happiness Biotech Group Limited’s shareholders’ equity
|
|
|
94,745,660
|
|
|
|
79,589,989
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interests
|
|
|
2,891,396
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
97,637,056
|
|
|
|
79,589,989
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
112,744,685
|
|
|
$
|
85,097,473
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
HAPPINESS BIOTECH GROUP LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
(IN U.S. DOLLARS)
|
|
For the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
71,484,703
|
|
|
$
|
65,061,953
|
|
|
$
|
63,936,185
|
|
Cost of revenues
|
|
|
(53,309,102
|
)
|
|
|
(34,642,649
|
)
|
|
|
(31,689,117
|
)
|
Gross profit
|
|
|
18,175,601
|
|
|
|
30,419,304
|
|
|
|
32,247,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
9,958,886
|
|
|
|
9,179,160
|
|
|
|
6,291,228
|
|
General and administrative
|
|
|
5,030,899
|
|
|
|
3,482,459
|
|
|
|
1,951,259
|
|
Research and development
|
|
|
1,660,100
|
|
|
|
2,358,968
|
|
|
|
2,161,708
|
|
Total operating expenses
|
|
|
16,649,885
|
|
|
|
15,020,587
|
|
|
|
10,404,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,525,716
|
|
|
|
15,398,717
|
|
|
|
21,842,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
131,901
|
|
|
|
74,929
|
|
|
|
42,038
|
|
Interest expense
|
|
|
(111,799
|
)
|
|
|
(98,086
|
)
|
|
|
(83,549
|
)
|
Other income, net
|
|
|
105,522
|
|
|
|
156,562
|
|
|
|
103,771
|
|
Total other income, net
|
|
|
125,624
|
|
|
|
133,405
|
|
|
|
62,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,651,340
|
|
|
|
15,532,122
|
|
|
|
21,905,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
(959,384
|
)
|
|
|
(2,844,087
|
)
|
|
|
(3,183,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
691,956
|
|
|
$
|
12,688,035
|
|
|
$
|
18,721,979
|
|
Net loss attributable to non-controlling interests
|
|
|
94,400
|
|
|
|
-
|
|
|
|
-
|
|
Net income attributable to Happiness Biotech Group Limited
|
|
|
786,356
|
|
|
$
|
12,688,035
|
|
|
$
|
18,721,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
6,113,570
|
|
|
|
(3,356,032
|
)
|
|
|
(2,985,586
|
)
|
Comprehensive income
|
|
$
|
6,805,526
|
|
|
$
|
9,332,003
|
|
|
$
|
15,736,393
|
|
Less: comprehensive income attributable to non-controlling interests
|
|
|
(2,873,378
|
)
|
|
|
-
|
|
|
|
-
|
|
Comprehensive income attributable to Happiness Biotech Group Limited
|
|
$
|
3,932,148
|
|
|
$
|
9,332,003
|
|
|
$
|
15,736,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per ordinary share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.03
|
|
|
$
|
0.53
|
|
|
$
|
0.81
|
|
Weighted average number of ordinary shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
26,160,270
|
|
|
|
23,843,836
|
|
|
|
23,000,000
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
HAPPINESS BIOTECH GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
(IN U.S. DOLLARS)
|
|
Ordinary
shares
|
|
|
Ordinary
shares
amount
|
|
|
Additional
paid-in
capital
|
|
|
Statutory
surplus reserve
|
|
|
Retained
earnings
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
Total
Happiness Biotech Group Limited shareholders’ equity
|
|
|
Non-controlling
interests
|
|
|
Total
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
|
23,000,000
|
|
|
$
|
11,500
|
|
|
$
|
5,075,035
|
|
|
$
|
2,008,019
|
|
|
$
|
35,269,267
|
|
|
$
|
2,187,805
|
|
|
$
|
44,551,626
|
|
|
$
|
-
|
|
|
$
|
44,551,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
627,628
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
627,628
|
|
|
|
-
|
|
|
|
627,628
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,721,979
|
|
|
|
-
|
|
|
|
18,721,979
|
|
|
|
-
|
|
|
|
18,721,979
|
|
Statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,077
|
|
|
|
(56,077
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign currency
translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,985,586
|
)
|
|
|
(2,985,586
|
)
|
|
|
-
|
|
|
|
(2,985,586
|
)
|
Balance at
March 31, 2019
|
|
|
23,000,000
|
|
|
$
|
11,500
|
|
|
$
|
5,702,663
|
|
|
$
|
2,064,096
|
|
|
$
|
53,935,169
|
|
|
$
|
(797,781
|
)
|
|
$
|
60,915,647
|
|
|
$
|
-
|
|
|
$
|
60,915,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for cash
|
|
|
2,000,000
|
|
|
|
1,000
|
|
|
|
9,341,339
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,342,339
|
|
|
|
-
|
|
|
|
9,342,339
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,688,035
|
|
|
|
-
|
|
|
|
12,688,035
|
|
|
|
-
|
|
|
|
12,688,035
|
|
Foreign currency
translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,356,032
|
)
|
|
|
(3,356,032
|
)
|
|
|
-
|
|
|
|
(3,356,032
|
)
|
Balance at
March 31, 2020
|
|
|
25,000,000
|
|
|
$
|
12,500
|
|
|
$
|
15,044,002
|
|
|
$
|
2,064,096
|
|
|
$
|
66,623,204
|
|
|
$
|
(4,153,813
|
)
|
|
$
|
79,589,989
|
|
|
$
|
-
|
|
|
$
|
79,589,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for cash
|
|
|
5,100,000
|
|
|
|
2,550
|
|
|
|
10,723,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,725,700
|
|
|
|
-
|
|
|
|
10,725,700
|
|
Ordinary shares issued for services
|
|
|
381,580
|
|
|
|
191
|
|
|
|
778,232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
778,423
|
|
|
|
-
|
|
|
|
778,423
|
|
Statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,558,669
|
|
|
|
(5,558,669
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Contribution from non-controlling
shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112,418
|
|
|
|
112,418
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
786,356
|
|
|
|
-
|
|
|
|
786,356
|
|
|
|
(94,400
|
)
|
|
|
691,956
|
|
Dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(375,000
|
)
|
|
|
-
|
|
|
|
(375,000
|
)
|
|
|
-
|
|
|
|
(375,000
|
)
|
Foreign currency
translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,240,192
|
|
|
|
3,240,192
|
|
|
|
2,873,378
|
|
|
|
6,113,570
|
|
Balance at
March 31, 2021
|
|
|
30,481,580
|
|
|
$
|
15,241
|
|
|
$
|
26,545,384
|
|
|
$
|
7,622,765
|
|
|
$
|
61,475,891
|
|
|
$
|
(913,621
|
)
|
|
$
|
94,745,660
|
|
|
$
|
2,891,396
|
|
|
$
|
97,637,056
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
HAPPINESS BIOTECH GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
|
|
For the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
691,956
|
|
|
$
|
12,688,035
|
|
|
$
|
18,721,979
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
880,879
|
|
|
|
690,749
|
|
|
|
699,538
|
|
Inventory write-downs
|
|
|
-
|
|
|
|
117,753
|
|
|
|
-
|
|
Loss (gain) on disposal of equipment
|
|
|
-
|
|
|
|
38
|
|
|
|
(3,155
|
)
|
Share-based compensation
|
|
|
778,423
|
|
|
|
-
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,106,752
|
)
|
|
|
393,143
|
|
|
|
(1,601,202
|
)
|
Other receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
3,714
|
|
Inventories
|
|
|
389,388
|
|
|
|
(276,909
|
)
|
|
|
148,388
|
|
Prepaid expenses and other current assets
|
|
|
(8,057,239
|
)
|
|
|
1,525,053
|
|
|
|
(6,025,735
|
)
|
Other assets
|
|
|
1,718,110
|
|
|
|
(4,402,208
|
)
|
|
|
(2,257,979
|
)
|
Accounts payable
|
|
|
6,723,151
|
|
|
|
(32,722
|
)
|
|
|
(3,378,079
|
)
|
Other payables and accrued liabilities
|
|
|
3,134,093
|
|
|
|
(559,496
|
)
|
|
|
61,303
|
|
Due to related parties
|
|
|
(844,718
|
)
|
|
|
966,589
|
|
|
|
-
|
|
Income taxes payable
|
|
|
(402,825
|
)
|
|
|
(332,182
|
)
|
|
|
176,107
|
|
Net cash provided by operating activities
|
|
|
2,904,466
|
|
|
|
10,777,843
|
|
|
|
6,544,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(2,783,440
|
)
|
|
|
(1,159,355
|
)
|
|
|
(283,100
|
)
|
Purchase of intangible assets
|
|
|
(1,051,138
|
)
|
|
|
-
|
|
|
|
-
|
|
Purchase of DAJI
|
|
|
(75,044
|
)
|
|
|
-
|
|
|
|
-
|
|
Deposits paid for business acquisitions
|
|
|
(9,313,225
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from disposal of equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
5,942
|
|
Net cash used in investing activities
|
|
|
(13,222,847
|
)
|
|
|
(1,159,355
|
)
|
|
|
(277,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued for cash
|
|
|
10,965,553
|
|
|
|
9,342,339
|
|
|
|
627,628
|
|
Cash contribution from non-controlling shareholders
|
|
|
37,522
|
|
|
|
-
|
|
|
|
-
|
|
Dividend payment
|
|
|
(375,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from short-term loans
|
|
|
2,163,037
|
|
|
|
3,129,711
|
|
|
|
1,396,382
|
|
Repayments of short-term loans
|
|
|
(2,118,893
|
)
|
|
|
(2,067,332
|
)
|
|
|
(1,752,905
|
)
|
Net cash provided by financing activities
|
|
|
10,672,219
|
|
|
|
10,404,718
|
|
|
|
271,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
2,550,149
|
|
|
|
(1,169,213
|
)
|
|
|
(622,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,903,987
|
|
|
|
18,853,993
|
|
|
|
5,915,943
|
|
Cash and cash equivalents at the beginning of year
|
|
|
33,654,765
|
|
|
|
14,800,772
|
|
|
|
8,884,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of year
|
|
$
|
36,558,752
|
|
|
$
|
33,654,765
|
|
|
$
|
14,800,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
1,209,381
|
|
|
$
|
3,176,269
|
|
|
$
|
3,007,047
|
|
Cash paid for interest expense
|
|
$
|
111,790
|
|
|
$
|
98,086
|
|
|
$
|
83,549
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
HAPPINESS BIOTECH GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Happiness Biotech Group Limited (“Happiness
Biotech”) is a holding company incorporated on February 13, 2018 under the laws of the Cayman Islands. The Company has no substantive
operations other than holding all of the outstanding share capital of Happiness Biology Technology Group Limited (“Happiness Hong
Kong”). Happiness Hong Kong is a holding company of all of the equity or ownership of Happiness (Nanping) Biotech Co., Limited (“Happiness
Nanping”).
Happiness
Nanping is a holding company of all of the equity or ownership of Fujian Happiness Biotech Co., Limited (“Fujian
Happiness”), Fuzhou Happiness Enterprise Management Consulting Co., Ltd. and Happy Buy (Fujian) Network Technology Co., Ltd. (“Happy
Buy”).
Fujian Happiness is a limited liability company
established under the laws of the People’s Republic of China (“PRC”) on November 19, 2004.
Fujian Happiness holds all of the equity or ownership
of Shunchang Happiness Nutraceutical Co., Limited (“Shunchang Happiness”) and also owns 51% of Fujian Happiness comes Medical
Equipment Manufacturing Co., Limited.
Through Fujian Happiness and Shunchang Happiness,
the Company is a biotech company that specializes in research, development, production and selling of nutraceutical and dietary supplements
made of Ganoderma spore powder and others mainly in China etc.
Hangzhou C'est la vie Interactive Technology Co.,
Ltd. ("Hangzhou C'est la vie") is a limited liability company established under the laws of the PRC on August 26, 2020. Through
Hangzhou C’est la vie, the Company operated the online sales business.
Happy Buy (Fujian) Automobile Service Co., Ltd.
("Happy Buy Automobile") is a limited liability company established under the laws of the PRC on October 27, 2020. Through Happy
Buy Automobile, the Company purchases and sells automobiles to the customers.
Happy Optimal (Fujian) Network Technology Co.,
Ltd. ("Happy Optimal") is a limited liability company established under the laws of the PRC on December 29, 2020. Through Happy
Optimal, the Company provides internet information and advertising services.
Reorganization
A Reorganization of the legal structure was completed
in August 2018. The Reorganization involved the incorporation of Happiness Biotech Group Limited, a Cayman Islands holding company; Happiness
Biology Technology Group Limited, a holding company established in Hong Kong, PRC; Happiness (Nanping) Biotech Co., Limited, a
holding company established in Fujian, PRC; and the transfer of 100% ownership of Fujian Happiness from the former shareholders to Happiness
Nanping. Happiness Biotech, Happiness Hong Kong and Happiness Nanping are all holding companies and had not commenced operation until
August 21, 2018.
Prior to the reorganization, Mr. Wang Xuezhu,
Chief Executive Officer owns 47.7% ownership of Fujian Happiness. On August 21, 2018, Mr. Wang Xuezhu and other shareholders of Fujian
Happiness transferred their 100% ownership interests in Fujian Happiness to Happiness Nanping, which is 100% owned by Happiness Hong Kong.
After the reorganization, Happiness Biotech owns 100% equity interests of Fujian Happiness. Mr. Wang Xuezhu, who owns 52.37% ownership
of Happiness Biotech, became the ultimate controlling shareholder (“the Controlling Shareholder”) of the Company.
Since the Company is effectively controlled by
the same Controlling Shareholder before and after the reorganization, it is considered under common control. Therefore, the above mentioned
transactions were accounted for as a recapitalization. The reorganization has been accounted for at historical cost and prepared on the
basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying
financial statements of the Company.
On March 4, 2019, the Company subdivided its 50,000
ordinary shares into 90,000,000 Ordinary shares and 10,000,000 Preferred shares. The authorized ordinary shares became 100,000,000 shares
and the par value was changed from $1 to $0.0005. On the same day, the Company cancelled 77,223,100 ordinary shares and sold additional
223,100 ordinary shares. As of March 31, 2019, the Company has 23,000,000 ordinary shares issued and outstanding. The Company has retrospectively
reflected the stock subdivision and cancellation in all periods presented in these financial statements.
Initial Public Offering
On October 25, 2019, the Company announced the
closing of its initial public offering of 2,000,000 ordinary shares, US$0.0005 par value per share (“Ordinary Shares”) at
an offering price of $5.50 per share for a total of $11,000,000 in gross proceeds. The Company raised total net proceeds of $9,342,339
after deducting underwriting discounts and commissions and offering expenses. In addition, the Company granted to its underwriters, Univest
Securities, LLC as the Underwriter Representative, an option for a period of 45 days after the closing of the initial public offering
to purchase up to 15% of the total number of the Company’s Ordinary Shares to be offered by the Company pursuant to the initial
public offering (excluding shares subject to this option), solely for the purpose of covering overallotments, at the initial public offering
price less the underwriting discount.
During the reporting periods, the Company has
several subsidiaries in PRC. Details of the Company and its operating subsidiaries are set out below:
Name of Entity
|
|
Date of Incorporation
|
|
Place of Incorporation
|
|
Registered
Capital
|
|
% of
Ownership
|
|
Principal Activities
|
|
|
|
|
|
|
|
|
|
|
|
Happiness (Nanping) Biotech Co., Ltd. (“Nanping Happiness”)
|
|
June 1, 2018
|
|
PRC
|
|
US$ 36,100,000
|
|
|
|
Investment
|
Fujian Happiness Biotech Co., Ltd (“Fujian Happiness”)
|
|
November 19, 2004
|
|
PRC
|
|
RMB 100,000,000
|
|
100% by Nanping Happiness
|
|
Research, development, production and selling of nutraceutical and dietary supplements
|
Fujian Happiness comes Medical Equipment Manufacturing Co., Ltd.
|
|
April 15, 2020
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Fujian Happiness
|
|
Selling of medical equipment
|
Shunchang Happiness Nutraceutical Co., Ltd (“Shunchang Happiness”)
|
|
May 19, 1998
|
|
PRC
|
|
RMB 2,000,000
|
|
100% by Fujian Happiness
|
|
Research, development, production and selling of edible fungi
|
Fuzhou Happiness Enterprise Management Consulting Co., Ltd.
|
|
December 15, 2020
|
|
PRC
|
|
RMB 1,000,000
|
|
100% by Nanping Happiness
|
|
Management and consulting service
|
Happy Buy (Fujian) Network Technology Co., Ltd. (“Happy Buy”)
|
|
July 16, 2020
|
|
PRC
|
|
RMB 30,000,000
|
|
100% by Nanping Happiness
|
|
Advertising service, online sales
|
Fujian Happy Studio Network Technology Co. LTD
|
|
August 10, 2020
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Happy Buy
|
|
Advertising service
|
Hangzhou C'est la vie Interactive Technology Co., Ltd. (“Hangzhou C’est la vie”)
|
|
August 26, 2020
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Happy Buy
|
|
Online sales
|
Fujian Lever Media Co., Ltd. (“Fujian Lever”)
|
|
March 1, 2021
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Hangzhou C'est la vie
|
|
Online sales
|
Shunchang Bangren Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 100,000
|
|
100% by Fujian Lever
|
|
Online sales
|
Shunchang Baolong Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 100,000
|
|
100% by Fujian Lever
|
|
Online sales
|
Shunchang Shihong Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 100,000
|
|
100% by Fujian Lever
|
|
Online sales
|
Happiness Youdao (Hangzhou) Electronic Commerce Co., Ltd.
|
|
August 21, 2017
|
|
PRC
|
|
RMB 10,000,000
|
|
70% by Hangzhou C'est la vie
|
|
Online sales
|
Putian City Hanjiang District Luochen Network Technology Co., Ltd. (“Putian Luochen”)
|
|
February 8, 2021
|
|
PRC
|
|
RMB 100,000
|
|
100% by Hangzhou C'est la vie
|
|
Online sales
|
Putian City Hanjiang District Qiyao Trading Co., Ltd.
|
|
February 9, 2021
|
|
PRC
|
|
RMB 100,000
|
|
100% by Putian Luochen
|
|
Online sales
|
Putian City Hanjiang District Zhiran Trading Co., Ltd.
|
|
February 8, 2021
|
|
PRC
|
|
RMB 100,000
|
|
100% by Putian Luochen
|
|
Online sales
|
Fujian Seravi Electronic Commerce Co., Ltd. (“Fujian Seravi”)
|
|
November 30, 2020
|
|
PRC
|
|
RMB 10,000,000
|
|
100% by Hangzhou C'est la vie
|
|
Online sales
|
Shunchang Qida Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Shenghui Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Zhibo Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Shenzhou Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Penghong Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Tongyuan Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Guangxiang Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Lishijin Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Wangfu Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 100,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Yibo Electronic Commerce Co., Ltd.
|
|
December 1, 2020
|
|
PRC
|
|
RMB 100,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Herui Electronic Commerce Co., Ltd.
|
|
December 1, 2020
|
|
PRC
|
|
RMB 100,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Runhao Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Shunchang Xianghong Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Fujian Seravi
|
|
Online sales
|
Fujian Daji Media Co., Ltd. (“Daji”)
|
|
February 1, 2021
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Happy Buy
|
|
Live streaming service
|
Happy Buy (Fujian) Automobile Service Co., Ltd. (“Happy
Buy Automobile”)
|
|
October 27, 2020
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Happy Buy
|
|
Automobile sales
|
Happy Buy (Nanping) Automobile Sales Co., Ltd.
|
|
December 15, 2020
|
|
PRC
|
|
RMB 5,000,000
|
|
100% by Happy Buy Automobile
|
|
Automobile sales
|
Happy Optimal (Fujian) Network Technology Co., Ltd.
(“Happy Optimal”)
|
|
December 29, 2020
|
|
PRC
|
|
RMB 10,000,000
|
|
51% by Happy Buy
|
|
Advertising service
|
Shunchang Jiefei Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Happy Optimal
|
|
Online sales
|
Shunchang Happy Cat Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Happy Optimal
|
|
Online sales
|
Shunchang Xiaocongcong Electronic Commerce Co., Ltd.
|
|
December 3, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Happy Optimal
|
|
Online sales
|
Shunchang Wansheng Electronic Commerce Co., Ltd.
|
|
December 2, 2020
|
|
PRC
|
|
RMB 30,000
|
|
100% by Happy Optimal
|
|
Online sales
|
Happy Feiyue (Fujian) Network Technology Co., Ltd.
|
|
March 19, 2021
|
|
PRC
|
|
RMB 10,000,000
|
|
70% by Happy Buy
|
|
Online sales
|
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”)
and have been consistently applied. The accompanying consolidated financial statements include the financial statements of Happiness Biotech
and its subsidiaries (collectively, the “Company”). All inter-company balances and transactions have been eliminated upon
consolidation.
Use of Estimates
In preparing the consolidated financial statements
in conformity with US GAAP, management makes 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 period. These estimates are based on information as of the date of the consolidated financial statements. Significant
estimates required to be made by management include, but are not limited to, the valuation of accounts receivable and related allowance
for doubtful accounts, useful lives of property and equipment and intangible assets, the recoverability of long-lived assets, inventory
reserve, and provisions necessary for contingent liabilities. The current economic environment has increased the degrees of uncertainty
inherent in those estimates and assumptions, actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investment
instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains
all bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other
programs.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable are recognized and carried
at original invoiced amount less an estimated allowance for uncollectible accounts. The Company determines the adequacy of reserves for
doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful
receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s
best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. Based on management
of customers’ credit and ongoing relationship, management makes conclusions whether any balances outstanding at the end of the
period will be deemed uncollectible on an individual basis and on aging analysis basis. The provision is recorded against accounts receivables
balances, with a corresponding charge recorded in the consolidated statements of income and comprehensive income. Delinquent account
balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection
is not probable.
Inventories
Inventories are stated at the lower of cost or
net realizable value. Cost of inventories is determined using the weighted-average method. In addition to cost of raw materials, work
in progress and finished goods include direct labor costs and overheads. The Company periodically assesses the recoverability of all
inventories to determine whether adjustments are required to record inventories at the lower of cost or market value. Inventories that
the Company determines to be obsolete or in excess of forecasted usage are reduced to its estimated realizable value based on assumptions
about future demand and market conditions. If actual demand is lower than the forecasted demand, additional inventory write-downs may
be required.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the identifiable assets and liabilities acquired in a business combination.
Goodwill is not depreciated or amortized but is
tested for impairment on an annual basis as of March 31, and in between annual tests when an event occurs or circumstances change that
could indicate that the asset might be impaired. In accordance with the FASB ASC 350 guidance on “Testing of Goodwill for Impairment”,
a company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If the company decides, as a result of its qualitative assessment, that it is more likely
than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise,
no further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with
its carrying amount, including goodwill. If the carrying amount of each reporting unit exceeds its fair value, an impairment loss equal
to the difference between the implied fair value of the reporting unit’s goodwill and the carrying amount of goodwill will be recorded.
Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit.
The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates
and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each
reporting unit. As of March 31, 2021 and 2020, there was no impairment indicator identified.
Property and Equipment
Property and equipment are stated at cost. The
straight-line depreciation method is used to compute depreciation over the estimated useful lives of the assets, as follows:
|
|
Useful Lives
|
Buildings
|
|
20 years
|
Machinery
|
|
10 years
|
Furniture, fixture and electronic equipment
|
|
3-10 years
|
Vehicles
|
|
4 years
|
Expenditures for maintenance and repairs, which
do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterment
which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired
or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements of income and other
comprehensive income in other income or expenses.
Intangible Assets, net
Intangible assets purchased from third parties
are initially recorded at cost. The intangible assets are amortized using the straight-line method over the estimated useful lives of
the assets. The estimated life of amortized intangibles is reassessed if circumstances occur that indicate the life has changed.
The estimated useful lives of intangible assets are as follows:
|
|
Useful life
|
Land use right
|
|
50 years
|
Licensed software
|
|
10 years
|
Impairment of Long-lived Assets other than goodwill
The Company reviews long-lived assets, including
definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s
carrying value, then the asset is deemed to be impaired and written down to its fair value. There were no impairments of these assets
as of March 31, 2021 and 2020.
Fair Value of Financial Instruments
The Financial Accounting Standards Board (FASB)
Accounting Standards Codification 820, Fair Value Measurement and Disclosures, requires certain disclosures regarding the fair
value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs
used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value are as follows:
|
●
|
Level
1 - Quoted prices in active markets for identical assets and liabilities.
|
|
●
|
Level
2 - Quoted prices in active markets for similar assets and liabilities, or other inputs that
are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the financial instrument.
|
|
●
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets and liabilities. This includes certain pricing models, discounted
cash flow methodologies and similar techniques that use significant unobservable inputs.
|
The Company considers the recorded value of its
financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other receivable, accounts
payable, short-term borrowings, accounts payable, and income taxes payable and to approximate the fair value of the respective assets
and liabilities at March 31, 2021 and 2020 based upon the short-term nature of the assets and liabilities.
Revenue Recognition
The Company generates its revenue mainly from
sales of healthcare products, automobiles, online store sales and internet information and advertising services. The Company’s revenue
recognition policies were in compliance with ASC 605, Revenue Recognition, for the period prior to April 1, 2019. Under this standard.,
sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.
The Company allows its customers to return products
within some range. The range was limited to 3% of the customer’s yearly payment amount for the year. The transportation fee is
borne by the customers in the condition of products return. There was less than 1% products return of online sales incurred for the year
ended March 31, 2021 and no products return incurred for the years ended March 31, 2020 and 2019.
The Company adopted the new guidance of ASC Topic
606, Revenue from Contracts with Customers (“Topic 606”), which supersedes the revenue recognition requirements in ASC Topic
605, Revenue Recognition on April 1, 2019. Topic 606 requires the Company to recognize revenue upon transfer of control of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services.
Healthcare products
The Company sells nutraceutical and dietary supplements
to distributors and experience stores. For all sales, the Company requires a signed contract and sales order, which specifies pricing,
quantity and product specifications. Under ASC 606, the Company recognizes revenue upon the satisfaction of its performance obligation,
which is to transfer the control of the promised products to customers in an amount that reflects the consideration to which the Company
expects to be entitled to in exchange for those products, excluding amounts collected on behalf of third parties (e.g. value-added taxes).
The transfer of control of the products is satisfied at a point in time, which is the delivery of the products to customers’ premises
and evidenced by signed customer acknowledgment. The selling price, which is specified in the signed sales orders, is fixed. The Company
has unconditional right to receive full payment of the sales price, upon the delivery of the products to customers and the signing of
the customer acknowledgment. Customers are required to pay under the customary payment terms, which is generally less than six months.
Automobile
The Company sells automobiles in fiscal year
2021. For all sales, the Company requires a signed contract and sales order, which specifies pricing, quantity and product specifications.
Under ASC 606, the Company recognizes revenue upon the satisfaction of its performance obligation, which is to transfer the control of
the promised products to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange
for those products, excluding amounts collected on behalf of third parties (e.g. value-added taxes). The transfer of control of the products
is satisfied at a point in time, which is the delivery of the products to customers’ premises and evidenced by signed customer
acknowledgment. The selling price, which is specified in the signed sales orders, is fixed. The Company has unconditional right to receive
full payment of the sales price, upon the delivery of the products to customers and the signing of the customer acknowledgment. Customers
are required to pay under the customary payment terms, which is generally less than six months.
Online store
The Company sells various goods through its online
store business in fiscal year 2021. For all sales, the Company requires a sales order generated by the online store platform, which specifies
pricing, quantity and product specifications. Under ASC 606, the Company recognizes revenue upon the satisfaction of its performance
obligation, which is to transfer the control of the promised products to customers in an amount that reflects the consideration to which
the Company expects to be entitled to in exchange for those products, excluding amounts collected on behalf of third parties (e.g. value-added
taxes). The transfer of control of the products is satisfied at a point in time, which is the delivery of the products to customers’
premises and evidenced by signed customer acknowledgment. The selling price, which is specified in the signed sales orders, is fixed.
The Company has unconditional right to receive full payment of the sales price, upon the delivery of the products to customers and the
signing of the customer acknowledgment. Customers are required to pay to the third party platform before the goods were send out and
the Company will receive the amount from the third party platform after the customer sign off the acceptance form on the platform.
Internet information and advertising service
The Company provides internet information and
advertising service online. For all sales, the Company requires a signed contract and sales order, which specifies the price and service
range. Under ASC 606, the Company recognizes revenue upon the satisfaction of its performance obligation, which is to provide specified
information and advertising service to customers in an amount that reflects the consideration to which the Company expects to be entitled
to in exchange for those services, excluding amounts collected on behalf of third parties (e.g. value-added taxes). The information and
advertising service provided is satisfied at a point in time, which is the time when the information and advertising service is performed.
The selling price per click, which is specified in the signed sales orders, is fixed. The Company has unconditional right to receive
full payment of the sales price, upon the completion of the service. Customers are required to pay to the Company in advance according
to the contract.
The Company adopted Topic 606 as of April 1,
2019 using the modified retrospective transition method, the Company recognizes the cumulative effect of initially applying the new revenue
standard as an adjustment to the opening balance of retained earnings; however, no adjustment was required as a result of adopting the
new revenue standard. Results for reporting periods beginning after April 1, 2019 are presented under the new standard. The
comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those
periods. The Company does not expect any impact to its net income from the adoption of ASU 2014-09 on an ongoing basis.
All of the Company’s revenues from
contracts with customers represent products transferred at a point in time as control is transferred to the customer and are generated
in PRC.
The following table presents an overview of our
sales from our product lines for the years ended March 31, 2021, 2020 and 2019:
|
|
For the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Nutraceutical and dietary supplements
|
|
$
|
45,389,702
|
|
|
$
|
65,061,953
|
|
|
$
|
63,936,185
|
|
Online store
|
|
|
13,473,626
|
|
|
|
-
|
|
|
|
-
|
|
Internet information and advertising
|
|
|
9,245,019
|
|
|
|
-
|
|
|
|
-
|
|
Automobile
|
|
|
3,376,356
|
|
|
|
-
|
|
|
|
-
|
|
Revenue
|
|
$
|
71,484,703
|
|
|
$
|
65,061,953
|
|
|
$
|
63,936,185
|
|
Government Grant
Government grants are recognized when received
and all the conditions for their receipt have been met. Government grants as compensation for the Company’s research and development
efforts. For the years ended March 31, 2021, 2020 and 2019, the Company recognized government grants of $63,520, $162,268 and $146,992,
respectively, for the government support of the Company’s research and development activities and patent applications. The government
grants were recorded as other income.
Research and Development Costs
Research and development activities are directed
toward the development of new products as well as improvements in existing processes. These costs, which primarily include salaries,
contract services, raw materials, and supplies, are expensed as incurred.
Shipping and Handling Costs
Shipping and handling costs are expensed when
incurred as selling and marketing expense. Shipping and handling costs were $1,104,120, $1,869,505 and $1,841,312 for the years ended
March 31, 2021, 2020 and 2019, respectively.
Advertising Costs
Advertising costs are
expensed as incurred in accordance with ASC 720-35, “Other Expenses-Advertising Costs”. Advertising costs were
$5,720,458, $3,856,921 and $3,217,096 for the years ended March 31, 2021, 2020 and 2019, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation
to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost
of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value
of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the
award, usually the vesting period. Stock option forfeitures are recognized at the date of employee termination. Effective April 1, 2019,
the Company adopted ASU 2018-07 for the accounting of share-based payments granted to non-employees for goods and services and no material
impacts to the Financial Statements.
Income Taxes
The Company accounts for current income taxes
in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between
the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those 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
income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets
to the amount expected to be realized.
The provisions of ASC 740-10, “Accounting
for Uncertainty in Income Taxes”, prescribe a more-likely-than-not threshold for consolidated financial statement recognition and
measurement of a tax position taken (or expected to be taken) in a tax return. This interpretation also provides guidance on the recognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, and related disclosures. The Company does not believe that there was any uncertain tax position
at March 31, 2021 and 2020.
To the extent applicable, the Company records
interest and penalties as a general and administrative expense. All of the tax returns of the Company and its subsidiaries remain subject
to examination by PRC tax authorities for five years from the date of filing.
The Company is subject to Chinese tax laws. We
are not subject to U.S. tax laws and local state tax laws. Our income and our related entities must be computed in accordance with Chinese
and foreign tax laws, as applicable, and we are subject to Chinese tax laws, all of which may be changed in a manner that could adversely
affect the amount of distributions to shareholders. There can be no assurance that Income Tax Laws of China will not be changed in a
manner that adversely affects shareholders. In particular, any such change could increase the amount of tax payable by us, reducing the
amount available to pay dividends to the holders of our ordinary shares.
We are a holding company with no material operations
of our own. We conduct our operations through our subsidiaries in China. As a result, our ability to pay dividends and to finance any
debt we may incur depends upon dividends paid by our subsidiaries. Under applicable PRC regulations, foreign-invested enterprises in
China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting
standards each year to its general reserves until the accumulative amount of such reserves reaches 50% of its registered capital. These
reserves are not distributable as cash dividends.
As of March 31, 2021, our PRC subsidiaries had
an aggregate retained earnings of approximately RMB 440.5 million (US$65.5 million) under PRC GAAP. With respect to retained earnings
accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition,
cash requirements and availability and other factors as it may deem relevant at such time. Any declaration and payment, as well as the
amount, of dividends will be subject to our By-Laws, charter and applicable Chinese and U.S. state and federal laws and regulations,
including the approval from the shareholders of each subsidiary which intends to declare such dividends, if applicable.
Value-added Tax (“VAT”)
Value-added taxes (“VAT”) collected
from customers relating to product sales and remitted to governmental authorities are presented on a net basis. VAT collected from customers
is excluded from revenue. The Company is generally subject to the value added tax (“VAT”) for merchandise sales and services
performed. Before May 1, 2018, the applicable VAT rate was 17%, while after May 1, 2018 and before April 1, 2019, the Company is subject
to a VAT rate of 16%. After April 1, 2019, the Company is subject to a VAT rate of 13% based on the new Chinese tax law.
Earnings per Share
The Company computes earnings per share (“EPS”)
in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies with complex capital structures to present basic
and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities,
options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential
common shares that have 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.
Foreign Currency Translation
The Company and its subsidiaries’ principal
country of operations is the PRC. The Company maintained its financial record using the United States dollar (“US dollar”)
as the functional currency, while the subsidiaries of the Company in Hong Kong and mainland China maintained their financial records using
RMB as the functional currencies. The consolidated statements of income and comprehensive income and cash flows denominated in foreign
currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies
at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional
currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based
on the average rate of exchange, amounts related to assets and liabilities reported on the consolidated statements of cash flows will
not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from
the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income
(loss) included in consolidated statements of changes in shareholders’ equity. Gains and losses from foreign currency transactions
are included in the consolidated statement of income and comprehensive income.
The value of RMB against US$ and other currencies
may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation
of RMB may materially affect the Company’s financial condition in terms of US$ reporting. The following table outlines the currency
exchange rates that were used in creating the consolidated financial statements in this report:
|
|
March 31, 2021
|
|
March 31,2020
|
|
March 31,2019
|
Period-end spot rate
|
|
US$1=RMB 6.5713 Yuan
|
|
US$1=RMB 7.0851 Yuan
|
|
US$1=RMB 6.7335 Yuan
|
Average rate
|
|
US$1=RMB 6.7960 Yuan
|
|
US$1=RMB 6.9655 Yuan
|
|
US$1=RMB 6.7317 Yuan
|
Comprehensive Income
Comprehensive income includes net income and
foreign currency translation adjustments and is reported in the consolidated statements of income and comprehensive income.
Segment Reporting
The Company uses the “management approach” in determining
reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief
operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable
segments. The Company’s chief operating decision maker has been identified as the chief executive officer of the Company who reviews
financial information of separate operating segments based on U.S. GAAP. The chief operating decision maker now reviews results analyzed
by customer. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company
has determined that it has only one operating segment.
Concentration of Risks
Exchange Rate Risks
The Company operates in China, which may give
rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the US$ and
the RMB. As of March 31, 2021 and 2020, cash and cash equivalents of $36,203,665 (RMB 237,905,147 Yuan) and $33,430,403 (RMB 236,857,749
Yuan), respectively, is denominated in RMB and is held in PRC.
Currency Convertibility Risks
Substantially all of the Company’s operating
activities are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place
either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions
requires submitting a payment application form together with other information such as suppliers’ invoices, shipping documents
and signed contracts.
Concentration of Credit Risks
Financial instruments that potentially subject
the Company to concentration of credit risks consist primarily of cash and cash equivalents and accounts receivable, the balances of
which are stated on the consolidated balance sheets which represent the Company’s maximum exposure. The Company places its cash
and cash equivalents in good credit quality financial institutions in China. Concentration of credit risks with respect to accounts receivables
is linked to the concentration of revenue. To manage credit risk, the Company performs ongoing credit evaluations of customers’
financial condition.
Interest Rate Risks
The Company is subject to interest rate risk.
Bank interest bearing loans are charged at variable interest rates within the reporting period. The Company is subject to the risk of
adverse changes in the interest rates charged by the banks when these loans are refinanced.
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 political, economic,
and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may be adversely affected
by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these
situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed
in Note 1, this may not be indicative of future results.
COVID-19 Pandemic
The outbreak of COVID-19 began in January 2020
and was quickly declared as a Public Health Emergency of International Concern and subsequently a pandemic by the World Health Organization.
A series of prevention and control measures including quarantines, travel restrictions, and the temporary closure of facilities were implemented
across the country.
The Company was impacted by the COVID-19 pandemic
in many ways, including the plump of closures of experience stores, diving sales by distribution channels, and shut down or partly shut
down of production facilities for around three months in the year ended March 31, 2021. Revenue recovered quickly after the Company reopened
and increased 10% in the year 2021 compared with 2020 as the Company expanded its online distribution channel and also from several new
business stream.
Despite the fact that China has largely brought the pandemic under
control, there is still a high degree of uncertainty as to how the pandemic will evolve going forward. A new outbreak in China could cause
new disruptions of our production, distribution and sales, and have an adverse impact on our business, financial condition and results
of operations for the remainder of the fiscal year ending March 31, 2022, which cannot be reasonably estimated at the current stage. The
Company will regularly assess its business conditions and adopt measures to mitigate any new impact of the ongoing pandemic.
Related Parties
The Company accounts for related party transactions
in accordance with ASC 850 (“Related Party Disclosures”). A party is considered to be related to the Company if the party
directly or indirectly or through one or more intermediaries, controls, is controlled by, or is 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. A party which can significantly influence the management or operating policies of the transacting parties
or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one
or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Recent Accounting Pronouncements
The Company considers the applicability and impact
of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842),” which increases lease transparency and comparability among organizations. Under the new standard, lessees
will be required to recognize all assets and liabilities arising from leases on the balance sheet, with the exception of leases with
a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize
lease assets and liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years, and early adoption is permitted. In March 2018, the FASB approved an alternative transition method to the
modified retrospective approach, which eliminates the requirement to restate prior period financial statements and requires the cumulative
effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption.
In May 2020, the FASB issued ASC 2020-05 to defer the effective date for non-issuer entities that have not yet issued their financial
statements reflecting the adoption of leases; the amended effective date non-issuer entities is for fiscal years beginning after December
15, 2021.
The Company as an “emerging growth company”
has elected to adopt the new lease standard as of the effective date applicable to non-issuers and will adopt the new lease standard
on April 1, 2022 using the modified retrospective method. The modified retrospective approach would not require any transition accounting
for leases that expired before the earliest comparative period presented. The Company does not expect this update will have a material
impact on the Company’s consolidated financial position, results of operations and cash flow.
In October 2020, the FASB issued Accounting Standards
Update No. 2020-10, Codification Improvements – Disclosures (“ASU 2020-10”) to align with the SEC’s regulations.
This ASU improves consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and
clarifies application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance,
and refining or correcting terminology. The Company will adopt ASU 2020-10 as of the reporting period beginning April 1, 2021. This ASU
will not affect the Company's results of operations, cash flows or financial position and the Company does not expect the adoption to
have a material impact on the disclosures to the consolidated financial statements.
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of March 31, 2021
and 2020:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accounts receivable, gross
|
|
$
|
34,563,743
|
|
|
$
|
30,036,448
|
|
Less: allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable
|
|
$
|
34,563,743
|
|
|
$
|
30,036,448
|
|
The Company recorded no allowance for doubtful
accounts as of March 31, 2021 and 2020. The Company gives its customers credit period of 180 days and continually assesses the recoverability
of uncollected accounts receivable. As of March 31, 2021 and 2020, the balances of the Company’s accounts receivable are all due
within 1 year. The Company believes the balances of its accounts receivable are fully recoverable as of March 31, 2021.
NOTE 4 – INVENTORIES
Inventories consisted of the following as of March 31, 2021 and 2020:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
1,422,941
|
|
|
$
|
1,647,667
|
|
Work in process
|
|
|
34,717
|
|
|
|
-
|
|
Finished goods
|
|
|
327,721
|
|
|
|
381,739
|
|
Total
|
|
$
|
1,785,379
|
|
|
$
|
2,029,406
|
|
No lower of cost or net realizable value adjustment
was recorded as of March 31, 2021 and 2020, respectively.
No inventory provision or write-downs for the
years ended March 31, 2021 and 2019. The inventory write-downs for the year ended March 31, 2020 was $117,753.
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following
as of March 31, 2021 and 2020:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Prepayments to suppliers
|
|
$
|
9,334,225
|
|
|
$
|
3,564,705
|
|
Other current assets
|
|
|
12,855,519
|
|
|
|
699,425
|
|
Total
|
|
$
|
22,189,744
|
|
|
$
|
4,264,130
|
|
The Company and Fujian Shennong Jiagu Development Co., Ltd. (Fujian
Shennong) are in negotiation for the Company to acquired 51% of Fujian Shennong and the Company has paid $9,130,613 (RMB 60 million)
to the owner of Fujian Shennong as a deposit for the transaction. Fujian Shennong is a company focusing on trading of agriculture products,
which generates a stable revenue and maintain a solid customers base. The transaction is expected to be completed within one year pending
parties complete their due diligence and Fujian Shennong to provide audited financial statements. If the parties are not able to complete
this transaction, the deposit will be refunded to the Company.
In fiscal year 2021, the Company made a prepayment of $8,877,817 (RMB
58.3 million) to Shandong Guanxian Lingzhibao Biological Co., Ltd. (Guanxian Lingzhibao) to purchase certain materials that the Company
uses in its products. The prepayment was deposit for raw material purchase in order to secure the quantities Guanxian Linzhibao produces.
The prepayment the Company made is fully refundable in condition of failure of supply caused by Guanxian Lingzhibao. As of March 31, 2021,
the Company has received approximate $5,000,000 of products and $4,022,851 (approximately RMB 26.4 million) prepayments made to Guanxian
Lingzhibao remained outstanding.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following as of March
31, 2021 and 2020:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Buildings
|
|
$
|
12,813,510
|
|
|
$
|
9,590,058
|
|
Machinery
|
|
|
2,867,046
|
|
|
|
2,339,879
|
|
Furniture, fixture and electronic equipment
|
|
|
231,929
|
|
|
|
163,819
|
|
Vehicles
|
|
|
147,132
|
|
|
|
131,381
|
|
Total property plant and equipment, at cost
|
|
|
16,059,617
|
|
|
|
12,225,137
|
|
Less: accumulated depreciation
|
|
|
(5,545,586
|
)
|
|
|
(4,328,636
|
)
|
Property, plant and equipment, net
|
|
$
|
10,514,031
|
|
|
$
|
7,896,501
|
|
As of March 31, 2021 and 2020, the Company pledged
its building with a carrying value of approximately $5.1 million and $5.1 million, respectively, as the collateral for short-term bank
loans (see Note 9).
Depreciation expense was $849,454, $674,247 and
$682,462 for the years ended March 31, 2021, 2020 and 2019, respectively. Depreciation allocated as manufacturing overhead to inventories
was $589,610, $555,636 and $568,017 for the years ended March 31, 2021, 2020 and 2019, respectively.
NOTE 7 – INTANGIBLE ASSETS, NET
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Land use right, cost
|
|
$
|
879,886
|
|
|
$
|
811,194
|
|
Software, cost
|
|
|
1,084,858
|
|
|
|
-
|
|
Total
|
|
|
1,964,744
|
|
|
|
811,194
|
|
Less: accumulated amortization
|
|
|
(132,645
|
)
|
|
|
(91,472
|
)
|
Intangible assets, net
|
|
$
|
1,832,099
|
|
|
$
|
719,722
|
|
The Company purchased several software to support
its business operation in fiscal year 2021.
As of March 31, 2021 and 2020, the Company pledged
its land use right on its land with a carrying value of $758,504 (29,720 square meters) and $719,722 (29,720 square meters), respectively,
as the collateral for a short-term bank loans (see Note 9).
Amortization expense was $31,425, $16,502 and
$17,076 for the years ended March 31, 2021, 2020 and 2019, respectively.
Estimated future amortization expense is as follows
as of March 31, 2021:
Years ending March 31,
|
|
Amortization
expense
|
|
|
|
|
|
2022
|
|
$
|
126,084
|
|
2023
|
|
|
126,084
|
|
2024
|
|
|
126,084
|
|
2025
|
|
|
126,084
|
|
2026
|
|
|
126,084
|
|
Thereafter
|
|
|
1,201,679
|
|
|
|
$
|
1,832,099
|
|
NOTE 8 – OTHER ASSETS
Other assets consisted of the following as of March 31, 2021 and 2020:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Prepayments for advertising or marketing
|
|
$
|
4,909,840
|
|
|
$
|
6,200,104
|
|
Prepayment of celebrity endorsement fee
|
|
|
228,265
|
|
|
|
296,397
|
|
Total
|
|
$
|
5,138,105
|
|
|
$
|
6,496,501
|
|
The Company entered into several agreements with
50 exclusive distributors to provide subsidy of $152,177 (RMB 1 million) to each exclusive distributor for advertising and marketing.
The prepayments were amortized within the contract periods of 3 years. In order to promote the culture of Chinese medicine and to seek
for opportunities to export traditional Chinese herbal products to overseas health care and wellness market, the Company entered into
a business development cooperation agreement with a service company located in the U.S. The agreement has a 3-year term for a total of
$1,600,000. The service provider will provide market channel and advertisement supports to the Company.
In October 2018, the Company paid a celebrity
endorsement fee of $445,533 (RMB 3 million). The celebrity endorsement contract is for a period of 5 years.
NOTE 9 – SHORT-TERM BANK BORROWINGS
Short-term bank borrowings consisted of the following as of March
31, 2021 and 2020:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Industrial Bank Co., Ltd
|
|
$
|
1,065,238
|
|
|
$
|
987,989
|
|
Postal Saving Bank of China
|
|
|
1,171,762
|
|
|
|
1,044,445
|
|
Total
|
|
$
|
2,237,000
|
|
|
$
|
2,032,434
|
|
On May 4, 2018, the Company entered into a bank
loan agreement with Industrial Bank Co., Ltd to borrow $1,039,578 (RMB 7 million Yuan) as working capital for one year with due date
on April 21, 2019 and it was renewed in 2019 for another year. The loan bears a fixed interest rate of 1-year Loan Prime Rate (“LPR”)
+2.19% on the date of drawing per annum. The loan facility agreement is personally guaranteed by Mr. Xuezhu Wang, Mr. Xianfu Wang, and
Mrs. Yanying Lin. Based on guarantee contract the maximum guaranteed amount was RMB 7 million Yuan. The Company also pledged its building
and land use rights as collaterals. Based on the pledge agreement, the maximum pledged amount was RMB 17.4 million Yuan. There were no
loan guarantee fees paid to the personal guarantors. In April 2020, Fujian Happiness renewed the loan agreement with Industrial Bank
Co. Ltd for $1,065,238 (RMB 7,000,000) bearing interest rate at LPR plus 1.45% per annum, payable monthly. The loan was expired and paid
off in April 2021.
On June 24, 2019, the Company entered into a
loan facility framework agreement with Postal Saving Bank of China. The agreement allows the Company to access a total borrowing of approximately
$3.4 million (RMB 24.4 million Yuan) for short-term loans. The loan facility agreement is valid until June 23, 2025 and subject to renewal.
The loan facility agreement is personally guaranteed by Mr. Xuezhu Wang and Happiness Nanping. The Company also pledged its building
and land use right as collaterals. Pursuant to the loan facility agreement with Postal Saving Bank of China, which is valid from June
24, 2019 to June 23, 2025. On January 15, 2020 and February 6, 2020, the Company entered into a loan agreement of $846,848 (RMB 6.0 million)
and $197,597 (RMB 1.4 million) short-term loans bearing fixed interest rate of 4.35%, which was due on January 14, 2021 and February
5, 2021, respectively. The Company repaid RMB 7.4 million during year ended March 31, 2021. In addition, on April 7, 2020 and January
15, 2021, the Company entered into a loan agreement of RMB 1.7 million Yuan and RMB 6.0 million Yuan with Postal Saving Bank of China
as working capital for one year, respectively. The loans bear a fixed interest rate of LPR+20 BP; and the Company repaid RMB 1.7 million
Yuan on April 6, 2021 and April 8, 2021.
The carrying values of the Company’s pledged
assets to secure short-term borrowings by the Company are as follows:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Buildings, net
|
|
$
|
5,062,724
|
|
|
$
|
5,079,080
|
|
Land use rights, net
|
|
|
758,504
|
|
|
|
719,722
|
|
Total
|
|
$
|
5,821,228
|
|
|
$
|
5,798,802
|
|
For the years ended March 31, 2021, 2020 and
2019, interest expense on all short-term bank loans amounted to $111,790, $98,086 and $83,549, respectively.
NOTE 10 – AMOUNTS DUE TO RELATED PARTY
As of March 31, 2020, $844,716 due to related
party were payables due to Xuezhu Wang, CEO of the Company, for the payment of expenses on behalf of the Company. The Company repaid
the amount due to CEO during the year ended March 31, 2021 and the amount due to related party was $0 at March 31, 2021.
NOTE 11 – SHAREHOLDERS’ EQUITY
Ordinary shares
Happiness Biotech was incorporated under the
laws of the Cayman Islands on February 9, 2018. The Company issued 50,000 ordinary shares with par value of $1 to exchange for the ownership
in Fujian Happiness from the former shareholders to Happiness Nanping.
A Reorganization of the legal structure was completed
in August 2018. The Reorganization involved the incorporation of Happiness Biotech Group Limited, a Cayman Islands holding company; Happiness
Biology Technology Group Limited, a holding company established in Hong Kong, PRC; Happiness (Nanping) Biotech Co., Ltd, a holding company
established in Fujian, PRC; and the transfer of 100% ownership of Fujian Happiness from the former shareholders to Happiness Nanping.
In May 2018, the Company received $627,628 (RMB
4,000,000 Yuan) from two investors into Fujian Happiness.
On March 4, 2019, the Company subdivided its 50,000
ordinary shares into 90,000,000 Ordinary shares and 10,000,000 Preferred shares. The authorized ordinary shares became 100,000,000 shares
and the par value changed from $1 to $0.0005. On the same day, the Company cancelled 77,223,100 ordinary shares and sold additional 223,100
ordinary shares. The Company has retrospectively reflected the stock subdivision and cancellation in all periods presented in these financial
statements.
On October 25, 2019, the Company announced the
closing of its initial public offering of 2,000,000 ordinary shares, US$0.0005 par value per share (“Ordinary Shares”) at
an offering price of $5.50 per share for a total of $11,000,000 in gross proceeds. The Company raised total net proceeds of $9,342,339
after deducting underwriting discounts and commissions and offering expenses.
The Company entered several Securities Purchase
Agreement from September 2020 through March 2021. Pursuant to which, the Company issued 5,100,000 ordinary shares to the purchasers with
a total consideration amounted $10,965,703. The Company collected total net proceeds of $10,725,700 after deducting commissions and offering
expenses.
On March 15, 2021, the Company issued 381,580
ordinary shares to its management and employees for their service. The Company recorded compensation cost $778,423 according to the fair
value of the shares issued.
Non-controlling Interest
Non-controlling interests represent the interest
of non-controlling shareholder in Happiness Biotech Group Limited based on his proportionate interests in the equity of that company
adjusted for its proportionate share of income or losses from operations. See Note 1 for details of the Company and its operating
subsidiaries ownership.
Statutory reserve
The Company is required to make appropriations
to certain reserve funds, comprising the statutory surplus reserve and the discretionary surplus reserve, based on after-tax net income
determined in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”). Appropriations to the statutory
surplus reserve are required to be at least 10% of the after-tax net income determined in accordance with PRC GAAP until the reserve
is equal to 50% of the entity’s registered capital. Appropriations to the discretionary surplus reserve are made at the discretion
of the Board of Directors. In 2019, $56,077 was appropriated by Fujian Happiness to the statutory surplus reserve and the statutory reserve
reached 50% of its registered capital. In 2020, no statutory surplus was appropriated. In 2021, $5,558,669 was appropriated by Fujian
Happiness to the statutory surplus reserve. The reserved amounts as determined pursuant to PRC statutory laws amounted $7,622,765 and
$2,064,096 as of March 31, 2021 and 2020.
Under PRC laws and regulations, statutory surplus
reserves are restricted to set-off against losses, expansion of production and operation and increasing registered capital of the respective
company, and are not distributable other than upon liquidation. The reserves are not allowed to be transferred to the Company in terms
of cash dividends, loans or advances, nor allowed for distribution except under liquidation. Amounts restricted include paid-in capital,
additional paid-in capital and statutory surplus reserves of the Company in PRC amounted $18,978,449 and $7,778,259 as of March 31, 2021
and 2020, respectively.
As of March 31, 2021, our PRC subsidiaries had
an aggregate retained earnings of approximately RMB 440.5 million (US$65.5 million) under PRC GAAP. With respect to retained earnings
accrued after such date, our Board of Directors may declare dividends after taking into account our operations, earnings, financial condition,
cash requirements and availability and other factors as it may deem relevant at such time.
Dividend
On July 31, 2020, the Board of the Company declared
a special cash dividend of $0.015 per Ordinary Shares. The dividend, equal to $375,000 in the aggregate, was fully paid on August 17,
2020.
Options
In October 2019, the Company granted its underwriters
an option for a period of 45 days after the closing of the initial public offering to purchase up to 15% of the total number of the Company’s
Ordinary Shares to be offered by the Company pursuant to the offering (excluding shares subject to this option), solely for the purpose
of covering overallotments, at the initial public offering price less the underwriting discount. These options expired and unexercised
in 2020.
|
|
Number Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Contractual Life in Days
|
|
|
Intrinsic Value
|
|
Options Outstanding as of March 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options Exercisable as of March 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
Options granted
|
|
|
300,000
|
|
|
|
5.12
|
|
|
|
45
|
|
|
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired
|
|
|
(300,000
|
)
|
|
|
5.12
|
|
|
|
45
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of March 31, 2021 and 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options Exercisable as of March 31, 2021 and 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
In October 2019, the Company granted to the underwriters
warrants to purchase up to a total of 184,000 ordinary shares (equal to 8% of the aggregate number of ordinary shares sold in the
offering, if over-allotment shares are placed by the underwriters. Without over-allotment share issuance, a total of 160,000 warrants
will be granted). The warrants will be exercisable at an exercise price equal to one hundred twenty percent (120%) of the offering price,
in whole or in parts, at any time from issuance and expire five (5) years from the effective date of the offering.
The Company’s outstanding and exercisable
warrants as of March 31, 2021 are presented below:
|
|
Number Outstanding
|
|
|
Weighted Average Exercise Price
|
|
|
Contractual Life in Years
|
|
|
Intrinsic Value
|
|
Warrants Outstanding as of March 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Warrants granted
|
|
|
160,000
|
|
|
$
|
6.60
|
|
|
|
5.0
|
|
|
|
-
|
|
Warrants forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants Outstanding as of March 31, 2020
|
|
|
160,000
|
|
|
$
|
6.60
|
|
|
|
4.6
|
|
|
$
|
-
|
|
Warrants Outstanding as of March 31, 2021
|
|
|
160,000
|
|
|
$
|
6.60
|
|
|
|
3.6
|
|
|
$
|
-
|
|
NOTE 12 – TAXES
(a) Corporate Income Taxes (“CIT”)
The Company was incorporated in the Cayman Islands
and is not subject to tax on income or capital gain under the laws of the Cayman Islands.
Happiness Hong Kong was incorporated in Hong
Kong and is subject to a statutory income tax rate of 16.5%.
Under the Law of the People’s Republic
of China on Enterprise Income Tax (“New EIT Law”), which was effective from January 1, 2008, both domestically-owned enterprises
and foreign-invested enterprises are subject to a uniform tax rate of 25% while preferential tax rates, tax holidays and even tax exemption
may be granted on case-by-case basis. EIT grants preferential tax treatment to High and New Technology Enterprises (“HNTEs”).
Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for
HNTE status every three years. Fujian Happiness, the Company’s main operating entity in PRC, was approved as HNTEs and is entitled
to a reduced income tax rate of 15% from December 2019 to December 2022.
The Company evaluates each uncertain tax position
(including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits
associated with the tax positions. As of March 31, 2021 and 2020, the Company did not have any significant unrecognized uncertain tax
positions. The Company did not incur any interest and penalties related to potential underpaid income tax expenses for the years ended
March 31, 2021 and 2020, respectively, and also did not anticipate any significant increases or decreases in unrecognized tax benefits
in the next 12 months from March 31, 2021.
The following table reconciles the statutory
rate to the Company’s effective tax rate:
|
|
For the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
PRC statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Effect of PRC preferential tax rate
|
|
|
(10
|
)%
|
|
|
(10
|
)%
|
|
|
(10
|
)%
|
Effect of other deductible expenses
|
|
|
7.4
|
%
|
|
|
3.3
|
%
|
|
|
(0.5
|
)%
|
Total
|
|
|
22.4
|
%
|
|
|
18.3
|
%
|
|
|
14.5
|
%
|
The provision for income tax consisted of the
following:
|
|
For the years ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
Current income tax provision
|
|
$
|
959,384
|
|
|
$
|
2,844,087
|
|
|
$
|
3,183,154
|
|
Deferred income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
959,384
|
|
|
$
|
2,844,087
|
|
|
$
|
3,183,154
|
|
Deferred income taxes reflect the net effects
of temporary difference between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used
for income tax purposes. The Company recorded no deferred tax assets and liabilities as of March 31, 2021, 2020 and 2019, as there were
no material temporary difference between the carrying amounts of assets and liabilities.
(b) Income Tax Payable
The Company’s taxes payable as of March 31, 2021 and 2020 consisted
of the following:
|
|
As of
March 31,
|
|
|
As of
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Income tax payable
|
|
$
|
377,025
|
|
|
$
|
568,830
|
|
VAT payable
|
|
|
(53,035
|
)
|
|
|
109,414
|
|
Other tax payables
|
|
|
10,533
|
|
|
|
18,408
|
|
Total
|
|
$
|
334,523
|
|
|
$
|
696,652
|
|
NOTE 13 – BUSINESS COMBINATION
On February 1, 2021, the Company acquired 51%
equity interest of DAJI with total cash consideration of $75,044 (RMB510,000). DAJI is a company incorporated in Nanjing, the PRC and
engages in providing live show service. The results of DAJI have been included in the consolidated financial statements of the Company
since the acquisition date of February 1, 2021.
On the acquisition date, the purchase price was
allocated to the assets acquired and liabilities assumed based on their fair values was as follows. Fair value of the non-controlling
interests was estimated based on the equity value of DAJI derived by the discounted cash flow method after considering a discount for
lack of control:
Net liabilities acquired
|
|
$
|
(11,544
|
)
|
|
|
|
|
|
Goodwill
|
|
|
162,832
|
|
Non-controlling interests
|
|
|
(76,244
|
)
|
Total
|
|
|
75,044
|
|
|
|
|
|
|
Purchase price – cash consideration
|
|
$
|
75,044
|
|
The accompanying unaudited pro forma combined
statements of operations presents the accounts of the Company and DAJI for the years ended March 31, 2021 and 2020, respectively, assuming
the acquisition occurred on April 1, 2019.
2021 Summary Statement of Operations
|
|
HAPPINESS BIOTECH GROUP LIMITED
|
|
|
DAJI
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
71,433,130
|
|
|
$
|
175,425
|
|
|
$
|
71,608,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
683,926
|
|
|
$
|
(2,333
|
)
|
|
$
|
681,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per ordinary share - basic and diluted
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares - basic and diluted
|
|
|
26,160,270
|
|
|
|
|
|
|
|
26,160,270
|
|
2020 Summary Statement of Operations
|
|
HAPPINESS BIOTECH GROUP LIMITED
|
|
|
DAJI
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
65,061,953
|
|
|
$
|
7,429
|
|
|
$
|
65,069,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
12,688,035
|
|
|
$
|
(21
|
)
|
|
$
|
12,688,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per ordinary share - basic and diluted
|
|
$
|
0.53
|
|
|
|
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares - basic and diluted
|
|
|
23,843,836
|
|
|
|
|
|
|
|
23,843,836
|
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
As of March 31, 2021 and 2020, Company has no
significant leases or unused letters of credit.
From time to time, the Company is involved in
various legal proceedings, claims and other disputes arising from commercial operations, employees, and other matters which, in general,
are subject to uncertainties and in which the outcomes are not predictable. The Company determines whether an estimated loss from a contingency
should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. Although the Company can give no assurances
about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on the Company, the Company
believes that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided or covered
by insurance, will not have a material adverse effect on our consolidated financial position or results of operations or liquidity. As
of March 31, 2021 and 2020, Company has no pending legal proceedings.
NOTE 15 – CUSTOMER AND SUPPLIER CONCENTRATION
Significant customers and suppliers are those
that account for greater than 10% of the Company’s revenues and purchases.
The Company’s sales are made to customers
that are located primarily in China. For the years ended March 31, 2021, 2020 and 2019, no individual customer accounted for more than
10% of the Company’s total revenues.
For the years ended March 31, 2021 and 2020, the
Company purchased a substantial portion of raw materials from one third-party supplier (16.84% of total raw materials purchase for the
year ended March 31, 2021 and 16.67% of total raw materials purchases for the year ended March 31, 2020). As of March 31, 2021, the amounts
due to this vendor was $645,635. As of March 31, 2020, the amounts due to this vendor was $-0-. For the year ended March 31, 2019, the
Company purchased a substantial portion of raw materials from two third-party suppliers (12.7% and 11.7% of total purchases for the year
ended March 31, 2019, respectively). As of March 31, 2019, the amounts due to the two vendors were $384,547 and $129,984, respectively.
The Company believes there are numerous other suppliers that could be substituted should these suppliers become unavailable or non-competitive.
NOTE 16 – SUBSEQUENT EVENTS
On February 24, 2021, the Company signed a share purchase agreement
with the shareholder of Fuzhou Baodeng Trading Co., Ltd. (“Baodeng”). Pursuant to which, the Company purchased 51% of Baodeng
from the shareholder with a total consideration amounted to $257,179 (RMB 1,690,000). As of March 31, 2021, the Company has made a deposit
of $182,612 (RMB 1,200,000). Baodeng provides management service to the online stores under on JD.com platform. The transaction is completed
on April 1, 2021. The Company started to consolidate Baodeng since April 1, 2021 after the transaction is completed. The Company evaluated
and determined that the combination did not meet the significance tests under the reporting requirements.
On May 8, 2021, the Company entered into a Max
Pledge Amount Agreement with Industrial Bank Co., Ltd. Pursuant to which, the Company obtained a total $2,617,443 (RMB 17,200,000 Yuan)
bank facility with its building and land use right as collaterals. There were no loan guarantee fees paid to the personal guarantors.
On June 9, 2021, the Company borrowed $1,065,238
(RMB 7,000,000) under the above Max Pledge Amount Agreement from Industrial Bank Co., Ltd and shall be repaid by June 5, 2022. The loan
bears a fixed interest rate of 1-year Loan Prime Rate (“LPR”) +0.75% on the date of drawing per annum.
On June 21, 2021, the Company issued an aggregate
of 231,445 ordinary shares of the Company to certain employees and a director for their services. The total compensation cost was $351,812.
On July 1, 2021, the Company has completed a registered
direct offering with four non-U.S. investors on Form F-3 (File No. 333-250026) for gross proceeds of $2.2 million before deducting any
offering expenses. The 1,240,000 shares were purchased by four non-U.S. investors.
ITEM 19. EXHIBITS