ITEM 1. BUSINESS.
In this report, unless the context requires otherwise, references to the “Company”, “Baying Ecological”, “we”, “us” and “our” are to Baying Ecological Holding Group, Inc.
CORPORATE HISTORY
We were incorporated pursuant to the laws of the State of Nevada on April 11, 2005 under the name Toro Ventures Inc. We were initially in the fast food services industry. In accordance with the terms and provisions of that certain stock purchase agreement dated December 31, 2013 (the “Stock Purchase Agreement”) between Joe Arcaro, seller of control block of restricted shares of common stock of the Company and our sole officer and director (“Arcaro”) and The World Financial Holdings Group Co., Ltd., purchaser of the control block of shares of (“World Financial”), there was a change in our control. Arcarco tendered his resignation as the sole member of the Board of Directors and our President/Chief Executive Officer, Secretary, Treasurer/Chief Financial Officer effective February 7, 2014. Effective February 7, 2014, the Board of Directors simultaneously appointed (i) Zhouping Jiao as the sole member of the Board of Directors and as the President/Chief Executive Officer and Treasurer/Chief Financial Officer of the Company; and (ii) Yuehong Yan as our Secretary. In light of the upcoming new business operations, effective May 1, 2014, Zhouping Jiao resigned as the sole member of the Board of Directors and as our President/Chief Executive Officer, Treasurer/Chief Financial Officer and Yuehong Yan resigned as our Secretary. Simultaneously, the Board of Directors effective May 1, 2014 appointed Parsh Patel as the sole member of the Board of Directors and as our President/Chief Executive Officer, Secretary, Treasurer/Chief Financial Officer.
Effective January 9, 2014, our Board of Directors and the majority shareholders approved an amendment to the articles of incorporation to change our name from “Toro Ventures Inc.” to “Baying Ecological Holding Group Inc.” (the “Name Change Amendment”). The Amendment was filed with the Secretary of State of Nevada on January 23, 2014 changing our name to “Baying Ecological Holding Group Inc.” (the “Name Change”). The Name Change was effected to better reflect our future business operations. We filed appropriate documents with FINRA to effect the Name Change. FINRA declared an effective date of February 7, 2014 for the Name Change. Our trading symbol changed to “BYIN”. The new cusip number for the Company is 07278X107. The Name Change was effected to better reflect our future business operations.
OUR BUSINESS
Management believes that agriculture is one of the fastest growing investment areas of the 21st century and is posturing the Company to embark on building an industry leading presence as one of China’s walnut conglomerates. Based on management’s research, management further believes that in order to capitalize on the growth potential of the walnut market, we will need to revolutionize the industry by building a large scale, all-inclusive, standardized industrial chain. Management intends to achieve this goal by fully utilizing a strong technical force and cultural awareness and heritage to build a strong marketing plan and achieve peak brand operational capability.
Management has been identifying and seeking potential corporate partnerships with the Yangling Modern Agricultural Standardization Institute, which provides an array of technical support for us, as well as Shaanxi Yuanwangda Venture Capital Co., Ltd. in an effort to continue our operational plans. We have been researching an industry-wide chain of production standards for China’s entire walnut industry to full realize the development potential that will lead the industry. We intend to incorporate national policy regulations into every step of our business as well as eco-friendly, yet markedly efficient, methods to ensure the very best product is available to our consumers, while also securing the appropriate profit margins for our investors.
As of the date of this Annual Report, we intend to meet the following milestones to prepare ourselves for complete self-sufficiency and dominance throughout the walnut industry:
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Successful cultivation of large-scale, eco-efficient walnut reserves (including seed bases and harvesting techniques)
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Independent development of a specialized compound, biological fertilizer that fights the most common forms of walnut disease and create a barrier to prevent future infection
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Acquisition and retention of a top-tier production management team to ensure continued success and growth
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PRODUCTS AND SERVICES
We intend to offer a high quality, new to market brand that encompasses expertly grafted walnut breeds including the American red spike-shaped walnut and premier fragrant walnuts. We have a focus on providing all of our customers with the absolute pinnacle of walnut perfection while also offering our VIPs the ecologically sound, organic products that are in such high demand with our upper-level clientele.
We intend to provide the following products and services:
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Items
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Individual Membership
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Corporate Membership
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Pre-paid consumer credit(RMB)
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100--10,000
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1,000--20,000
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1
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Sales
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Pre-paid to enjoy double discount
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2
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Discount for special products
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15% off if paid by cash
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Double discount for corporate credit card
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3
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Discount for consuming in the Club
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15% off if paid by cash
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Double discount for corporate credit card
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4
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Discount for normal products
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10% off if paid by cash
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Double discount for corporate credit card
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5
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Service fee for group buying
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1%--3%
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6
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A variety of free workshop
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20 hours in total
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7
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Annual fruit-picking
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Not limited
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8
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Group trips
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Yes
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As special incentives to our long-term clients we will be prepared to offer the following programs through our retail location, the Baying Precious and Delicious Food Club:
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Rechargeable Membership Cards: We will offer a discount to our members that choose to pre-pay for their products using a membership card system.
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Special Products: Working in tandem with our cooperative business partners, we will be ready to offer our customers unique products only available through our collaboration.
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Glamorous VIP Reception Center: At our physical location we intend to feature a VIP tasting experience within our established reception center. Our members will have an opportunity to host guests as they enjoy sampling our offerings at a discount.
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Superior Offerings: With a focus on providing our clients with the very best walnuts and related products, we are committed to producing only the finest ecologically sound, organic products for our VIPs.
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Group Discount Purchasing: Our VIPs will have the opportunity to purchase products as a group, thereby taking advantage of a bulk discount.
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Personal and Professional Development Opportunities: The Fine and Delicious Food Club will be offering free lectures to our clients so as to expand their knowledge base about nutritional and dietary options, health related topics, finance and investment opportunities, as well as classic Chinese cultural studies.
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Group Enrichment Trips and Annual Fruit Picking Opportunities: The agricultural hubs of the Baying Company will be made available to our VIPs in an effort to offer true transparency to our top clients. We intend to also offer group trips, organized with both leisure and education in mind, as well as a family-friendly annual fruit picking trip that will cultivate not only an appreciation of the richness of our products, but also a holistic approach to a family’s health and nutrition.
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The Baying Precious & Delicious Food Club was an idea that management believes will allow us to directly reach our customers as we market our products to them. By specializing in selling high-quality and organic fruits, vegetables, cereals, and precious oils, we believe that this aspect of our corporate strategy will be a strong solidifier of profit and top-of-mind presence. The Baying Precious & Delicious Food Club will have profit making applications and intends to capitalize on these through: (i) membership card sales; (ii) direct profits from product sales; (iii) cooperation base supply; (iv) public media advertising revenue; and (v) website and periodical advertisement income.
We also intend on applying for and accepting subsidies from the following national organizations/branches of government to enrich our products and our production standards: (i) Department of Commerce: ‘Rural Construction Development’ project which is designed to assist companies with operations in rural areas who help serve local populations; (ii) Ministry of Agriculture: where the government provides subsidies for the construction of pollution-free base and food deep-processing factories countrywide; (iii) Development and Reform Commission: subsidies from government for agricultural machinery equipment; (iv) The Provincial Labor Union; and(v) funds from SME Promotion Bureau.
As of the date of this Annual Report, our offices in China are located on the 6th Floor of Huihao Building, off of 3rd Keji Road, in the heart of Xi’an city.
MARKETING
We are dedicated to capitalizing on a multi-pronged approach to advertising our products. We are confident that when potential consumers try our products, they will become loyal customers in swift order. As such, we intend to participate in numerous customer acquisition and retention activities including complimentary tastings at outdoor events and venues, door-to-door direct advertising, one-on-one marketing techniques including organizing meet and greet opportunities with our staff and our potential consumers, print and electronic media advertising in the Guangming Daily and the Shaanxi Daily, as well as a referral program that benefits both the company, and our existing clients who spread the word about our fantastic offerings. Through these ever-evolving and personalized approaches, we are ensuring that we are both increasing brand awareness and profit margins at the same time.
COMPETITION
After dedicating years to understanding the domestic, as well as the international, walnut market we are confident in our ability to not only penetrate the existing market, but to revolutionize what success means for the industry. The current market is facing a number of shortcomings:
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There is a marked shortage of quality products. With a lack of well-engineered walnut varieties, the current offers are lacking. An oversaturation of product due to an intense uptick in the number of orchards has caused the quality of fine Chinese walnuts to decline.
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There are also rampant inconsistencies in the types of varieties being offered. We refer to this as the ‘wide and messy’ effect. Amongst the existing brands there is blind grafting of plants and almost no regulation when it comes to cultivations techniques. This leads to a lack of standardized quality as well as a lack of diversity in the available products.
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Severe frost damage has also caused a great number of problems within the walnut industry. With no proper research having been applied to create a more frost-resistant walnut, almost the entire industry’s crop was lost with a bald harvest.
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Without the ability to employ the systems that we have designed for crop management, the industry is currently experiencing the effects of poor management and in turn, they are seeing increasing smaller yields. When we compare the average yield in an American farm (around 4,000 to 5,000 kg per orchard) to the average in a Chinese farm (about 20 kg), we can see that if we are to be as successful as seasoned farmers, there is a vital need for our farmers to be using a better grafted plant in conjunction with a better, more standardized growing process.
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Finally, we are revolutionizing the existing industrial chain, which is flawed and entirely inadequate for the industry. With no effective business partnerships in place, and widely unregulated, home-based distributions centers, there is no central organizing principle that allows for efficient management of the walnut market. We plan to broaden the processing capabilities of the current system, and tap into the relatively un-competitive industry by offering a more efficient distribution and production chain as well as our superior product.
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We intend to adopt a world-renowned irrigation system designed by the Netafirm Company of Israel. In employing this system we will be able to broaden our agricultural locations since this system can be utilized in even the most challenging of environments, thus allowing us endless options as to where we can cultivate our crops. In addition we use organic fertilizers to grow all of our products. Not only are organic foods better for the environment and our customers’ health, but they will continue to be in extremely high demand and on track to be the most requested items in the industry.
EMPLOYEES
As of the date of this Annual Report, we employ approximately 30 persons.
ITEM 1A. RISK FACTORS.
RISK FACTORS
You should carefully consider the risks, uncertainties and other factors described below because they could materially and adversely affect our business, financial condition, operating results and prospects and could negatively affect the market price of our common stock. Also, you should be aware that the risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not yet know of, or that we currently believe are immaterial, may also impair our business operations and financial results. Our business, financial condition or results of operations could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
In assessing these risks you should also refer to the other information contained in or incorporated by reference to this Annual Report on Form 10-K, including our financial statements and the related notes.
Risks Related to Our Business
Our walnut products have not been introduced to the market so there is no retail distribution history. Our future ability to grow our revenues depends upon successfully marketing and selling our walnut products.
We have not yet marketed our walnut products. Any adverse developments with respect to the future sale of our walnut products could significantly reduce revenues and have a material adverse effect on our ability to achieve profitability and achieve future growth. We cannot be certain that we will be able to commercialize our walnut products or that our products will be accepted in markets. Specifically, the following factors, among others, could affect market acceptance, revenues and profitability of our walnut products:
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the introduction of competitive products into the healthy nut snack market;
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the level and effectiveness of our sales and marketing efforts;
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any unfavorable publicity regarding nut products or similar products;
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litigation or threats of litigation with respect to these products;
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the price of the product relative to other competing products;
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price increases resulting from rising commodity costs;
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regulatory developments affecting the manufacture, marketing or use of these products; and
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the inability to gain significant customers.
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There is no assurance that this effort will be successful or that we will receive a return on our investment.
We may not be able to contract for the timely processing of nuts at an acceptable quality and cost.
In order to provide for the processing of our nuts, we may be required to enter into a nut processing agreement. While we believe that we will be able to enter into a processing agreement or engage other third parties to process our nuts, there is no assurance that we will be able to contract for the timely processing of nuts at an acceptable quality and cost. If we are unable to make arrangements with local processors, we would need to ship the crop to processors not in proximity, which may or may not be possible and, even if possible, would likely increase our cost of goods.
We are required to comply with quality and food production standards. The failure to maintain the quality of our walnut products could adversely affect our reputation in the market place and result in product recalls and product liability claims.
We are required to maintain the quality of our products and to comply with our product specifications and requirements for certain certifications for food safety from third-party organizations. In addition, we are required to comply with all Chinese local laws with respect to food safety. However, there can be no assurance that we will continue to produce products that are consistent with our standards or in compliance with applicable laws and standards, and we cannot guarantee that we will be able to identify instances in which we fail to comply with such standards or applicable laws. The failure to produce products that conform to our standards could materially and adversely affect our reputation in the marketplace and result in product recalls, product liability claims and severe economic loss.
Any significant delays of shipments to or from our warehouses could adversely affect our sales.
Shipments to and from our warehouses could be delayed for a variety of reasons, including weather conditions, strikes, and shipping delays. Any significant delay in the shipments of product would have a material adverse effect on our business, results of operations and financial condition, and could cause our sales and earnings to fluctuate during a particular period or periods. We have from time to time experienced, and may in the future experience, delays in the production and delivery of product.
Our farming operations face a competitive labor market in China.
Our farming operations require a large number of workers, many on a seasonal basis. The labor market in China is very competitive. In the event that we are not able to obtain and retain both permanent and seasonal workers to conduct our farming operations, or in the event that we are not able to maintain satisfactory relationships with our workers, our financial results could be negatively impacted.
Our operations rely on certain key personnel who are critical to our business.
Our future operating results depend substantially upon the continued service of key personnel and our ability to attract and retain qualified management and technical and support personnel. We cannot guarantee success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills and relevant industry experience to serve in those positions. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees.
Our business is subject to seasonal fluctuations.
We may experience seasonal fluctuations in production and sales and our quarterly results may fluctuate and our annual performance depends largely on results from prior quarters. Our business is highly seasonal, reflecting the general pattern of peak production and consumer demand for nut products during certain months. Typically, a substantial portion of our revenues may occur during those months. We may experience lower revenues during other quarters and may incur losses in these quarters. In addition, weather conditions may delay harvesting, which may result in a fiscal year with lower than normal revenues.
Additional regulation could increase our costs of production, and our business could be adversely affected.
As an agricultural company, we are subject to extensive government regulation, including regulation of the manner in which we cultivate and fertilize as well as process our walnuts. Furthermore, as we endeavor to move toward processing and selling our products, we will be subject to additional regulation regarding the manufacturing, distribution, and labeling of our products. There may be changes to the legal or regulatory environment, and governmental agencies and jurisdictions where we operate may impose new manufacturing, importation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our financial performance.
Diseases and pests can adversely affect nut production.
Walnuts are susceptible to various diseases and pests that can affect the health of the trees and resultant nut production. There are several types of fungal diseases that can affect nut development. Walnut trees and production may also be affected by insects and other pests. As indicated above, natural enemies are relied upon to manage insects that contribute to nut loss. Without these natural enemies, greater losses are possible. Pesticides may be available to manage these economic insect pests when treatment costs and nut loss justify their use, and when their use does not disrupt the natural enemy population. Increases in these diseases and pests or our inability to successfully control these diseases and pests could result in decreases in production, including loss of trees in affected orchards, which could have a material adverse effect on our business, financial condition and results of operations.
Our orchards are susceptible to natural hazards such as wildfires, rainstorms, floods and windstorms, which may adversely affect nut production.
Our orchards are located in areas that are susceptible to natural hazards, including drought, wildfires, heavy rains, floods, and windstorms. The occurrence of any natural disaster affecting a material portion of our orchards could have a material adverse effect on our business, financial conditions and results of operations.
The amount and timing of rainfall can materially impact nut production.
The productivity of orchards depends in large part on moisture conditions. Inadequate rainfall can reduce nut yields significantly, whereas excessive rain without adequate drainage can foster disease and hamper harvesting operations. Also, the timing of rainfall relative to key development stages in the growing season can impact nut production. Excessive rains affects pollination. Regardless of the timing, lack of adequate rainfall for prolonged periods of time will also negatively affect nut production.
Fluctuations in various food and supply costs as well as increased costs associated with product processing and transportation could materially adversely affect our business, financial condition and operating results.
As with most food products, the availability and cost of raw materials used in our products can be significantly affected by a number of factors beyond our control, such as general economic conditions, growing decisions, government programs (including government programs and mandates relating to ethanol), weather conditions such as frosts, drought, and floods, and plant diseases, pests and other acts of nature. Because we do not control the production of raw materials, we are also subject to delays caused by interruptions in production of raw materials based on conditions not within our control. Such conditions include job actions or strikes by employees of suppliers, weather, crop conditions, transportation interruptions, natural disasters, sustainability issues and boycotts of products or other catastrophic events.
There can be no assurance that we will be able to obtain alternative sources of raw materials at favorable prices, or at all, should there be shortages or other unfavorable conditions. Our inability to obtain adequate supplies of raw materials for our products or energy at favorable prices, or at all, as a result of any of the foregoing factors or otherwise could cause an increase in our cost of sales and a corresponding decrease in gross margin, or cause our sales and earnings to fluctuate from period to period. Such fluctuations and decrease in gross margin could have a material adverse effect on our business, results of operations and financial conditions. There is no assurance that we would be able to pass along any cost increases to our customers.
We may be subject to significant liability should the consumption of any food products manufactured or marketed by us cause injury, illness or death.
Regardless of whether such claims against us are valid, they may be expensive to defend and may generate negative publicity, both of which could materially adversely affect our operating results. The sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of bacterial contamination, foreign objects, substances, chemicals, other agents or residues introduced during production processes. Although we believe that we and our manufacturers are in material compliance with all applicable laws and regulations, if the consumption of our products causes or is alleged to have caused an illness in the future, we may become subject to claims or lawsuits relating to such matters. Even if a liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding an illness, injury or death could materially adversely affect our reputation with existing and potential customers on a permanent basis as well as our corporate image and operating results.
The food industry is highly competitive, and we compete with many companies that have greater resources than us.
Numerous regional and local firms may compete or are capable of competing with us. We compete primarily on the basis of product quality, ability to satisfy specific consumer needs, brand recognition, brand loyalty, service, marketing, advertising and price. Some competitors may have different profit or strategic objectives than we do. Competitors may develop new patentable technology that results in products which are able to compete successfully with our products. Substantial advertising and promotional expenditures are required to maintain or improve a brand’s market position or to introduce a new product, and participants in our industry are engaging with new media, including customer outreach through social media and web-based vehicles, which require additional staffing and financial resources.
Our business can be affected by currency rate fluctuations as our business is in China and the majority of potential revenue and expenses will be in Chinese Renminbi.
All of our business in China will be in the Chinese Renminbi. Because of this we will be affected by changes in foreign exchange rates. Over the past year the exchange rate between the Chinese Renminbi and the US Dollar has fluctuated drastically. Some of our expenses will be in US Dollars however the majority of our revenues will be in Chinese Renminbi. If we are not able to successfully protect ourselves against those currency fluctuations, then our profits will also fluctuate and could cause us to be less profitable or incur losses, even if our business would otherwise be profitable.
We have an accumulated deficit. If we are unable to reverse this trend, we will be like by forced to alter operations.
We have incurred losses for the past two fiscal years which consists of a net loss of $40,941 for June 30, 2019 and $43,518 for June 30, 2018. In addition, we had an accumulated deficit of $1,265,117 at June 30, 2019. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital will be required for future periods for: (i) new walnut product development expenses; (ii) potential marketing costs and professional fees; or (iii) we encounter greater costs associated with general and administrative expenses or offering costs. As a result, we are unable to predict whether we will achieve profitability in the future, or at all.
The uncertainty and factors described throughout this section may impede our ability to economically develop, produce, and market our walnut products effectively. As a result, we may not be able to achieve or sustain profitability or positive cash flows from operating activities in the future. Furthermore, since we have not yet achieved or acquired sufficient operating capital and given these financial results along with our expected cash requirements in the next twelve months, additional capital investment will be necessary to develop and sustain our operations.
Our independent registered public accounting firm has raised about over our ability to continue as a going concern.
The independent registered public accounting firm’s report accompanying our June 30, 2019 and 2018 audited financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared “assuming that the Company will continue as a going concern.” Our ability to continue as a going concern is dependent on raising additional capital to fund our operations and ultimately on generating future profitable operations. There can be no assurance that we will be able to raise sufficient additional capital or eventually have positive cash flow from operations to address all of our cash flow needs. If we are not able to find alternative sources of cash or generate positive cash flow from operations, our business and shareholders will be materially and adversely affected
We have incurred operating and net losses as well as negative operating cash flow and do not have financing commitments in place to meet expected cash requirements for the next twelve months. If we are unable to fund our day-to-day operations through revenues alone, and management believes we will incur operating losses for the near future while we expand our sales channels. While we have expanded our product line and expect to establish new sales channels, we may be unable to increase revenues to the point that we attain and are able to maintain profitability. We have had to rely on loans from shareholders to cover cash shortfalls. As a result, we continue to have significant working capital and stockholders’ deficits including a substantial accumulated deficit at June 30, 2019. In recognition of such, our independent registered public accounting firms have included an explanatory paragraph in their respective reports on our consolidated financial statements for the fiscal years ended June 30, 2019 and June 30, 2018 that expressed substantial doubt regarding our ability to continue as a going concern.
We need additional external capital and if we are unable to raise sufficient capital to fund our plans, we may be forced to delay operations.
Based on our current growth plan we believe we may require approximately $1,200,000 in additional financing within the next twelve months to develop our walnut products. Furthermore, if the cost of our development, production and marketing programs are greater than anticipated, we may have to seek additional funds through public or private share offerings or arrangements with corporate partners. There can be no assurance that we will be successful in our efforts to raise these required funds, or on terms satisfactory to us. Our success will depend upon our ability to access equity capital markets and borrow on terms that are financially advantageous to us. However, we may not be able to obtain additional funds on acceptable terms. If we fail to obtain funds on acceptable terms, then we might be forced to delay or abandon some or all of our business plans or may not have sufficient working capital to develop products, finance acquisitions, or pursue business opportunities. If we borrow funds, then we could be forced to use a large portion of our cash reserves, if any, to repay principal and interest on those loans. If we issue our securities for capital, then the interests of investors and stockholders will be diluted.
The success of our business depends upon the continuing contribution of our key personnel, including Mr. Parsh Patel, our Chief Executive Officer, whose knowledge of our business would be difficult to replace in the event we lose his services.
We are dependent on the services of Parsh Patel, our Chief Executive Officer, and a member of our Board and our other members of our senior management team. There can be no assurance that Mr. Patel will continue in his present capacity for any particular period of time. Other than non-compete provisions of limited duration included in employment agreements that we may or will have with certain individuals, we do not generally seek non-compete agreements with key personnel, and they may leave and subsequently compete against us. The loss of service of any of our senior management team, particularly those who are not party to employment agreements with us, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business.
Our majority shareholder is able to exercise significant influence over matters requiring stockholder approval.
As of the date of this Annual Report, we have 260,983 shares of common stock issued. Currently, our majority shareholder holds approximately 76.6% of the voting power of our common entitled to vote on any matter brought to a vote of the stockholders. Pursuant to Nevada law and our bylaws, the holders of a majority of our voting stock may authorize or take corporate action with only a notice provided to our stockholders. A stockholder vote may not be made available to our minority stockholders, and in any event, a stockholder vote would be controlled by the majority stockholders.
Our office and director may be subject to conflicts of interest.
Our officer and director serve only part time and can become subject to conflicts of interest. Mr. Patel may devote part of his working time to other business endeavors, including consulting relationships with other entities, and have responsibilities to these other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, our officer and director could be subject to conflicts of interest. Currently, we have no policy in place to address such conflicts of interest.
Nevada law and our Articles of Incorporation may protect our director from certain types of lawsuits.
Nevada law provides that our officers and directors will not be liable to us or our stockholders for monetary damages for all but certain types of conduct as officers and directors. Our Bylaws permit us broad indemnification powers to all persons against all damages incurred in connection with our business to the fullest extent provided or allowed by law. The exculpation provisions may have the effect of preventing stockholders from recovering damages against our officers and directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our officers and directors against claims, including claims arising out of their negligence, poor judgment, or other circumstances.
We have identified material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not adequately address those weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.
For fiscal year ended June 30, 2019, we did not adequately implement certain internal controls and for the interim periods of September 30, 2018, December 31, 2018 and March 31, 2019. Although we intend to take steps to correct our identified material weaknesses in our internal controls, the existence of these or possibly other material weaknesses or significant deficiencies raises concerns that the prevention of future errors could require the allocation of scarce financial resources at times when such resources may not be available to us. As of the date of this Annual Report, we believe we will be able to correct any material weaknesses in our internal controls in the future. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information; the market price of our stock could decline significantly; we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed.
Pursuant to proposals related to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.
To maintain compliance with Section 404 of the Act, we will engage in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging and requires management to dedicate scarce internal resources and to retain outside consultants.
During the course of our testing, we may identify deficiencies which we may not be able to remediate in time for securities disclosure reporting deadlines. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.
We may be deemed a shell company under SEC regulations, which would affect sales of our common stock in reliance on Rule 144 of the Securities Act and subject to the requirements of Rule 144(i).
Rule 144 under the Securities Act, which generally permits the resale, subject to various terms and conditions, of restricted securities after they have been held for six months will not immediately apply to our common stock because we are designated as a “shell company” under SEC regulations. Pursuant to Rule 144(i), securities issued by a current or former shell company that otherwise meet the holding period and other requirements of Rule 144 nevertheless cannot be sold in reliance on Rule 144 until one year after the date on which the issuer filed current “Form 10 information” (as defined in Rule 144(i)) with the SEC reflecting that it ceased being a shell company, and provided that at the time of a proposed sale pursuant to Rule 144, the issuer has satisfied certain reporting requirements under the Exchange Act. Because we have not advanced our business operations and have no assets, we may be considered a shell company. Thus, the reporting requirements of Rule 144(i) will apply and restrictive legends on certificates for shares of our common stock cannot be removed except in connection with an actual sale that is subject to an effective registration statement under or an applicable exemption from the registration requirements of, the Securities Act.
There is no significant active trading market for our shares and if an active trading market does not develop, purchasers of our shares maybe unable to sell them publicly.
There is no significant active trading market for our shares, and we do not know if an active trading market will develop. An active market will not develop unless broker-dealers develop interest in trading our shares, and we may be unable to generate interest in our shares among broker-dealers until we generate meaningful revenues and profits from operations. Until that time occurs, if it does at all, purchasers of our shares may be unable to sell them publicly. In the absence of an active trading market:
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Investors may have difficulty buying and selling our shares or obtaining market quotations;
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Market visibility for our common stock may be limited; and
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A lack of visibility for our common stock may depress the market price for our shares.
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Moreover, the market price for our shares is likely to be highly volatile and subject to wide fluctuations in response to various factors, including the following: (i) actual or anticipated fluctuations in our quarterly operating results and revisions to our expected results; (ii) changes in financial estimates by securities research analysts; (iii) conditions in the market for our walnut products; (iv) changes in the economic performance or market valuations of companies specializing in the nut industries; (v) announcements by us or our competitors of new products, strategic relationships, joint ventures or capital commitments; (vi) addition or departure of key personnel; and (vii) sales or perceived potential sales of our shares.
In addition, the securities market has from time to time, and to an even greater degree, experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ordinary shares. Furthermore, in the past, following periods of volatility in the market price of a public company’s securities, shareholders have frequently instituted securities class action litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.
Our common stock is considered to be “Penny Stock”.
Our common stock is considered to be a “penny stock” because it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Securities Exchange Act of 1934, as amended. These include but are not limited to, the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted on The NASDAQ Stock Market, or even if quoted, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the stock but must trade it on an unsolicited basis.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer, and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for stock that becomes subject to those penny stock rules. If a trading market for our common stock develops, our common stock will probably become subject to the penny stock rules, and shareholders may have difficulty in selling their shares.
Broker-Dealer requirements may affect trading and liquidity.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stocks.” Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
Our common stock may be volatile, which substantially increases the risk that you may not be able to sell your shares at or above the price that you may pay for the shares.
Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.
The market price of our common stock may be higher or lower than the price you may pay for your shares. Certain factors, some of which are beyond our control, that may cause our share price to fluctuate significantly include, but are not limited to, the following:
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variations in our quarterly operating results;
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loss of a key relationship or failure to complete significant transactions;
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additions or departures of key personnel; and
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fluctuations in stock market price and volume.
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Additionally, in recent years the stock market in general, and the over-the-counter markets in particular, have experienced extreme price and volume fluctuations. In some cases, these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price, regardless of our operating performance.
In the past, class action litigation often has been brought against companies following periods of volatility in the market price of those companies’ common stock. If we become involved in this type of litigation in the future, it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on your investment in our stock.
Our shares may not become eligible to be traded electronically which could result in brokerage firms being unwilling to trade them.
Our shares of common stock are eligible to be quoted on the OTCBB and OTCQB. However, our shares are not eligible with Depository Trust Company (DTC) to trade electronically. Because we are not DTC eligible, our shares cannot be electronically transferred between brokerage accounts, the practical effect of which means that our shares will not trade much, if at all, on the OTCBB or OTCQB. In order for our shares to trade on the OTCBB or OTCQB, our shares would need to be traded manually between broker dealers and their accounts, which is time consuming, costly and cumbersome. We cannot guaranty that our shares will ever become DTC eligible or, if in the event we apply for DTC eligibility, how long it will take to become eligible.
We have not paid and do not intend to pay cash dividends in the foreseeable future.
We have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Dividend payments in the future may also be limited by other loan agreements or covenants contained in other securities which we may issue. Any future determination to pay cash dividends will be at the discretion of our board of directors and depend on our financial condition, results of operations, capital and legal requirements and such other factors as our board of directors deems relevant.