CHINA FOODS HOLDINGS LTD. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
Special note regarding forward-looking statements
This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "estimate" or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include by are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships. Plan of Operation
We are a health company that develops, markets, promotes and distributes a variety of customized health care products and services, including supplements, healthy snacks, meal replacements, and nutritional consultation services to consumers in
China. We work with certain licensed healthcare food factories to develop and manufacture products and services that are distributed conventionally through sales agents and also through a network of e-commerce and social media platforms. In addition to products, we are committed to providing customized science based wellness consultation and service programs to customers. Our diverse products and services target health conscious customers and differentiate based upon age and gender and seek to manage different conditions. We reach out to customers fitting certain health and lifestyle profiles through our offline and online consultation services, and track eating habits and health indicators to provide customized products such as supplements. We believe this will facilitate the ability of customers to monitor, understand and adjust their health practices and lifestyle anytime and anywhere for increased customer engagement and retention. We conduct our business through our wholly owned subsidiary Guangzhou Xiao Xiang Health Industry Company Limited, a limited liability company organized under the laws of Chinaon March 8, 2017. Alpha Wellness (HK) Limited, a limited liability company organized under the laws of Hong Kongon April 24, 2019, and Elite Creation Group, a limited liability company formed under the laws of the British Virgin Islandsformed on September 5, 2018, are holding companies without operations. 7 Our Products and Services Our health products are designed to help enhance immunity and improve general wellbeing. We provide the following categories of healthcare products and customized healthcare consultation services in China: (i) Nutrition Catering(ii) Special Health Food (iii) Health Supplement and (iv) Skincare. The products target all age groups with different needs. Product category Representative Products Description Nutrition Catering Jasmine Beauty Meal replacement and healthy snacks Series Special Health Food Power Centinent Products that support a healthy active Series lifestyle and enhance Immunity Health Supplement Fuli Fruit Juice Functional fruit beverages and dietary Series and nutritional supplements containing resveratrol, anthocyanin, superoxide enzyme Skincare Series Tightness Facial skin care and recovery
Our products are taken as health care supplements in accordance with the principles of traditional Chinese medicine, including the principle of complementary medicine and ideal ingredient ratios and combinations.
Markets and Regions The Great Health Industry refers to production, operation, service and information dissemination, maintenance, restoration, and promotions linked to health. It covers medical products, health supplements, nutritional foods, medical devices, health appliances, fitness, health management, health consulting and many other production and service areas closely related to human health. The Great Health Industry is an emerging industry with huge market potential, especially in
China. According to the "China Great Health Industry Strategic Planning and Enterprise Strategy Consulting Report" published by Qianzhan Industry Institute(???????), the scale of the Great Health Industry in 2017 was USD 947.42 billion, which increased to over USD 1,069.66 billionin 2018. The report predicted USD 1,341.66 billionvolume for 2019 and forecast over USD 1,528.09 billionfor 2020. In the years till 2023, the average annual compound growth rate will be approximately 12.55%, and with the Great Health Industry reaching approximately USD 2,153.08 billionin 2023. Our Strategies We are focused on achieving long-term growth in revenues, cash flow and profit. We believe that we can achieve this by developing multiple distribution channels and strengthening our marketing and promotions, leading to better product turnover and revenue. We also expect to broaden our product range as well as product differentiation in the future. Based on the business experience accumulated over the years, we believe we can improve the efficiency of our supply chain with time-saving and cost-saving supply chain management and marketing planning for the target customer base with our one-stop service.
Our main objectives are (i) to enhance the marketability of our products; (ii) reduce logistics costs and time spent and (iii) further expand market share in
? Collaborate with third-party e-commerce platforms to increase product exposure,
e.g. Tmall, Jingdong mall
? Provide health care knowledge and consultation service via social media and
? Build brand image and reputation through customer experience and word of mouth
? Increase the number of downstream distributors and wholesalers
? Strengthen relationships with manufacturers, suppliers, pharmaceutical agents and
distributors ? Pursue strategic acquisitions and partnerships We intend to develop both online and offline distribution channels to increase sales volume and revenue. We expect to partner with third party e-commerce platforms, social media and We-media such as Wechat,
TikTokand Xiaohongshu to build our online presence. We believe that online channels will allow us to provide real-time nutrition and healthcare consultation services as well as increase customer engagement and retention. Starting from the second half of 2020, we have launched our "nutrition consulting" support services using a major social media software to allow customer groups to receive pre-purchase consultation and after-sales service for products anytime and anywhere. Our current offline sales channel relies on distributors and sales agents. To enhance the visibility and marketability of our products and services and to improve brand recognition and awareness, we hope to develop store-in-shop and counter experiences. We also intend to partner with high-end gyms to form nutrition clubs and hold weight-loss training camps, health assessment and fitness training camps and other activities. We intend to create a 'one-stop' solution for our customers by creating a multi-channel health product supply and retail system. We not only provide personalized consultation service to our customers, but also summarize and analyze our customer feedback and experiences through our consultation service and after-sales service. We intend to share this data with our manufacturers and supply chain partners to develop products and services that better meet the demands of our customers. By pooling and addressing the needs of downstream businesses and combining it with the Consumer to Manufacturer model for upstream transformation, we anticipate establishing a close relationship between manufacturers and suppliers. We believe this model can also reduce circulation costs and improve the efficiency of our supply chain. 8 Competition We operate in a highly competitive and fragmented industry that is sensitive to price and service. We compete with leading e-commerce companies such as Alibaba( China) which may offer substantially the same or similar product offerings as us. We also compete with businesses that focus on particular merchant categories or markets such as UNI HEALTH (HK stock code: 02211) and ALI HEALTH (HK stock code:0241). We also compete with traditional cash payments and other popular online shopping websites and apps, and other traditional media companies that provide discounts on products and services. We believe the principal competitive factors in our market include the following: ? Breadth of member base and the products and services featured. ? Close and fast pre-sales and after-sales service response. ? Ability to reduce the product turnover time and inventory cost. ? Relationship and bargaining power with supplier and manufacturer. ? Healthcare product effectiveness and acceptance from customer. ? Local presence and understanding of local business trends.
? Ability to provide a high volume of relevant services and information to
consumers. ? Ability to produce high purchase rates for products and services among members. ? Strength and recognition of our brand. Although we believe we compete favorably on the factors described above, many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, larger product and services offerings, larger customer base and greater brand recognition. These factors may allow our competitors to benefit from their existing customer base with lower development costs or to respond more quickly than we can to new or emerging technologies and changes in customer requirements. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build a larger customer base more effectively than us. Our competitors may develop products or services that are similar to our products and services or that achieve greater market acceptance than our products and services. In addition, although we do not believe that customer payment terms are a principal competitive factor in our market, they may become such a factor, and we may be unable to compete
on such terms.
Government and industry regulations
We are subject to the general laws in
Product liability and consumer protection
Product liability claims may arise if any of our healthcare products have a harmful effect on a consumer, who may make a claim for damages or compensation as an injured party. The General Principles of the Civil Law of the PRC, which became effective in
January 1987, state that manufacturers and sellers of defective products causing property damage or injury shall incur civil liabilities for such damage or injuries. The Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers' rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability. The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993and became effective on January 1, 1994to protect consumers when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers. In extreme situations, product manufacturers and distributors may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other third parties. 9
Summary of financial information
We have been significantly impacted by COVID-19 global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets.
Chinaand many other countries have issued policies intended to stop or slow the further spread of the disease. COVID-19 and China'sresponse to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business or
The following table presents certain operational data for the years ended
OPERATIONAL STATUS DATA:
For the Year For the Year Ended December Ended December 31, 2021 31, 2020 Revenues $ 361,116
$ 1,013,141Cost of revenue (121,690 ) (596,530 ) Gross profit 239,426 416,611 Total operating expenses (695,856 ) (887,426 ) Total other income 7,692 9,554 Loss before income taxes (448,738 ) (461,261 ) Income tax expense (6,671 ) (8,215 ) Net loss (455,409 ) (469,476 ) Revenue. We generated revenues of $361,116and $1,013,141for the fiscal years ended December 31, 2021and 2020. All the major customers are located in the PRC and Hong Kong. The significant decreases in the revenue due to the outbreak of COVID-19, we expected the revenue would be increased in the future once an efficacious COVID-19 vaccine emerges.
Over the years ended
Currently, the Company has two reportable business segments:
(i) Healthcare segment, mainly provides healthcare consulting services and
health and wellness products to customers; and (ii) the Wine segment, mainly provides wine products to customers.
In the following table, revenue is disaggregated by primary major product line, and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments. Year Ended December 31, 2021 Healthcare Segment Wine Segment Total Revenue from external customers: Consulting service income
$ 216,850$ - $ 216,850Sale of healthcare products 39,996 - 39,996 Sale of wine products - 104,270 104,270 Total revenue 256,846 104,270 361,116 Cost of sales: Consulting service income (31,315 ) - (31,315 ) Sale of healthcare products (32,064 ) - (32,064 ) Sale of wine products - (58,311 ) (58,311 ) Total cost of revenue (63,379 ) (58,311 ) (121,690 ) Gross profit 193,467 45,959 239,426 Operating Expenses Selling and distribution - (5,076 ) (5,076 ) General and administrative (690,780 ) - (690,780 ) Total operating expenses (690,780 ) (5,076 ) (695,856 ) Segment (loss) income $ (497,313 ) $ 40,883 $ (456,430 )Year Ended December 31, 2020 Healthcare Segment Wine Segment Total Revenue from external customers: Consulting service income $ 221,041$ - $ 221,041Sale of healthcare products 564,814 - 564,814 Sale of wine products - 227,286 227,286 Total revenue 785,855 227,286 1,013,141 Cost of sales: Consulting service income - - - Sale of healthcare products (395,392 ) - (395,392 ) Sale of wine products - (201,138 ) (201,138 ) Total cost of revenue (395,392 ) (201,138 ) (596,530 ) Gross profit 390,463 26,148 416,611 Operating Expenses Selling and distribution - (158,432 ) (158,432 ) General and administrative (728,994 ) - (728,994 ) Total operating expenses (728,994 ) (158,432 ) (887,426 ) Segment (loss) income $ (338,531 ) $ (132,284 ) $ (470,815 )The below revenues are based on the countries in which the customer is located. Summarized financial information concerning the geographic segments is shown in the following tables: Years ended December 31, 2021 2020 Hong Kong $ 216,851 $ 221,041China 144,265 792,100 $ 361,116 $ 1,013,14110
Over the years ended
Year ended December 31, 2021 December 31, 2021 Percentage of Revenues revenues Accounts receivable
Simmax Supply Chian Limited
$ 165,39146 % $ - Guangzhou Dexin Huamao Trading Co., Ltd. 103,072 29 % - Tang Fung Limited 51,460 14 % - TOTAL $ 319,92389 % Total $ - Year ended December 31, 2020 December 31, 2020 Percentage of Revenues revenues Accounts receivable Guangdong Hualian Health Industry Co., Ltd. $ 394,15839 % $ - Huaye Little Elephant HealthIndustry Co., Ltd. 234,547 23 % - TOTAL $ 628,70562 % Total $ - Cost of Revenue. Cost of revenue as a percentage of net revenue was approximately 33.70% for the fiscal year ended December 31, 2021. Cost of revenue as a percentage of net revenue was approximately 58.88% for the fiscal year ended December 31, 2020. The decrease of cost of revenue as a percentage of net revenue is attributable to a decrease in import of product from supplier and manufacturer due to the COVID-19 global pandemic.
Over the years ended
11 Year ended December 31, 2021 December 31, 2021 Percentage of Vendor Purchases purchases Accounts payable
Guangzhou Jingdong Trading Co., Ltd.
% Total: $ - Year ended December 31, 2020 December 31, 2020 Percentage of Vendor Purchases purchases Accounts payable Zhejiang Hongshiliang Group Tiantai Mountain Wuyao Co., Ltd.
$ 219,00737 % $ - Tengfeng (China) Trading Co., Ltd. 71,616 12 % - Guangzhou Zeli Pharmaceutical Technology Co., Ltd. 61,222 10 % - Total: $ 351,84559 % Total: $ - Gross Profit. We achieved a gross profit of $239,426and $416,611for the fiscal years ended December 31, 2021, and 2020, respectively. The decrease in gross profit is primarily attributable to the decrease in revenue.
General and Administrative (“G&A”) Expenses. We incurred G&A costs of
Other Income, net. We incurred net other income of
$7,692for the fiscal year ended December 31, 2021, as compared to a net other income of $9,554for the fiscal year ended December 31, 2020. Our net other income for the year ended December 31, 2020consisted of the subsidy funds from Government.
income tax expense. We recorded an income tax expense of
Net Loss. During the year ended
December 31, 2021, we incurred a net loss of $445,409, as compared to a net income $469,476for the year ended December 31, 2020. The significant decreases due to a decrease in the revenue, cost of revenue and selling and distribution expenses due to the outbreak of COVID-19. 12
Cash and capital resources
We believe that our current liquidity and the other sources of liquidity described below are sufficient to support general operations for at least the next 12 months.
December 31, 20212020
Net cash (used in) provided by operating activities
Net cash used in investing activities
(27,358 ) (67,862 ) Net cash provided by financing activities 50,319
For the year ended
December 31, 2021, net cash used in operating activities was $438,620which consisted primarily of the increase in accrued liabilities and other payables of $48,884, increase in prepayment and other receivables of $17,753, decrease in accounts payables of $7,827, decrease in tax payables of $17,229, increase in inventories of $121,279, and decrease in customer deposit of $69,141. For the year ended December 31, 2020, net cash provided by operating activities was $343,657, which consisted primarily of the decrease in prepayment and other receivables of $199,317, decrease in accounts receivables of $530,196, increase in accrued liabilities and other payables of $2,316, increase in accounts payables of $7,827, increase in tax payables of $8,219, increase in inventories of $94,655, increase in lease liabilities of $47, and increase in customer deposit of $13,044.
However, we expect to continue to rely on cash generated from our existing shareholder financing and private placements of our securities to fund our future operations and acquisitions.
For the year ended
For the year ended
December 31, 2020, net cash used in investing activities was $67,862, consisted primarily of purchase of plant and equipment of $75,060, and cash from acquisition of legal acquirer of $7,198.
Net cash generated by financing activities.
For the year ended
December 31, 2021, net cash provided by financing activities was $50,319, consisting primarily of advance from a related company of $150,508and repayment of lease liabilities of $100,189. For the year ended December 31, 2020, net cash provided by financing activities was $45,862, consisting primarily of repayment to a related company of $3,038, advance from a director 128,295 and repayment of lease liabilities of $79,395. Material Commitments
As of the date of this annual report, we have no significant commitments.
13 Material Cash Requirements We have not achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. We expect net cash expended in 2022 to be significantly higher than 2021. As of
December 31, 2021, we had an accumulated deficit of $918,195. Our material cash requirements are highly dependent upon the additional financial support from our major shareholders
in the next 12 - 18 months. We had the following contractual obligations and commercial commitments as of
December 31, 2021: Less More than 3-5 than 5 Contractual Obligations Total 1 year 1-3 Years Years Years $ $ $ $ $ Amounts due to a related company 199,964 199,964 - - - Amount due to a director 219,461 219,461 - - - Operating lease obligations 360,154 114,132 246,022 Accrued liabilities and other payables 51,200 51,200 - - - Customer deposits 340,783 340,783 - - - Total obligations 1,171,562 925,540 246,022 - -
Off-balance sheet arrangements.
The Company has no off-balance sheet arrangements and the Company is not expected to enter into any off-balance sheet arrangements.
Summary of Significant Accounting Policies
The Company's consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States(GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board(FASB). All adjustments considered necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as non-recurring charges. The consolidated financial statements are presented in US Dollars and include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The results of subsidiaries acquired or disposed of during the periods are included in the consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Important areas where management uses estimates include:
? revenue recognition, ? impairment of assets, including goodwill and other indefinite life intangible assets
? sales returns and allowances; ? inventory; ? estimated lives for tangible and intangible assets; ? income tax valuation allowances; and These estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we may consult outside experts to assist as considered necessary.
Segment Reporting Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting" establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organization structure as well as information about geographical areas, business segments and major customers in consolidated financial statements. Currently, the Company operates in one reportable operating segment in
Hong Kongand China. Cash and cash equivalents Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments. Accounts receivable Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from completion of service. Credit is extended based on evaluation of a customer's financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. At the end of fiscal year, the Company specifically evaluates individual customer's financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of December 31, 2021and 2020, there was no allowance for doubtful accounts. Inventories
Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a first-in-first-out method. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of
December 31, 2021and 2020, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs. 14 Plant and equipment
Property, plant and equipment are recorded at cost less accumulated amortization and accumulated impairment losses, if any. Depreciation is calculated on a straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
Expected useful lives Residual value Furniture, fixture and equipment 3 years 5
% Motor vehicle 3.33 to 4 years 5 % Leasehold improvement 2 years 5 % Expenditures for repairs and maintenance are expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations. Intangible assets Intangible assets represented trademarks of their products and are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of their registrations on a straight-line basis, which is 10 years and will expire in 2028.
Impairment of long-lived assets
In accordance with the provisions of ASC Topic 360, "Impairment or Disposal of Long-Lived Assets", all long-lived assets such as plant and equipment, as well as intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Revenue recognition
The Company adopted Accounting Standards Codification ("ASC") 606 - Revenue from Contracts with Customers" ("ASC 606"). Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract's transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: ? identify the contract with a customer; ? identify the performance obligations in the contract; ? determine the transaction price;
? allocate the transaction price to the performance obligations of the contract; and
? recognize revenue as the performance obligation is satisfied. 15
Currently, the Company operates two business segments.
Healthcare Business mainly provides health consulting services and health and wellness products to customers.
Revenue is earned from the rendering of health consulting advisory services to the customers. The Company recognizes services revenue over the period in which such services are performed. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. The sale and distribution of the healthcare products, such as (i)
Nutrition Catering(ii) Special Health Food (iii) Health Supplement and (iv) Skincare, is the only performance obligation under the fixed-fee arrangements. Revenue is recognized from the sale of their healthcare products upon delivery to the customers, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes ("VAT") on the majority of the products at the rate of 17% on the invoiced value of sales. The cost, such as shipping cost and material cost, is recognized when the product delivered to the customers. The Company records its cost including taxes. Wine Business mainly provides the wine products to the customers. Revenue is recognized from the sale of wine products upon delivery to the customers, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes ("VAT") on the majority of the products at the rate of 17% on the invoiced value of sales. The Company recorded product sales returns $148,208and $0for the years ended December 31, 2021and 2020, respectively. The cost, such as shipping cost and material cost, is recognized when the product delivered to the customers. The Company records its cost including taxes. Disaggregation of Revenue 16 Income taxes The Company adopted the ASC 740 Income tax provisions of paragraph 740-10-25-13, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13. The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Foreign Currency Conversion
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations. 17 The reporting currency of the Company is United States Dollar ("US$") and the accompanying financial statements have been expressed in US$. In addition, the Company is operating in
Hong KongSAR and the People's Republic of Chinaand maintain its books and record in its local currency, Hong Kong Dollars ("HK$") and Renminbi ("RMB"), which is a functional currency as being the primary currency of the economic environment in which their operations are conducted. In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, "Translation of Financial Statement", using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the year. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statements of changes in shareholder's equity. Net loss per share
The Company calculates net loss per share in accordance with ASC Topic 260, "Earnings per Share." Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive. Comprehensive income
ASC Topic 220, "Comprehensive Income", establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying consolidated statements of changes in shareholders' equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit. Retirement plan costs Contributions to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the accompanying statements of operation as the related employee service are provided. 18 Leases The Company adopts the FASB Accounting Standards Update ("ASU") 2016-02 "Leases (Topic 842)." for all periods presented. This standard requires lessees to recognize lease assets ("right of use") and related lease obligations ("lease liabilities") on the balance sheet for leases with terms in excess of 12 months.
The Company determines whether an agreement is a lease at inception. Operating leases are included in right-of-use operating lease assets and operating lease liabilities on the Consolidated Balance Sheets. Finance leases are included in ROU finance lease assets and finance lease liabilities in the Consolidated Balance Sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease and finance lease ROU assets and liabilities are recognized at
January 1, 2019based on the present value of lease payments over the lease term discounted using the rate implicit in the lease. In cases where the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the
lease term. Related parties
The Company follows ASC 850-10,
Pursuant to section 850-10-20 the related parties include: a) affiliates of the
Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and Income-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) 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; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have 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. The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amount due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. 19 Commitments and contingencies The Company follows the ASC 450-20, Commitments to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company's financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company's business, financial position, and results of operations or cash flows.
Fair value of financial instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification ("Paragraph 820-10-35-37") to measure the fair value of its financial instruments. Paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by paragraph 820-10-35-37 of the FASB Accounting Standards Codification are described below:
Level 1 Quoted market prices available in active markets for identical or
liabilities at the closing date.
Level 2 Pricing inputs other than quoted prices in active markets included in
level 1, which are either directly or indirectly observable at
Level 3 Pricing inputs that are generally observable and unsubstantiated inputs
by market data. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and lowest priority to unobservable inputs. If the inputs used to value the financial assets and financial liabilities fall under more than one level described above, the categorization is based on the lowest level that is significant for measuring the fair value of the instrument.
Recent accounting statements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board ("FASB") or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board ("FASB") or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), ("ASU 2021-04"). This ASU reduces diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 on January 1, 2022did not have a material impact on the Company's financial statements or disclosures.
The Company has reviewed all recently issued but not yet effective accounting pronouncements and does not believe that the future adoption of such pronouncements could have a material impact on its financial condition or results of operations.
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