424B4 1 form424b4.htm

 

Filed pursuant to Rule 424(b)(4)

Registration No. 333-248876

 

 

Wunong Net Technology Company Limited

 

5,000,000 Ordinary Shares

 

This is the initial public offering (the “Offering”) of Wunong Net Technology Company Limited, a British Virgin Islands company limited by shares, whose principal place of business is in Shenzhen, People’s Republic of China. We are offering, on a firm commitment basis, 5,000,000 ordinary shares, no par value (the “Ordinary Shares”). The selling shareholder identified in this prospectus is offering an additional 999,910 Ordinary Shares. We will not receive any proceeds from the sale of Ordinary Shares by the selling shareholder.

 

Prior to this offering, there has been no public market for our Ordinary Shares. The initial public offering price (the “Offering Price”) is $5.00 per Ordinary Share.

 

We have received approval to list our Ordinary Shares on the Nasdaq Capital Market under the symbol “WNW”.

 

As the date hereof, we are authorized to issue an unlimited number of ordinary shares of a single class with no par value. As of the date hereof, we have 20,000,000 Ordinary Shares issued and outstanding.

 

Investors will own ordinary shares in a holding company that does not directly own all of its operations in China. We are a British Virgin Islands corporation that wholly owns our Hong Kong subsidiary, Shenzhen Vande Technology Co., Limited. Shenzhen Vande Technology Co., Limited, in turn, wholly owns all of the share capital of Guo Gangtong Trade (Shenzhen) Co., Ltd, a wholly foreign-owned enterprise incorporated in China (“WFOE”). Guo Gangtong Trade (Shenzhen) Co., Ltd, through a series of contractual arrangements, manages and controls our operating entities, Wunong Technology (Shenzhen) Co., Ltd and its wholly-owned subsidiary, Wunong Catering Chain Management (Shenzhen) Co., Ltd. The interests of the shareholders of Wunong Technology (Shenzhen) Co., Ltd may conflict with yours.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Act of 2012, as amended, and, as such, are eligible for to reduced public company reporting requirements. Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 11.

 

 

   Per Ordinary Share   Total 
Public offering price  $5.00   $29,999,550.00 
Underwriting discounts and commissions to be paid by us(1)  $0.425   $2,549,961.75 
Proceeds, before expenses, to us(1)(2)  $4.575   $22,875,000.00 
Proceeds, before expenses, to the selling shareholder  $4.575   $4,574,588.25 

 

(1)

We will pay the Underwriters eight and one half percent (8.5%) of the gross proceeds of this Offering. In addition to the cash commission, we will also reimburse the Underwriter for its accountable out-of-pocket expenses not to exceed $250,000. See “Underwriting” in this prospectus for more information regarding our arrangements with the Underwriters.

(2)The total estimated expenses related to this offering are set forth in the section entitled “Fees, Commission and Expense Reimbursement.”

 

We expect our total cash expenses payable to our underwriters, Boustead Securities, LLC and Brilliant Norton Securities Company Limited (the “Underwriters”), for their accountable expenses referenced above, exclusive of the above commissions, to be $250,000. We estimate that the total expenses of this Offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting fees and commissions and Underwriters’ accountable expenses, will be approximately $925,661.

 

The Underwriters are committed to purchase all the Ordinary Shares offered by the Company. The underwriting agreement also provides that if the Underwriters default, the Offering may be terminated. The Underwriters propose to offer the Ordinary Shares directly to the public at the Offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $0.20 per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $0.20 per share from the Offering price. After the Offering of the Ordinary Shares, the Offering price and other selling terms may be changed by the Underwriters. Sales of Ordinary Shares made outside of the United States may be made by affiliates of the Underwriter.

 

The Underwriters expect to deliver the Ordinary Shares to purchasers in the Offering on or about December 17, 2020.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

This prospectus does not constitute, and there will not be, an offering of securities to the public in the British Virgin Islands.

 

 

The date of this prospectus is December 15, 2020.

 

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TABLE OF CONTENTS

 

Commonly Used Defined Terms 1
Prospectus Summary 2
Risk Factors 11
Special Note Regarding Forward-Looking Statements 41
Use of Proceeds 41
Dividend Policy 43
Exchange Rate Information 44
Capitalization 47
Dilution 48
Management’s Discussion and Analysis of Financial Condition and Results of Operations 49
Business 68
Management 95
Executive Compensation 100
Related Party transactions 102
Principal Shareholders 103
Description of Ordinary Shares 104
Shares Eligible for Future Sale 117
Material Tax Consequences Applicable to U.S. Holders of Our Ordinary Shares 117
Enforceability of Civil Liabilities 126
Underwriting 127
Expenses Relating to this Offering 130
Legal Matters 130
Experts 131
Interests of Named Experts and Counsel 131
Disclosure of Commission Position on Indemnification 131
Where You Can Find Additional Information 131
Index to Financial Information F-1

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free-writing prospectus. We and the selling shareholder are offering to sell, and seeking offers to buy, the Ordinary Shares offered hereby, but only under circumstances and in jurisdictions where offers and sales are permitted and lawful to do so. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ordinary shares.

 

Neither we, the selling shareholder nor the Underwriters have/has taken any action that would permit a public offering of the Ordinary Shares outside the United States or permit the possession or distribution of this prospectus or any related free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any related free-writing prospectus must inform themselves about and observe any restrictions relating to the offering of the Ordinary Shares and the distribution of the prospectus outside the United States.

 

Until January 11, 2021 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade Ordinary Shares, whether or not participating in this Offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold subscriptions.

 

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COMMONLY USED DEFINED TERMS

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

  “BVI” refers to the British Virgin Islands;
     
  “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
     
  “shares”, “Shares” or “Ordinary Shares” are to the Ordinary Shares of Wunong Net Technology Company Limited, no par value;
     
 

“Vande” refers to Shenzhen Vande Technology Co., Limited, a limited company organized under the laws of Hong Kong and a wholly owned subsidiary of Wunong;

     
  “we,” “us,” “our company,” “our,” “the Company” and “Wunong” is to Wunong Net Technology Company Limited, a British Virgin Islands company, its subsidiaries, Shenzhen Vande Technology Co., Limited and Guo Gangtong Trade (Shenzhen) Co., Ltd, and its affiliated entities in China, including but not limited to Wunong Technology (Shenzhen) Co., Ltd, and its wholly-owned subsidiary, Wunong Catering Chain Management (Shenzhen) Co., Ltd;
     
  “WFOE” or “Guo Gang Tong” refers to Guo Gangtong Trade (Shenzhen) Co., Ltd, a limited liability company organized under the laws of China, which is wholly-owned by Shenzhen Vande Technology Co., Limited;
     
  “Wunong Catering” is to Wunong Catering Chain Management (Shenzhen) Co., Ltd, a limited liability company organized under the laws of China and a wholly owned subsidiary of Wunong Shenzhen;
     
  “Wunong Shenzhen” refers to Wunong Technology (Shenzhen) Co., Ltd, a limited liability company organized under the laws of China and a variable interest entity (“VIE”) contractually controlled by WFOE;
     
  All references to “RMB” or “Chinese Yuan” is to the legal currency of China;
     
  All references to “U.S. dollars,” “dollars,” “USD” or “$” are to the legal currency of the United States;
     
  “Website” is to our online electronic retail store for the offering of the food products at www.wnw108.com; and
     
  “variable interest entity” or “VIE” is to our variable interest entity, Wunong Technology (Shenzhen) Co., Ltd, that is 100% owned by PRC citizens and a PRC entity, that holds the business operation licenses or approvals to, and generally operates our Website for our internet businesses or other businesses in which foreign investment is restricted or prohibited, and is consolidated into our consolidated financial statements in accordance with U.S. GAAP as if it were our wholly-owned subsidiary.

 

Our business is conducted by our VIE entity in PRC, using RMB, the currency of China. Our consolidated financial statements are presented in United States dollars. In this prospectus, we refer to assets, obligations, commitments and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to United States dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of United States dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

 

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This prospectus contains translations of certain RMB amounts into U.S. dollar amounts at specified rates solely for the convenience of the reader. The relevant exchange rates are listed below:

 

  

For the
Six months ended
June 30, 2020

   For the Year
Ended
December 31, 2019
   For the Year
Ended
December 31, 2018
 
Period Ended RMB: USD exchange rate   0.1414    0.1435    0.1454 
Period Average RMB: USD exchange rate   0.1422    0.1447    0.1537 

 

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

 

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of our Chairman will be presented as “Peijiang Chen,” even though, in Chinese, Mr. Chen’s name is presented as “Chen Peijiang.”

 

We have relied on statistics provided by a variety of publicly-available sources regarding China’s expectations of growth. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. We have sought to provide current information in this prospectus and believe that the statistics provided in this prospectus remain up-to-date and reliable, and these materials are not incorporated in this prospectus other than to the extent specifically cited in this prospectus. Except where otherwise stated, all ordinary share accounts provided herein are on a pre-share-increase basis.

 

PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Ordinary Shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

Overview

 

We are a British Virgin Islands company incorporated on December 4, 2018, and conduct our business in China through our subsidiaries and variable interest entity, Wunong Technology (Shenzhen) Co., Ltd.

 

Investors will own ordinary shares in a holding company that does not directly own all of its operations in China. We are a British Virgin Islands corporation that wholly owns our Hong Kong subsidiary, Shenzhen Vande Technology Co., Limited. Shenzhen Vande Technology Co., Limited, in turn, wholly owns all of the share capital of Guo Gangtong Trade (Shenzhen) Co., Ltd, a wholly foreign-owned enterprise incorporated in China (“WFOE”). Guo Gangtong Trade (Shenzhen) Co., Ltd, through a series of contractual arrangements, manages and controls our operating entities, Wunong Technology (Shenzhen) Co., Ltd and its wholly-owned subsidiary, Wunong Catering Chain Management (Shenzhen) Co., Ltd. The interests of the shareholders of Wunong Technology (Shenzhen) Co., Ltd may conflict with yours.

 

We are an online and mobile commerce company and conduct our business through our online retail store on our Website - www.wnw108.com. We sell a myriad of food products on our Website. We do not grow, foster or manufacture any food products and all the food products sold on our Website are from our suppliers. We do not sell genetically modified food. We are committed to providing our customers with safe, high-quality, nutritious, tasty and non-genetically modified food products through our portfolio of trusted and well-known suppliers. Optimizing our Website and real-time data, we are able to respond to and match supply with demand for food products in keeping with consumer trends.

 

Food safety, product quality and sustainability are our core values. The food products/commodities sold on our Website are broadly categorized into (i) Green Food, (ii) Organic Food, (iii) intangible cultural heritage food products (“ICH Products”) (iv) agricultural products bearing geographical indications (“Agri GI Products”) and (v) Pollution-Free Products (genetically modified products excepted).

 

As of the date of this prospectus, the portfolio of food products sold on our Website comprises 8.9% Organic Food (36 products), 0.7% Green Food (3 products), 3.4% Agri GI Products (14 products), and 87.0% of other food products (including non-genetically modified Pollution-Free Products) (352 products). The mix of food products sold on our Website is ever-changing, depending on food quality and safety, market demand, and customer preferences.

 

We also plan to open franchise restaurants throughout China that offer our food products and each of these restaurants will be equipped with a grocery section that sells our products. As of the date of this prospectus, we have launched our first restaurant in Shenzhen and plan to roll out other restaurants through franchisees throughout China. Our present restaurant model (which is subject to further refinement) allows a customer to rent our restaurant facilities, cook and serve food utilizing the food products purchased from us.

 

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We generate most of all our revenue from the sale of food products/commodities on our Website, which includes custom pre-sales of food products/commodities such as crops. We have limited income from our restaurants in 2019.

 

We have historically paid the following commissions on the sale of our food/products/commodities for the referrals of new food products and new customers:

 

New Food Products

 

(i)2% on the sales of the relevant food product after it was referred by a customer and qualified for sale on our Website to the referring customer;
(ii)3% on the sales of the relevant food product to the local service center for assessing the food product

 

Wunong Commission 1

 

New Customers

 

(i)2% on all orders placed by a new customer to the referring customer;
(ii)10% on all orders placed by a new customer to the relevant local service under which the new customer is under the “jurisdiction” of.

 

 

Beginning August 2019, we began to negotiate and execute a new commission structure in stages, which is now fully implemented as of January 1, 2020:

 

There are no more commissions paid for the referrals of new food products.

 

Customers with an accumulated spending of over RMB 999 (approximately, $144) will be designated “Privileged Customers”. A referring Privileged Customer will be paid an 8% commission of all purchases made by its referee customer. However, only for the first purchase this referee customer makes, the referring Privileged Customer will be paid a 30% commission on the referee customer’s first purchase, capped at RMB300 (approximately, $43). In the event the referee customer subsequently qualifies as a “Privileged Customer”, the referrer’s commission is reduced from 8% to 2% of the referee customer’s purchases.

 

Wunong Commission 3

 

A referrer who is not a Privileged Customer will not be paid any commissions for referring new customers.

 

The local service center will now be paid a 3% on all purchases made by customers within its jurisdiction.

 

For fiscal year ended December 31, 2019, our total revenue was $7,682,583, comprising online sales of food products on our Website and some revenue from our restaurant. We do not grow, foster or manufacture any food products. We do not sell genetically modified food.

 

We received an Internet Content Provider (“ICP”) license for value-added Internet information services on December 21, 2018. As we only sell food products that we have purchased from suppliers on the Website instead of operating an online marketplace which matches third party sellers and buyers, we are legally not required under Chinese law to obtain an ICP license. We have, however, obtained an ICP license just to preserve the option to run the aforementioned online marketplace in the future. The ICP license is a permit issued by the Chinese Ministry of Industry and Information Technology to permit China-based websites to operate in China.

 

Competitive Strengths

 

We believe that the following strengths have contributed to our success and are differentiating factors that set us apart from our peers.

 

Innovative platform focusing on providing verified “clean” food products. An Agriculture and Agri-Food Canada report cited China as the largest e-commerce market in the world with retail sales amounting to US$366.1 billion in 2016 and a compound annual growth rate of 51.2% from 2012 to 2016. It reported that although the e-grocery sector in China was significantly smaller in comparison to other e-commerce sectors such as apparel and footwear, the e-grocery sector had seen significant growth with a compound annual growth rate of 53% from 2012 to 2016. As a result, China was also the largest e-grocery market in the world worth US$23.9 billion in 2016. (Source: http://www.agr.gc.ca/eng/industry-markets-and-trade/international-agri-food-market-intelligence/reports/e-grocery-market-in-china/?id=1504037238257). We believe that our focus on providing our customers with one-stop access to licensed food producers by selling Green Food, Organic Food, ICH Products, Agri GI Products and Pollution-free Products (genetically modified products excepted) merges the potential of this multi-billion dollar industry with growing consumer e-shopping preference for “clean” food products. With our Website, we are able to span across geographic regions and connect with buyers and suppliers from different regions.

 

Nation-wide sales network. We have established a strong client base and our food suppliers are directly working with their distributors to ship food products to our customers throughout China. As of December 31, 2019, we have over 398,884 registered customers on our Website, of which approximately 85,594 of them are monthly active customers. We also have approximately 28,420 registered search agents of food products who help us search and then recommend to us high-quality food products throughout China. In addition, we work with over 100 local service centers across 15 provinces in China, including Shanxi, Xinjiang, Gansu, Henan, Hebei, Sichuan, Hunan, Guangdong and Guangxi, and established strategic cooperation relationships with approximately 300 rural cooperatives across China.

 

Experienced and committed management team. We have an experienced management team, where most of our members have more than 10 years of experience in marketing and/or management. The management team’s experience has provided them with the skills and expertise that are essential in approaching and selecting licensed food product suppliers, and dealing with our local service centers, food search agents and customers. In addition, we also have an experienced food examination team specialized in testing the quality of the food, assuring our customers that the food offered by us is clean, healthy and high quality.

 

Cross- fertilization of business segments. With access to quality food products, we are able to expand our offering to our restaurant business, which we plan to roll out through franchisees throughout China. Not only will customers be able to pre-order our products to cook at our restaurants, they will also be able to purchase food products at the grocery section of each restaurant.

 

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Pre-ordering service. We provide our customers with a pre-ordering service to pre-order food products specially grown and cultivated for them. Pre-ordering has grown in popularity recently as it connects our customers with suppliers who grow authentic and fresh food products for them. In addition, pre-ordering reflects the market demand of a more discerning and affluent customer and avoids blind production of food products. We believe the safety and quality of pre-ordered food products and the predictability in delivery of these products are particularly attractive to our customers. Our customers are able to participate in the cultivation of the food products by actively overseeing the growth stages via real-time cameras installed by the suppliers.

 

Extensive Supply chain support. As of December 31, 2019, we have more than 16 suppliers occupying over 46,757 acres (equivalent to 283,812mu; 1 acre = 6.07mu) of production sites to provide over 400 types food products for sale on our Website. The portfolio of food products sold on our Website is diversified and our extensive inventory is supported by a reliable network of suppliers.

 

Significant Risk Factors

 

The following is a summary of our most significant risk factors:

 

Retention of customers. We are heavily dependent on purchases of our food products by customers, who are typically middle-income young professionals and who can be extremely fickle. We operate in a very competitive environment and face strong competition in terms of distribution, brand recognition, taste, quality, price, availability, and product positioning. The market is highly fragmented, particularly in China, and the resources of our competitors may increase due to mergers, consolidations or alliances, and we may face new competitors in the future. Further, a failure to correct anticipate changes in consumer preferences may also lead to a loss in customers.

 

Dependence on third party suppliers. We currently obtain our products from third party suppliers, who we do not have long term contracts with. These business relationships could be terminated on short notice. The supply of these products could be adversely affected by any material change in the economic and political conditions in various countries which may, in turn, result in increase in our costs to purchase these products. Further, our suppliers may fail to meet timelines or contractual obligations or provide us with sufficient products, which may adversely affect our business and reputation.

 

Dependence on positive macroeconomic factors. Our business is dependent in large part on China’s growing middle-class with disposable income. A downturn in macroeconomics such as an economic recession or a spike in transportation costs could have a direct impact on our business. Apart from our customers withholding discretionary spending on our products, a spike in transportation costs may make our products less appealing to an already price-sensitive market.

 

Our Growth Strategies

 

The key elements of our strategy to grow our business are to:

 

Optimize our pre-ordering service. Our pre-ordering service allows our customers to actively participate in food products specially grown and customized for them. We plan to expand this service to livestock.

 

Enhanced cooperation with suppliers. We have a network of over 124 food suppliers and plan to explore more avenues of cooperation with them. Apart from purchasing more products from these suppliers, we will explore other non-traditional ways of cooperation. For example, some of our food suppliers have expressed interest in becoming franchisees of our restaurant.

 

Cultivating our “Wunong 108” brand name. In order to distinguish ourselves, we plan to launch 108 premium products under our own “Wunong 108” brand name co-branded with the suppliers’ brand names. These products will not only be specially selected and curated by us based on customer data and feedback and be exclusive to our Website, they will also be competitively priced and superior in quality. We will supervise the production of the food products and participate in the design of their packaging and delivery. We plan to launch the “Wunong 108” products in a campaign with a compelling concept and pitch.

 

Building a grassroots e-commerce distribution system. We plan to work with our local service centers to recruit, train and install more store managers to promote our Website and products at these service centers.

 

Enhance our ability to attract, incentivize and retain talented professionals. We believe our success greatly depends on our ability to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive advantage in the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level personnel, including formulating a market-oriented employee compensation structure and implementing a standardized multi-level performance review mechanism.

 

Expand our customer base through online and offline marketing activities. We have launched a sales platform on one of the most popular Chinese messaging applications, WeChat, through which our customers can shop for our food products on their phones as well as learn about our latest promotions. Our customers can easily recommend us to their friends and families by sharing us on WeChat. In addition, we held eight agricultural products expos in the major provinces in China, including Sichuan, Shanxi, Henan and Shandong. Thousands of people have participated in our expo, including central and local government officials, and learned about the Company and the food products offered by us. We shall continue our marketing activities to expand our profile.

 

Developing our customers into food-search agents. We believe that a key element to our success will be to continue identifying and building commercial relationships with reliable suppliers of high-quality food products. China’s licensed food producers are highly fragmented and therefore we need to have a broad food-search agent base to assist us in sourcing high quality food products for sale on our Website. We offer our online platform users opportunities to become a food-search agent with us. By signing an agent agreement with us, customers who successfully recommend us food products that pass our standards will receive a 2% commission of the sale price of such products. As of December 31, 2019, we have successfully cultivated approximately 28,420 nationwide food-search agents from our online platform users, among whom approximately 85,594 are active monthly. Approximately 95% products on our platform were recommended by our food-search agents and we shall continue to expand on this base.

 

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Coronavirus (COVID-19) Update

 

Recently, there is an ongoing outbreak of a novel strain of coronavirus (COVID-19) first identified in China and has since spread rapidly globally. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally for the past few months. In March 2020, the World Health Organization declared COVID-19 to be a pandemic. Given the rapidly expanding nature of the COVID-19 pandemic, and because substantially all of our business operations and our workforce are concentrated in China, we believe there is a risk that our business, results of operations, and financial condition will be adversely affected. Potential impact to our results of operations will also depend on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by government authorities and other entities to contain COVID-19 or mitigate its impact, almost all of which are beyond our control. The impact of COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following:

 

the supply chain of our products and our ability to fulfil orders;
our ability to source available labor and materials to renovate and retrofit our restaurants;
any restrictions on restaurants will also impact our expansion plans and revenue especially if indoor dining capacity is severely curtailed;
the curtailment of any in-person marketing, advertising and meetings;
the global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak. It is possible that the price of our ordinary shares will decline significantly after the consummation of this offering, in which case, you may lose your investment.

 

Because of the uncertainty surrounding the COVID-19 outbreak, the business disruption and the related financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time. For a detailed description of the risks associated with the novel coronavirus, see “Risk Factors - Risks Related to Our Business and Industry - We are exposed to the risks of an economic recession, credit and capital markets volatility and economic and financial crisis as a result of the COVID-19 virus pandemic, which could adversely affect the demand for our products, our business operations and expansion plans and our ability to mitigate its impact and provide timely information to our investors and the SEC.”

 

Our Corporate Structure

 

We are a British Virgin Islands corporation that wholly owns our Hong Kong subsidiary, Shenzhen Vande Technology Co., Limited. Shenzhen Vande Technology Co., Limited, in turn, wholly owns all of the share capital of Guo Gangtong Trade (Shenzhen) Co., Ltd, a wholly foreign-owned enterprise incorporated in China (“WFOE”). Guo Gangtong Trade (Shenzhen) Co., Ltd, through a series of contractual arrangements, manages and controls our operating entity, Wunong Technology (Shenzhen) Co., Ltd. Wunong Technology (Shenzhen) Co., Ltd wholly owns a subsidiary, Wunong Catering Chain Management (Shenzhen) Co., Ltd.

 

The following diagram illustrates our corporate structure as of the date of this prospectus. For more detail on our corporate history please refer to “Our Corporate History and Structure” appearing on page 72 of this prospectus.

 

 

Corporate Information

 

Our principal executive office is located at B401, 4th Floor Building 12, Hangcheng Street, Hourui No. 2 Industrial District, Southern Section, Zhichuang Juzhen Double Creative Park, Bao’an District, Shenzhen, PRC, and our phone number is +86-755-85255139. We maintain a corporate Website at www.wnw108.com. The information contained in, or accessible from, our Website or any other website does not constitute a part of this prospectus.

 

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Our Challenges and Risk Factors Summary

 

The following section outlines the primary challenges and risks inherent to our business model. Before deciding to invest in our ordinary shares, we strongly recommend a close reading and consider all of the risks in the section entitled “Risk Factors” beginning on page 11.

 

Implications of Our Being an “Emerging Growth Company”

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company, we:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A;
     
  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
     
  are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
     
  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting for two years.

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

 

Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting, are not required to provide a compensation discussion and analysis, are not required to provide a pay-for-performance graph or CEO pay ratio disclosure, and may present only two years of audited financial statements and related MD&A disclosure.

 

Implication of Being a Foreign Private Issuer

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;

 

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  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
     
  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Offering Summary

 

Following completion of our initial public offering, ownership of Wunong Net Technology Company Limited will be as follows:

 

 

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THE OFFERING

 

Issuer   Wunong Net Technology Company Limited
     
Selling shareholder   Eternal Horizon International Company Limited
     
Securities being offered by us   5,000,000 Ordinary Shares, no par value
     
Securities being offer by the selling shareholder   999,910 Ordinary Shares, no par value
     
Ordinary Shares Outstanding Prior to Completion of Offering   20,000,0000
     
Ordinary Shares outstanding immediately after this Offering    25,000,000 Ordinary Shares
     
Offering Price per Ordinary Share   $5.00
     
Gross Proceeds to Us Before Expenses    $25,000,000
     
Symbol  

We have received approval to list our Ordinary Shares on the Nasdaq Capital Market under the symbol “WNW”

     
Use of Proceeds   

We estimate that we will receive net proceeds from this Offering of up to $21,699,339, after deducting underwriting fees and commissions and estimated offering expenses. We will use any proceeds from this Offering as follows: 50% to be used for general working capital, 30% to be used for research and development, 10% to be used for expanding our restaurant business and 10% to be used for brand development and marketing.

 

We will not receive any proceeds from the sale of Ordinary Shares by the selling shareholder.

 

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Risk Factors   Investing in our Ordinary Shares involves a high degree of risk and purchasers of our Ordinary Shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our Ordinary Shares beginning on Page 11.
     
Lock-Up  

We, our directors, executive officers and our existing shareholders, expect for the selling shareholder as identified herein, are expected to enter into a lock-up agreement with the Underwriters not to sell, transfer or dispose of any Ordinary Shares for a period of up to 12 months after this Offering is completed. See “Shares Eligible for Future Sale” and “Underwriting.”

     
Dividend Policy   We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

Summary Financial Data

 

The following summary consolidated statements of operations and cash flow data for the six months ended June 30, 2020 and 2019 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations and cash flow data for the years ended December 31, 2019 and 2018 and the summary consolidated balance sheet data as of December 31, 2019 and 2018 have been derived from our consolidated financial statements included elsewhere in this prospectus. You should read the summary consolidated financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP, our consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.

 

Our management believes that the assumptions underlying our financial statements and the above allocations are reasonable. Our financial statements, however, may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a separate, stand-alone company during the periods presented. You should not view our historical results as an indicator of our future performance.

 

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The following table presents our summary consolidated statements of income and comprehensive income for the six months ended June 30, 2020 and 2019 and fiscal years ended December 31, 2019 and 2018:

 

   Six months Ended 
   June 30, 
   2020   2019 
   Unaudited   Unaudited 
NET REVENUES  $2,990,267   $2,463,019 
COST OF REVENUES   2,407,192    1,786,312 
GROSS PROFIT   583,075    676,707 
Operating Expenses   1,899,349    1,146,644 
INCOME/(LOSS) FROM OPERATIONS   (1,316,274)   (469,937)
NET INCOME/(LOSS)   (1,313,342)   (460,744)
COMPREHENSIVE INCOME/(LOSS)  $(1,283,035)  $(458,610)

 

   Years ended 
   December 31, 
   2019   2018 
         
NET REVENUES  $7,682,583   $1,076,827 
COST OF REVENUES   5,778,167    848,777 
GROSS PROFIT   1,904,416    228,050 
Operating Expenses   3,663,362    1,211,337 
INCOME/(LOSS) FROM OPERATIONS   (1,758,946)   (983,287)
NET INCOME/(LOSS)   (1,755,042)   (980,098)
COMPREHENSIVE INCOME/(LOSS)  $(1,728,175)  $(950,915)

 

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RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

 

Risks Related to Our Business and Industry

 

We are exposed to the risks of an economic recession, credit and capital markets volatility and economic and financial crisis as a result of the COVID-19 virus pandemic, which could adversely affect the demand for our products, our business operations and expansion plans and our ability to mitigate its impact and provide timely information to our investors and the SEC.

 

We are exposed to the risk of a global recession or a recession in one or more of our key markets, credit and capital markets volatility and an economic or financial crisis, or otherwise, which could result in reduced consumption or sales prices of our products, which in turn could result in lower revenue and reduced profit. Our financial condition and results of operations, as well as our future prospects, would likely be hindered by an economic downturn in any of our key markets.

 

The purchase of our products is closely linked to general economic conditions, with levels of consumption tending to rise during periods of rising per capita income and fall during periods of declining per capita income. Additionally, per capita consumption is inversely related to the sale prices of our products.

 

Besides moving in concert with changes in per capita income, purchase of our products also increases or decreases in accordance with changes in disposable income.

 

Any decrease in disposable income resulting from an increase in inflation, income taxes, the cost of living, unemployment levels, political or economic instability or other factors would likely adversely affect the demand for our products.

 

Capital and credit market volatility, such as that experienced in recent years, may result in downward pressure on share prices and the credit capacity of issuers. Potential changes in social, political, regulatory and economic conditions may be significant drivers of capital and credit market volatility. The COVID-19 virus pandemic has resulted in significant financial market volatility and uncertainty in recent weeks. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and will include emerging information concerning the severity of COVID-19 and the actions taken by governments and private businesses to attempt to contain the coronavirus, A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on us. For example, any statewide lockdown, quarantine, or travel ban will likely affect the supply chain of our products and our ability to fulfil orders. Our ability to source available labor and materials to renovate and retrofit our restaurants may also be limited. Further, any restrictions on restaurants will also impact our expansion plans and revenue especially if indoor dining capacity is severely curtailed.

 

Additionally, the COVID-19 pandemic may also affect our overall ability to react timely to mitigate the impact of this event and may hamper our efforts to contact our service providers and advisors and to provide our investors with timely information and comply with our filing obligations with the SEC, especially in the event of office closures, stay-in-place orders and a ban on travel or quarantines.

 

We have commenced limited operations in our business.

 

We only launched our Website in 2018 and have commenced limited business operations. Accordingly, we have no way to evaluate the likelihood that our business will be successful. Potential investors should be aware of the difficulties normally encountered by new online companies and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the operations that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to the ability to generate sufficient cash flow to operate our business, and additional costs and expenses that may exceed current estimates. We recognize that if we are not successful in implementing our business plan, we will not be able to continue business operations. There is limited history upon which to base any assumption as to the likelihood that we will prove successful.

 

We are heavily dependent on our customers. Due to the high level of competition in our industry, we may fail to retain our customers, which would harm our financial condition and operating results.

 

We are heavily dependent on purchases of our food products by customers, who are typically middle-income young professionals and who can be extremely fickle. We operate in a very competitive environment and face strong competition in terms of distribution, brand recognition, taste, quality, price, availability, and product positioning. The market is highly fragmented, particularly in China, and the resources of our competitors may increase due to mergers, consolidations or alliances, and we may face new competitors in the future.

 

The business of selling healthy food products is highly sensitive to the introduction of new products, which may rapidly capture a significant share of the market. These market segments include numerous manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers in various countries. In addition, we anticipate that we will be subject to increasing competition in the future from sellers that utilize electronic commerce. Some of these competitors have longer operating histories, significantly greater financial, technical, product development, marketing and sales resources, greater name recognition, larger established customer bases and better-developed distribution channels than we do. Our present or future competitors may be able to develop products that are comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. From time to time in response to competitive and customer pressures or to maintain market share, we may be forced to reduce our selling prices or increase or reallocate spending on marketing, advertising, or promotions in order to compete. These types of actions could decrease our profit margins. Such pressures may also restrict our ability to increase our selling prices in response to raw material and other cost increases.

 

Accordingly, we may not be able to retain our customers, compete effectively in our markets and competition may intensify. In light of the strong competition that we currently face, and which may intensify in the future, there can be no assurance that we will be able to increase the sales of our products or even maintain our past levels of sales, or that our profit margins will not be reduced. If we are unable to increase our product sales or to maintain our past levels of sales and profit margins, our business, financial condition, results of operations and prospects may be materially and adversely affected.

 

In addition, because the industry in which we operate is not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new competitors to emerge who will compete with our customers and their customers. Our ability customers to remain competitive therefore depends, in significant part, on our success in retaining and attracting new customers. We cannot ensure that our efforts will be successful and if we are not, our financial condition and operating results would be harmed.

 

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Sales of our products are subject to changing consumer preferences; if we do not correctly anticipate such changes, our sales and profitability may decline.

 

There are a number of trends in consumer preferences which have an impact on us and the healthcare consumer products industry as a whole. These include, among others, preferences for convenient, natural, better value, healthy and sustainable products. Concerns as to the health impacts and nutritional value of certain foods may increasingly result in food producers being encouraged or required to produce products with reduced levels of salt, sugar and fat and to eliminate trans-fatty acids and certain other ingredients. Consumer preferences are also shaped by concern over the environmental impact of products. The success of our business depends on both the continued appeal of our products and, given the varied backgrounds and tastes of our customer base, our ability to offer a sufficient range of products to satisfy a broad spectrum of preferences. Any shift in consumer preferences in the markets in which we operate could have a material adverse effect on our business. Consumer tastes are also susceptible to change. Our competitiveness therefore depends on our ability to predict and quickly adapt to consumer trends, exploiting profitable opportunities for product development without alienating our existing consumer base or focusing excessive resources or attention on unprofitable or short-lived trends. If we are unable to respond on a timely and appropriate basis to changes in demand or consumer preferences, our sales volumes and margins could be adversely affected.

 

Our future results and competitive position are dependent on the successful development of new product offerings and improvement of existing products, which is subject to a number of difficulties and uncertainties.

 

Our future results and ability to maintain or improve our competitive position depend on our capacity to anticipate changes in our key markets and to identify, develop, manufacture, market and sell new or improved products in these changing markets successfully. We have to introduce new products and re-launch and extend existing product lines on a timely basis in order to counteract obsolescence and decreases in sales of existing products as well as to increase overall sales of our products. The launch and success of new or modified products are inherently uncertain, especially as to the products’ appeal to consumers, and there can be no assurance as to our continuing ability to develop and launch successful new products or variations of existing products. The failure to launch a product successfully can affect consumer perception of our other products. Market factors and the need to develop and provide modified or alternative products may also increase costs. In addition, launching new or modified products can result in cannibalization of sales of our existing products if consumers purchase the new product in place of our existing products. If we are unsuccessful in developing new products in response to changing consumer demands or preferences in an efficient and economical manner, or if our competitors respond more effectively than we do, demand for our products may decrease, which could materially and adversely affect our business, financial condition and results of operations.

 

To maximize our potential for future growth and achieve our expected revenues, we need to manage growth in our current operations.

 

In order to maximize potential growth in our current and potential markets, we believe that we must expand our sourcing and marketing operations. This expansion will place a significant strain on our management and on our operational, accounting, and information systems. We expect that as we continue to grow we will need to improve our financial controls, operating procedures, and management information systems to handle increased operations. We will also need to effectively train, motivate, and manage our employees. Failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.

 

We cannot assure you that our acquisition growth strategy will be successful.

 

In addition to our organic growth strategy we also expect to grow through strategic acquisitions. We cannot assure you that our acquisitions will be successful or that we will have the funds to pursue any acquisitions. Further, even if we are able to complete strategic acquisitions, as expected, we will face challenges such as integration of systems, personnel and corporate culture that may impact our ability to successfully integrate acquired businesses into our overall corporate structure, which would negatively impact our business, operations and financial performance.

 

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If we are not able to implement our strategies to achieve our business objectives, our business operations and financial performance will be adversely affected.

 

Our business plan and growth strategy is based on currently prevailing circumstances and the assumption that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in various stages of development. However, there is no assurance that we will be successful in implementing our strategies or that our strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our strategies, our business operations and financial performance will be adversely affected.

 

Any funding we raise through the future sale of our shares will result in dilution to existing shareholders and funding through bank loans will increase our liabilities.

 

We plan to raise capital in order to fund our growth plans in the future and anticipate doing so through further share issuances. Such share issuances will cause shareholders’ interests in our company to be diluted. Such dilution is likely to negatively affect the value of investors’ shares if our revenues and earnings do not grow commensurately. Alternate sources of finance, such as obtaining commercial loans, assuming those loans would be available, will increase the Company’s liabilities and future cash commitments.

 

We depend on third parties to supply our food products; any adverse changes in such supply or the costs of products may adversely affect our operations.

 

We currently obtain our products from third parties. The supply of these products can be adversely affected by any material change in the economic and political conditions in various countries which may, in turn, result in increased costs to purchase these products. For example, any economic downturn, tighter credit conditions and slow or declining growth can negatively affect the geographic markets in which we compete in by affecting consumer confidence. This can result in consumers purchasing cheaper private label products instead of equivalent branded products. Such macroeconomic trends could, among other things, negatively impact global demand for branded and premium healthcare consumer products, which could result in a reduction of sales or pressure on margins of our branded products or cause an increasing transfer to lower priced product categories.

 

Our business is dependent on third-party suppliers and changes or difficulties in our relationships with our suppliers may harm our business and financial results.

 

We are dependent on our suppliers for our products. Our suppliers may fail to meet timelines or contractual obligations or provide us with sufficient products, which may adversely affect our business. Certain of our contracts with key suppliers, can be terminated by the supplier upon giving notice within a certain period and restrict us from using other suppliers. Failure to appropriately structure or adequately manage our agreements with third parties may adversely affect our supply of products. We are also subject to credit risk with respect to our third-party suppliers. If any such suppliers become insolvent, an appointed trustee could potentially ignore the service contracts we have in place with such party, resulting in increased charges or the termination of the service contracts. We may not be able to replace a supplier within a reasonable period of time, on as favorable terms or without disruption to our operations. Any adverse changes to our relationships with third-party suppliers could have a material adverse effect on our image, brand and reputation, as well as on our business, financial condition and results of operations.

 

In addition, to the extent that our creditworthiness is impaired, or general economic conditions decline, certain of our key suppliers may demand onerous payment terms that could materially adversely affect our working capital position, or such suppliers may refuse to continue to supply to us. A number of our key suppliers have taken out trade credit insurance on our ability to pay them. To the extent that such trade credit insurance becomes unobtainable or more expensive due to market conditions, we may face adverse changes to payment terms by our key suppliers or they may refuse to continue to supply us.

 

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Our suppliers’ inability to source raw materials or other inputs of an acceptable type or quality, could adversely affect our results of operations.

 

Our suppliers use significant quantities of ingredients and packaging materials and are therefore vulnerable to fluctuations in the availability and price of ingredients, packaging materials, energy costs and other supplies. General economic conditions, unanticipated demand, problems in manufacturing or distribution, natural disasters, weather conditions during the growing and harvesting seasons, plant, fish and livestock diseases and local, national or international quarantines can also adversely affect availability and prices of commodities in the long and short term. Moreover, there is no market for hedging against price volatility for certain raw materials and accordingly such materials are bought at the spot rate in the market.

 

Accordingly, their ability to avoid the adverse effects of a pronounced, sustained price increase in raw materials is limited. Any increases in prices or scarcity of ingredients or packaging materials required for our products could increase their costs and disrupt our operations. If the availability of any of their inputs is constrained for any reason, we may not be able to obtain sufficient supplies or supplies of a suitable quality on favorable terms or at all. Such shortages could materially adversely affect our market share, business, financial condition and results of operations.

 

Our inability to pass on price increases for food products to our customers could adversely affect our results of operations.

 

Our ability to pass through increases in the prices of good products depends, among others, on prevailing competitive conditions and pricing methods in the markets in which we operate, and we may not be able to pass through such price increases to our customers. Even if we are able to pass through increases in prices, competition from other similar products may lead to a decline in orders for our products or even obsolescence. Our inability to pass through price increases in food products and preserve our profit margins in the future while remaining competitive could materially adversely affect our business, financial condition and results of operations.

 

Any failure of our products to comply with safety requirements set by government may adversely affect our results from operations.

 

We currently obtain our products from third parties. We may fail to ensure the supplied goods to be in compliance with safety regulation and rules set by government, which may, in turn, results in losing our customers which would adversely affect our revenues and shareholder value.

 

Any disruptions in our information technology systems could harm our business and reduce our profitability.

 

We rely on our information technology systems, most notably our Website, for communication among our suppliers, distribution functions, headquarters and customers. Our performance depends on the availability of accurate and timely data and other information from key software applications to aid day-to-day business and decision-making processes. We may be adversely affected if our controls designed to manage information technology operational risks fail to contain such risks. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure and to maintain the related automated and manual control processes, we could be subject to adverse effects including billing and collection errors, business disruptions, in particular concerning our logistics functions, and security breaches. Any disruption caused by failings in our information technology infrastructure equipment or of communication networks, could delay or otherwise impact our day-to-day business and decision-making processes and negatively impact our performance. In addition, we are reliant on third parties to service parts of our IT infrastructure. Failure on their part to provide good and timely service may have an adverse impact on our information technology network. Furthermore, we do not control the facilities or operations of our suppliers. An interruption of operations at any of their or our facilities or any failure by them to deliver on their contractual commitments may have an adverse effect on our business, financial condition and results of operations.

 

Our business generates and processes a large amount of data, which subjects us to governmental regulations and other legal obligations related to privacy, information security and data protection. Any improper use or disclosure of such data by us, our employees or our business partners could subject us to significant reputational, financial, legal and operational consequences.

 

Our business generates and processes a large quantity of personal, transaction, and behavior data. We face risks inherent in handling large volumes of data and in protecting the security of such data. In particular, we face a number of challenges relating to data from transactions and other activities on our system, including:

 

protecting the data in and hosted on our system, including against attacks on our system by third parties or fraudulent behavior by our employees;
addressing concerns related to privacy and sharing, safety, security and other factors; and
complying with applicable laws, rules and regulations relating to the collection, use, disclosure or security of personal information, including any requests from regulatory and government authorities relating to such data.

 

Any systems failure or security breach or lapse that results in the release of customer data could harm our reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability. In addition, our business partners and their employees may improperly use or disclose the data we disclose to them for our operation and we have limited control over the actions of our business partners and their employees. Any failure, or perceived failure, by us, our employees, our business partners, or their employees to comply with privacy policies or with any regulatory requirements or privacy protection-related laws, rules and regulations could result in proceedings or actions against us by governmental entities or others. These proceedings or actions may subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and severely disrupt our business.

 

Recently, companies’ practices regarding collection, use, retention, transfer, disclosure and security of user data have been the subject of enhanced regulations and increased public scrutiny. The regulatory frameworks regarding privacy issues in many jurisdictions are constantly evolving and can be subject to significant changes from time to time. For instance, a growing number of legislative and regulatory bodies have adopted customer notification requirements in the event of unauthorized access to or acquisition of certain types of data. In China, the PRC Cybersecurity Law, which became effective in June 2017, leaves substantial uncertainty as to the circumstances and standards under which the law would apply and violations would be found. See “Regulations—Regulations Relating to Cybersecurity - Regulation on Information Security” and “Regulations – Regulations Relating to Cybersecurity—Regulation on Internet Privacy.” Complying with these obligations could cause us to incur substantial costs. Any failure to comply with applicable regulations, whether by us, business partners, or other third parties, or as a result of employee error or negligence or otherwise, could result in regulatory enforcement actions against us and have an adverse impact on our business operations.

 

Security breaches and attacks against our technology systems, and any potentially resulting breach or failure to otherwise protect confidential and proprietary information, could damage our reputation and negatively impact our business, as well as materially and adversely affect our financial condition and results of operations.

 

Although we have employed significant resources to develop our security measures against breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of customer information, or a denial of service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we may be unable to anticipate, or implement adequate measures to protect against, these attacks.

 

Further, if we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technologies, train employees and engage third-party experts and consultants.

 

Our supply network and our suppliers’ manufacturing and distribution facilities could be disrupted by factors beyond our control such as extreme weather, fire and other natural disasters.

 

Severe weather conditions and natural disasters, such as storms, floods, droughts, frosts, earthquakes or pestilence, may affect the supply of the raw materials that our suppliers use for the manufacturing of our products. For example, changing climate may cause flooding and drought in crop growing areas. Competing food producers can be affected differently by weather conditions and natural disasters depending on the location of their supply sources. If supplies of raw materials are reduced, our suppliers may not be able to find adequate supplemental supply sources, if at all, on favorable terms, which could have a material adverse effect on our business, financial condition and results of operation. In addition, our suppliers’ manufacturing facilities may be subject to damage

 

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Significant disruption in the workforce of our suppliers could adversely affect our business, financial condition and results of operations.

 

Our suppliers may experience labor disputes and work stoppages at one or more of their manufacturing sites due to localized strikes or strikes in the larger healthcare consumer product industry sector. They may also be involved in negotiations on collective bargaining agreements. A labor stoppage or other interruption at one of their manufacturing sites would impact our ability to supply our customers and could have a pronounced effect on our operations and, potentially, on our business, financial condition and results of operations.

 

Higher labor costs could adversely affect our business and financial results.

 

We compete with our competitors for good and dependable employees. The supply of such employees is limited and competition to hire and retain them may result in higher labor costs. High labor costs could adversely affect our profitability if we are not able to pass them on to our customers.

 

We are dependent upon key executives and highly qualified managers and we cannot assure their retention.

 

Our success depends, in part, upon the continued services of key members of our management. Our executives’ and managers’ knowledge of the market, our business and our company represents a key strength of our business, which cannot be easily replicated. The success of our business strategy and our future growth also depend on our ability to attract, train, retain and motivate skilled managerial, sales, administration, development and operating personnel.

 

There can be no assurance that our existing personnel will be adequate or qualified to carry out our strategy, or that we will be able to hire or retain experienced, qualified employees to carry out our strategy. The loss of one or more of our key management or operating personnel, or the failure to attract and retain additional key personnel, could have a material adverse effect on our business, financial condition and results of operations.

 

We do not have long term contracts with our suppliers and they can reduce order quantities or terminate their sales to us at any time.

 

We do not have long term contracts with our suppliers. At any time, our suppliers can reduce the quantities of products they sell to us, or cease selling products to us altogether. Such reductions or terminations could have a material adverse impact on our revenues, profits and financial condition.

 

Failure to protect our suppliers’ brand names and trademarks could materially affect our business.

 

We do not own the brand names and trademarks for the products we sell. They are generally owned by our suppliers. We cannot be certain that the actions our suppliers have taken or will take in the future will be adequate to prevent violation of their proprietary rights. Litigation may be necessary to enforce their trademark or proprietary rights or to defend us against claimed infringement of the rights of third parties. Adverse publicity, legal action or other factors which we have no control over could lead to substantial erosion in the value of the brands, which could lead to decreased consumer demand and could have a material adverse effect on our business, financial condition and results of operations.

 

Health concerns or adverse developments with respect to the safety or quality of the food product industry in general or our own products specifically may damage our reputation, increase our costs of operations and decrease demand for our products.

 

Food safety and the public’s perception that our products are safe and healthy are essential to our image and business. We sell verified “clean” food for human consumption, which subjects us to safety risks such as product contamination, spoilage, misbranding or product tampering. Product contamination, including the presence of a foreign object, substance, chemical or other agent or residue or the introduction of a genetically modified organism, could require product withdrawals or recalls or the destruction of inventory, and could result in negative publicity, temporary plant closures and substantial costs of compliance or remediation.

 

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We may also be impacted by publicity concerning any assertion that our products caused illness or injury. In addition, we could be subject to claims or lawsuits relating to an actual or alleged illness stemming from product contamination or any other incidents that compromise the safety and quality of our products. Any significant lawsuit or widespread product recall or other events leading to the loss of consumer confidence in the safety and quality of our products could damage our brand, reputation and image and negatively impact our sales, profitability and prospects for growth. In addition, product recalls are difficult to foresee and prepare for and, in the event we are required to recall one or more of our products, such recall may result in loss of sales due to unavailability of our products and may take up a significant amount of our management’s time and attention.

 

We are also subject to further risks affecting the food industry generally, including risks posed by widespread contamination and evolving nutritional and health-related concerns. Regulatory authorities may limit the supply of certain types of food products in response to public health concerns and consumers may perceive certain products to be unsafe or unhealthy. For example, due to avian flu, we or our suppliers could be required to find alternative supplies or ingredients that may or may not be available at commercially reasonable prices and within the required time. In addition, governmental regulations may require us to identify replacement products to offer to our customers or, alternatively, to discontinue certain offerings or limit the range of products we offer. We may be unable to find substitutes that are as appealing to our customer base, or such substitutes may not be widely available or may be available only at increased costs. Such substitutions or limitations could also reduce demand for our products.

 

We could also be subject to claims or lawsuits relating to an actual or alleged illness or injury or death stemming from the consumption of a misbranded, altered, contaminated or spoiled product, which could negatively affect our business. Awards of damages, settlement amounts and fees and expenses resulting from such claims and the public relations implications of any such claims could have an adverse effect on our business. The availability and price of insurance to cover claims for damages are subject to market forces that we do not control, and such insurance may not cover all the costs of such claims and would no cover damage to our reputation. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming, and divert our management’s time and resources towards defending them rather than operating our business. In addition, any adverse publicity concerning such claims, even if unfounded, could cause customers to lose confidence in the safety and quality of our products and damage our reputation and brand image.

 

Changes to our payment terms with both customers and suppliers may materially adversely affect our operating cash flows.

 

We may experience significant pressure from both our competitors and our key suppliers to reduce the number of days of our accounts payable. At the same time, we may experience pressure from our customers to extend the number of days before paying our accounts receivable. Any failure to manage our accounts payable and accounts receivable may have a material adverse effect on our business, financial condition and results of operations.

 

Our results of operations may fluctuate from period to period due to seasonality.

 

We experience seasonality in our business, reflecting seasonal fluctuations in food production during different times of the year. For example, we generally experience fewer transactions on our Website during national holidays in China such as the Chinese New Year which usually occurs during the first quarter of each year. Food suppliers usually have limited food inventory between the winter and spring, and more during the summer and autumn, and this directly translates to fluctuations in the prices of the food products. Due to the seasonality of our business, the results of any period of a year are not necessarily indicative of the results that may be achieved for the full year.

 

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Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.

 

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation allowances and accrued liabilities (including allowances for returns, doubtful accounts and obsolete and damaged inventory), accounting for income taxes, valuation of long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance, and could have a material adverse effect on our business.

 

We may engage in future acquisitions, which may be expensive and time consuming and from which we may not realize anticipated benefits.

 

Our strategy is largely based on our ability to grow through acquisitions of further businesses to build an integrated group. Consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in unanticipated expenses and losses. Please refer to “Acquisition Strategy” on page 85 for more discussion.

 

We anticipate that any future acquisitions we may pursue as part of our business strategy may be partially financed through additional debt or equity. If new debt is added to current debt levels, or if we incur other liabilities, including contingent liabilities, in connection with an acquisition, the debt or liabilities could impose additional constraints and requirements on our business and operations, which could materially adversely affect our financial condition and results of operation. In addition, to the extent our shares are used for all or a portion of the consideration to be paid for future acquisitions, dilution may be experienced by existing shareholders.

 

In connection with our completed and future acquisitions, the process of integrating acquired operations into our existing group operations, may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the other risks associated with acquisitions include:

 

potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets with indefinite useful lives, which could adversely affect our results of operations and financial condition;
the possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product quality, product architecture, product development, intellectual property issues, key personnel issues or legal and financial contingencies, including any deficiencies in internal controls and procedures and the costs associated with remedying such deficiencies;
the possible adverse effect of such acquisitions on existing relationships with third party partners and suppliers of technologies and services;
unexpected losses of key employees or customers of the acquired company;
conforming the acquired company’s standards, processes, procedures and controls with our operations;
coordinating new product and process development;
difficulty in predicting and responding to issues related to product transition such as development, distribution and client support;
hiring additional management and other critical personnel;
the possibility that staff or clients of the acquired company might not accept new ownership and may transition to different technologies or attempt to renegotiate contract terms or relationships, including maintenance or support agreements;
difficulty in integrating acquired operations due to geographical distance and language and cultural differences;
the possibility that acquired assets become impaired, requiring us to take a charge to earnings which could be significant;
negotiating with labor unions; and
increasing the scope, geographic diversity and complexity of our current operations.

 

In addition, general economic and market conditions or other factors outside of our control could make our operating strategies difficult or impossible to implement. Any failure to implement these operational improvements successfully and/or the failure of these operational improvements to deliver the anticipated benefits could have a material adverse effect on our results of operations and financial condition.

 

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Because our controlling shareholders own a majority of our outstanding and issued Ordinary Shares, they have the ability to make and control corporate decisions that may be disadvantageous to minority shareholders.

 

We may face significant competition for acquisition opportunities.

 

There may be significant competition in some or all of the acquisition opportunities that we may explore. Such competition may for example come from strategic buyers, sovereign wealth funds, special purpose acquisition companies and public and private investment funds, many of which are well established and have extensive experience in identifying and completing acquisitions. A number of these competitors may possess greater technical, financial, human and other resources than us. We cannot assure investors that we will be successful against such competition. Such competition may cause us to be unsuccessful in executing any acquisition or may result in a successful acquisition being made at a significantly higher price than would otherwise have been the case.

 

Any due diligence by us in connection with potential future acquisition may not reveal all relevant considerations or liabilities of the target business, which could have a material adverse effect on our financial condition or results of operations.

 

We intend to conduct such due diligence as we deem reasonably practicable and appropriate based on the facts and circumstances applicable to any potential acquisition. The objective of the due diligence process will be to identify material issues which may affect the decision to proceed with any one particular acquisition target or the consideration payable for an acquisition. We also intend to use information revealed during the due diligence process to formulate our business and operational planning for, and our valuation of, any target company or business. While conducting due diligence and assessing a potential acquisition, we may rely on publicly available information, if any, information provided by the relevant target company to the extent such company is willing or able to provide such information and, in some circumstances, third party investigations.

 

There can be no assurance that the due diligence undertaken with respect to an acquisition will reveal all relevant facts that may be necessary to evaluate such acquisition including the determination of the price we may pay for an acquisition target or to formulate a business strategy. Furthermore, the information provided during due diligence may be incomplete, inadequate or inaccurate. As part of the due diligence process, we will also make subjective judgments regarding the results of operations, financial condition and prospects of a potential target. For example, the due diligence we conduct may not have been complete, adequate or accurate and may not uncover all material issues and liabilities to which we are now subject. If the due diligence investigation fails to correctly identify material issues and liabilities that may be present in a target company or business, or if we consider such material risks to be commercially acceptable relative to the opportunity, and we proceed with an acquisition, we may subsequently incur substantial impairment charges or other losses.

 

In addition, following an acquisition, we may be subject to significant, previously undisclosed liabilities of the acquired business that were not identified during due diligence and which could contribute to poor operational performance, undermine any attempt to restructure the acquired company or business in line with our business plan and have a material adverse effect on our financial condition and results of operations.

 

Economic recessions could have a significant, adverse impact on our business.

 

The food industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, interest rate fluctuations, and other economic factors beyond our control. Deterioration in the economic environment subjects our business to various risks, which may have a material and adverse impact on our operating results and cause us to not reach our long-term growth goals. For example, a downturn in the economy could directly affect the discretionary spending power of our customers and in turn, depress the number of orders for our food product on our Website.

 

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Higher carrier prices may result in decreased net revenue margin.

 

Carriers can be expected to charge higher prices if market conditions warrant, or to cover higher operating expenses. Our net revenues and income from operations may decrease if we are unable to increase our pricing to our customers. In some instances where we have entered into contract freight rates with customers, in the event market conditions change and those contracted rates are below market rates, we may be required to provide transportation services at a revenue loss.

 

Changing fuel costs and interruptions of fuel supplies may have an impact on our net revenue margins.

 

Fluctuating fuel prices may result in decreased net revenue margin. While our different pricing arrangements with customers and contracted carriers make it very difficult to measure the precise impact, in times of fluctuating fuel prices, our net revenue margin may also fluctuate.

 

Our dependence on third parties to provide equipment and services may impact the delivery and quality of our transportation and logistics services.

 

We do not employ the people directly involved in delivering our customers’ orders. Our suppliers and indirectly, we, depend on independent third parties to provide truck, rail, ocean, and air services and to report certain events to us, including delivery information and freight claims. These independent third parties may not fulfill their obligations to us, preventing us from meeting our commitments to our customers. This reliance also could cause delays in reporting certain events, including recognizing revenue and claims. In addition, if we are unable to secure sufficient equipment or other transportation services from third parties to meet our commitments to our customers, our operating results could be materially and adversely affected, and our customers could switch to our competitors temporarily or permanently. Many of these risks are beyond our control, including:

 

  equipment shortages in the transportation industry, particularly among contracted truckload carriers;
  changes in regulations impacting transportation;
  disruption in the supply or cost of fuel;
  reduction or deterioration in rail service; and
  unanticipated changes in transportation rates.

 

We are subject to negative impacts of changes in political and governmental conditions.

 

Our operations are subject to the influences of significant political, governmental, and similar changes and our ability to respond to them, including:

 

  changes in political conditions and in governmental policies;
  changes in and compliance with international and domestic laws and regulations; and
  wars, civil unrest, acts of terrorism, and other conflicts.

 

We may be subject to negative impacts of catastrophic events.

 

A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, heightened security measures, actual or threatened, terrorist attack, strike, civil unrest, pandemic or other catastrophic event could cause delays in providing services or performing other critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information systems could harm our ability to conduct normal business operations and adversely impact our operating results.

 

We may incur liabilities that are not covered by insurance.

 

While we seek to maintain appropriate levels of insurance, not all claims are insurable and we may experience major incidents of a nature that are not covered by insurance. We presently have insurances for our assets, including our office (insured amount of RMB100 million), office machines and equipment (insured amount of RMB 500,000) and office furniture (insured amount of RMB 600,000) and for our employees’ health, including death, disability, hospital in-patient subsidy caused by accidents, death caused by diseases and inpatient/ outpatient emergency treatments.

 

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We do not have other insurances that cover, among other things, product or business liability and other property damage and liability deriving from our activities. Furthermore, insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. We maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that such insurance will continue to be available on acceptable terms or that our insurance coverage will be sufficient or effective under all circumstances and against all liabilities to which we may be subject. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected. We could, for example, be subject to substantial claims for damages upon the occurrence of several events within one calendar year. In addition, our insurance costs may increase over time in response to any negative development in our claims history or due to material price increases in the insurance market in general.

 

We are a holding company whose principal source of operating cash is the income received from our subsidiaries.

 

We are dependent on the income generated by our subsidiaries in order to make distributions and dividends on the shares. The amount of distributions and dividends, if any, which may be paid to us from our operating subsidiaries will depend on many factors, including such subsidiaries’ results of operations and financial condition, limits on dividends under applicable law, its constitutional documents, documents governing any indebtedness, and other factors which may be outside our control. If our operating subsidiaries do not generate sufficient cash flow, we may be unable to make distributions and dividends on the shares.

 

Our significant shareholders have considerable influence over our corporate matters.

 

Each of Messrs Peijiang Chen, Changbin Xia and Hanwu Yang beneficially owns and controls 4,350,043.500435, 3,024,270.2424 and 2,400,024.000240 Ordinary Shares that correspond to 21.75%, 15.12% and 12.00%, respectively on a pre-Offering basis and 17.40%, 12.10% and 9.60%, respectively on a post-Offering basis of our issued and outstanding Ordinary Shares. Each of them, either collectively (which would aggregate into a controlling interest in us pre-Offering) or individually, will hold considerable influence over corporate matters requiring shareholder approval and will independently control the operations of the Company, including without limitation, electing directors and approving material mergers, acquisitions or other business combination transactions. This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our Ordinary Shares of the opportunity to sell their shares at a premium over the prevailing market price

 

Our significant shareholders may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

Because our significant shareholders have, either collectively or individually, considerable influence over our corporate matters, their interests may differ from the interests of our company as a whole. These shareholders could, for example, appoint directors and management without the requisite experience, relations or knowledge to steer our company properly because of their affiliations or loyalty, and such actions may materially and adversely affect our business and financial condition. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and the shareholders, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

 

We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing customers. Successful promotion of our brand and our ability to attract customers depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our services. It is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.

 

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New lines of business or new products and services may subject us to additional risks.

 

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. Our restaurant initiative is one such example. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new services could have a material adverse effect on our business, results of operations and financial condition.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

 

We regard our trademarks, copyrights, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. We own certain intellectual properties. See “Description of Property — Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

 

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

 

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties, especially since we do not manage or control the intellectual property rights of any of our suppliers. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

 

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Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

 

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products.

 

Our business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

 

The master lease and sub-leases over our headquarters and executive offices and restaurant may be defective and if they are adjudicated to be so and rendered null and void, we may face substantial damages and may even be evicted, resulting in disruption to our business operations and adversely impacting our financial performance.

 

Both our headquarters/ executive offices and restaurant are located in Shenzhen, China and are subleased from Shenzhen Zhichuang Juzhen Technology Ltd (“Zhichuang Juzhen”), which in turn sub-leased the same from Shenzhen Xinhao Precision Technology Co., Ltd (“Xinhao”). Xinhao entered into a master lease with Shenzhen Hourui Joint-Stock Cooperation Company (“Hourui”) to lease the space encompassing our aforementioned headquarters/ executive offices and restaurant. We have been advised by our PRC counsel, China Commercial Law Firm, that our sub-leases are legally defective according to Article 2 of Interpretation of the Supreme Court on Several Questions Concerning the Specific Application of Law in the Trial of Disputes over Urban Housing Lease Contracts (Interpretation of Law [2009]11). Due to historical reasons, Hourui has neither title nor any proper legal documentation from the real owner of our premises to sub-lease our space. However, Hourui has a certificate from a local government agency certifying Hourui’s entitlement to sublease, assign, use, and receive proceeds from our premises. If our sub-leases are declared to be invalid, we may need to pay damages to the owner and may even be evicted. Either of these scenarios would likely result in disruption to our business operations and adversely impact our financial performance.

 

We are reliant on our shareholders for the funds necessary to run our operations and implement our business plan.

 

We began operations only in mid-2018 and in our first year of operations, we posted a net loss of $980,098. For the year ended December 31, 2019, we posted a net loss of $1,755,042. Our ability to continue operations and execute our business plan is dependent on our ability to raise additional capital or obtain necessary debt financing. Through present date, we have been dependent on our shareholders to provide us the necessary funding for our daily operations and expenses, including professional fees and fees charged by regulators, although they are under no obligation to do so.

 

To the extent it becomes necessary to raise additional cash in the future as our current cash and working capital resources are depleted, we will first seek to raise it through further loans from our shareholders. We will also consider the public or private sale of debt or equity securities, debt financing or short-term loans, or a combination of the foregoing. We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.

 

We currently do not have any binding commitments for, or readily available sources of, additional financing. We cannot guarantee that we will be able to secure the adequate cash or working capital from our shareholders or otherwise and consequently, may have to modify or suspend our operations and business plan.

 

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Risks Related to Our Corporate Structure and Operation

 

If the PRC government deems that the contractual arrangements in relation to Wunong Shenzhen, our consolidated variable interest entity, do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

We are a BVI company and our PRC subsidiaries are considered foreign-invested enterprises. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into among WFOE and Wunong Shenzhen and its shareholders. As a result of these contractual arrangements, we exercise control over Wunong Shenzhen and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see “Business - Our Corporate History and Structure.”

 

In the opinion of our PRC counsel, China Commercial Law Firm, our current ownership structure, the ownership structure of WFOE, our PRC subsidiary and Wunong Shenzhen, our consolidated variable interest entity, the contractual arrangements between WFOE and Wunong Shenzhen are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, our PRC counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.

 

In January 2015, the Ministry of Commerce, or MOC, published a discussion draft of the proposed Foreign Investment Law for public review and comments, and on March 15, 2019, the Foreign Investment Law was promulgated and implemented on January 1, 2020. The draft Foreign Investment Law expanded the definition of foreign investment and introduced the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law did not take a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. The final Foreign Investment Law does not include the contractual control concept from the 2015 draft and so the government’s view on variable interest entities continues to be unclear. The Foreign Investment Law also retains a comprehensive oversight over all “foreign investors who invest in China through laws, administrative regulations or other methods prescribed by the State Council”. Foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises, or other organizations, including investment in new construction project, establishment of foreign funded enterprise or increase of investment, merger and acquisition, and investment in any other way stipulated under laws, administrative regulations, or provisions of the State Council. Accordingly it cannot be ruled out that the National People’s Congress or relevant departments may introduce a series of related supporting policies in the future to resolve any ambiguity on the application of the Foreign Investment Law.

 

If the ownership structure, contractual arrangements and business of our Company, WFOE or Wunong Shenzhen are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of WFOE and Wunong Shenzhen, revoking the business licenses or operating licenses of WFOE or Wunong Shenzhen, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from our offerings to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of Wunong Shenzhen, and/or our failure to receive economic benefits from Wunong Shenzhen, we may not be able to consolidate their results into our consolidated financial statements in accordance with U.S. GAAP.

 

We rely on contractual arrangements with Wunong Shenzhen, our consolidated variable interest entity for a portion of our business operations, which may not be as effective as direct ownership in providing operational control.

 

We have relied and expect to continue to rely on contractual arrangements with Wunong Shenzhen and its shareholders to operate our business. For a description of these contractual arrangements, see “Business — Our Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity. For example, Wunong Shenzhen and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.

 

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If we had direct ownership of Wunong Shenzhen, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Wunong Shenzhen, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by Wunong Shenzhen, and its shareholders of their obligations under the contracts. The shareholders of Wunong Shenzhen may not act in the best interests of our Company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with Wunong Shenzhen. Although we have the right to replace any shareholder of Wunong Shenzhen under their respective contractual arrangements, if any shareholder of Wunong Shenzhen is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Any failure by Wunong Shenzhen, our consolidated variable interest entity, or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business” below. Therefore, our contractual arrangements with Wunong Shenzhen, our consolidated variable interest entity, may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

Any failure by Wunong Shenzhen, our consolidated variable interest entity, or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

If Wunong Shenzhen, our consolidated variable interest entity, or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of Wunong Shenzhen were to refuse to transfer their equity interest in Wunong Shenzhen to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated variable interest entity, and our ability to conduct our business may be negatively affected.

 

The shareholders of Wunong Shenzhen, our consolidated variable interest entity, may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The shareholders of Wunong Shenzhen may differ from the interests of our Company as a whole. These shareholders may breach, or cause Wunong Shenzhen to breach, the existing contractual arrangements we have with them and Wunong Shenzhen, which would have a material adverse effect on our ability to effectively control Wunong Shenzhen and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Wunong Shenzhen to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

 

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Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the Exclusive Purchase Agreement (as defined below) with these shareholders to request them to transfer all of their equity interests in Wunong Shenzhen to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Wunong Shenzhen, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Contractual arrangements in relation to Wunong Shenzhen, our consolidated variable interest entity, may be subject to scrutiny by the PRC tax authorities and they may determine that we or Wunong Shenzhen owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between WFOE, our wholly-owned subsidiary in China, Wunong Shenzhen, our consolidated variable interest entity in China, and the shareholders of Wunong Shenzhen, were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust WFOE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Wunong Shenzhen for PRC tax purposes, which could in turn increase its tax liabilities without reducing WFOE’s tax expenses. In addition, if WFOE requests the shareholders of Wunong Shenzhen, as the case may be, to transfer their equity interests in Wunong Shenzhen, as the case may be, at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject WFOE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on Wunong Shenzhen for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our consolidated variable interest entity’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

 

We may lose the ability to use and benefit from assets held by Wunong Shenzhen, our consolidated variable interest entity, that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

 

Wunong Shenzhen, our consolidated variable interest entity, holds certain assets that are material to the operation of our business, including domain names and an ICP license. Under the contractual arrangements, our consolidated variable interest entity may not and its shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event Wunong Shenzhen’s shareholders breach these contractual arrangements and voluntarily liquidate Wunong Shenzhen, or Wunong Shenzhen declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If Wunong Shenzhen undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

If the chops of WFOE, our PRC subsidiaries and Wunong Shenzhen, our consolidated variable interest entity, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of WFOE, our PRC subsidiaries and Wunong Shenzhen, our consolidated variable interest entity are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

 

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Risks Related to Doing Business in the People’s Republic of China

 

Changes in political, social and economic policies in any of China, the U.S. or Europe may materially and adversely affect our business, financial condition, results of operations and prospects.

 

Our business operations are primarily conducted in China. Accordingly, we are affected by the economic, political and legal environment in China.

 

In particular, China’s economy differs from the economies of most developed countries in many respects, including the fact that it:

 

  has a high level of government involvement;
     
  is in the early stages of development of a market-oriented economy;
     
  has experienced rapid growth; and
     
  has a tightly controlled foreign exchange policy.

 

China’s economy has been transitioning from a planned economy towards a more market-oriented economy. However, a substantial portion of productive assets in China remain state-owned and the PRC government exercises a high degree of control over these assets. In addition, the PRC government continues to play a significant role in regulating industrial development by imposing industrial policies. For the past three decades, the PRC government has implemented economic reform measures to emphasize the utilization of market forces in economic development.

 

China’s economy has grown significantly in recent years; however, there can be no assurance that such growth will continue. The PRC government exercises control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall economy of China, but may also have a negative effect on our business. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. As such, our future success is, to some extent, dependent on the economic conditions in China, and any significant downturn in market conditions may materially and adversely affect our business prospects, financial condition, results of operations and prospects.

 

China’s legal system is evolving and has inherent uncertainties that could limit the legal protection available to you.

 

We have all of our operations in China. The legal system of China is a civil law system based on written statutes. Unlike common law systems, it is a system in which prior court decisions have limited value as precedents. Since 1979, the PRC government has promulgated laws and regulations governing economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not developed a fully integrated legal system. Recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these newer laws and regulations involve greater uncertainties than those in jurisdictions available to you. In addition, China’s legal system is based in part on government policies and administrative rules and many have retroactive effects. We cannot predict the effect of future developments in China’s legal system, including the promulgation of new laws, changes to existing laws, or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws.

 

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Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us.

 

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

 

We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company incorporated in the British Virgin Islands, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require WFOE to adjust its taxable income under the contractual arrangements they currently have in place with our consolidated variable interest entity in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us. See “Risks Related to Our Corporate Structure and Operation — Contractual arrangements in relation to Wunong Shenzhen, our consolidated variable interest entity, may be subject to scrutiny by the PRC tax authorities and they may determine that we or Wunong Shenzhen owe additional taxes, which could negatively affect our financial condition and the value of your investment.”

 

Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.”

 

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PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Under PRC laws and regulations, we are permitted to utilize the proceeds from our initial public offering to fund our PRC subsidiaries by making loans to or additional capital contributions to our PRC subsidiaries, subject to applicable government registration and approval requirements.

 

Any loans to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. According to the Interim Measures on the Management of Foreign Debts promulgated by SAFE, the Ministry of Finance and the National Development and Reform Commission on January 8, 2003, the statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the MOC or its local counterpart and the amount of registered capital of such foreign-invested company. According to the Circular of the People’s Bank of China on Matters relating to the Comprehensive Macro-prudential Management of Cross-border Financing issued by the People’s Bank of China in January 2017, or Circular 9, the maximum amount of foreign debt that each of our PRC subsidiaries or our consolidated variable interest entity is allowed to borrow is two times of their respective net assets as indicated in their respective latest audited financial reports. Pursuant to circular 9 and other PRC laws and regulations regarding foreign debt, within a one-year grace period starting from January 11, 2017, the statutory limit for the total amount of foreign debt of a foreign-invested company, which is subject to its own election, is either the difference between the amount of total investment and the amount of registered capital as approved by the MOC or its local counterpart, or two times of their respective net assets. With respect to our consolidated variable interest entity, the limit for the total amount of foreign debt is two times of its respective net assets pursuant to circular 9. Moreover, according to Notice of the National Development and Reform Commission on Promoting the Administrative Reform of the Recordation and Registration System for Enterprises’ Issuance of Foreign Debts issued by the National Development and Reform Commission in September 2015, any loans we extend to our consolidated variable interest entity for more than one year must be filed with the National Development and Reform Commission or its local counterpart and must also be registered with SAFE or its local branches.

 

We may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved by the MOC or its local counterpart. On March 30, 2015, SAFE promulgated Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or Circular 19, which expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. Circular 19 came into force and replaced both previous Circular 142 and Circular 36 on June 1, 2015. On June 9, 2016, SAFE promulgated Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, to further expand and strengthen such reform. Under Circular 19 and Circular 16, foreign-invested enterprises in the PRC are allowed to use their foreign exchange funds under capital accounts and RMB funds from exchange settlement for expenditure under current accounts within its business scope or expenditure under capital accounts permitted by laws and regulations, except that such funds shall not be used for (i) expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations; (ii) investments in securities or other investments than principal-secured products issued by banks; (iii) granting loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) construction or purchase of real estate for purposes other than self-use (except for real estate enterprises). In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of these circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the cash provided by our offshore financing activities to fund the establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new variable interest entities in the PRC.

 

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from our initial public offering and our private placement and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

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Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our shares.

 

Substantially all of our revenues and expenditures are denominated in RMB. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiaries and consolidated variable interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. However, the PBOC regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. Since October 1, 2016, Renminbi has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our shares.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on the price of our shares.

 

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Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our BVI company relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.

 

In light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

 

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

 

We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations.

 

Currently, we are making contributions to the plans based on the minimum standards although the PRC laws required such contributions to be based on the actual employee salaries up to a maximum amount specified by the local government. Therefore, in our consolidated financial statements, we have made an estimate and accrued a provision in relation to the potential make-up of our contributions for these plans as well as to pay late contribution fees and fines. If we are subject to late contribution fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.

 

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. Based on our knowledge after due inquiry, our shareholders who are PRC residents or entities have not completed their SAFE registration.

 

If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions and these shareholders may be subject to administrative punishment pursuant to the related law.

 

Additionally, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

 

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

 

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We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that Wunong Net Technology Company Limited or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on the investment in our shares.

 

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary.

 

We are a British Virgin Islands incorporated company and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in November 2015, require non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file relevant report and materials with the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. As of December 31, 2019 and 2018, we did not record any withholding tax on the retained earnings of our subsidiaries in the PRC as we recorded net losses for the years ended December 31, 2019 and 2018 and did not distribute any dividend for the year ended December 31, 2019 and 2018. Should our tax policy change to allow for offshore distribution of our earnings, we would be subject to a significant withholding tax. We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant tax authority or we will be able to complete the necessary filings with the relevant tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to Vande, our Hong Kong subsidiary.

 

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective in February 2015.

 

Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

 

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In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

 

We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

 

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Risks Related to Our Initial Public Offering and Ownership of Our Ordinary Shares

 

We will incur additional costs as a result of becoming a public company, which could negatively impact our net income and liquidity.

 

Upon completion of this Offering, we will become a public company in the United States. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, Sarbanes-Oxley and rules and regulations implemented by the SEC and the Nasdaq require significantly heightened corporate governance practices for public companies. We expect that these rules and regulations will increase our legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly.

 

We do not expect to incur materially greater costs as a result of becoming a public company than those incurred by similarly sized U.S. public companies. If we fail to comply with these rules and regulations, we could become the subject of a governmental enforcement action, investors may lose confidence in us and the market price of our Ordinary Shares could decline.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

Upon completion of this Offering, we will be a publicly listed company in the United States. As a publicly listed company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.

 

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

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We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our Ordinary Shares less attractive to investors.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our shares held by non-affiliates exceeds $700 million as of any December 31 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our shares less attractive because we may rely on these exemptions. If some investors find our shares less attractive as a result, there may be a less active trading market for our shares and our stock price may be more volatile.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

The market price of our Ordinary Shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

The initial public offering price for our Ordinary Shares will be determined through negotiations between the Underwriters, the selling shareholder and us and may vary from the market price of our Ordinary Shares following our initial public offering. If you purchase our Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Ordinary Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. The market price of our Ordinary Shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
     
  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

Future issuances or sales, or perceived issuances or sales, of substantial amounts of shares in the public market could materially and adversely affect the prevailing market price of the Shares and our ability to raise capital in the future.

 

The market price of our shares could decline as a result of future sales of substantial amounts of shares or other securities relating to the shares in the public market, including by the Company’s substantial shareholders, or the issuance of new shares by the Company, or the perception that such sales or issuances may occur. Future sales, or perceived sales, of substantial amounts of the shares could also materially and adversely affect our ability to raise capital in the future at a time and at a price favorable to us, and our shareholders will experience dilution in their holdings upon our issuance or sale of additional securities in the future.

 

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our initial public offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our shareholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

 

Future financing may cause a dilution in your shareholding or place restrictions on our operations.

 

We may need to raise additional funds in the future to finance further expansion of our capacity and business relating to our existing operations, acquisitions or strategic partnerships. If additional funds are raised through the issuance of new equity or equity-linked securities of the Company other than on a pro rata basis to existing shareholders, the percentage ownership of such shareholders in the Company may be reduced, and such new securities may confer rights and privileges that take priority over those conferred by the shares. Alternatively, if we meet such funding requirements by way of additional debt financing, we may have restrictions placed on us through such debt financing arrangements which may:

 

  further limit our ability to pay dividends or require us to seek consents for the payment of dividends;
     
  increase our vulnerability to general adverse economic and industry conditions;
     
  require us to dedicate a substantial portion of our cash flows from operations to service our debt, thereby reducing the availability of our cash flow to fund capital expenditure, working capital requirements and other general corporate needs; and
     
  limit our flexibility in planning for, or reacting to, changes in our business and our industry.

 

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We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our shares if the market price of our shares increases.

 

There may not be an active, liquid trading market for our shares.

 

There is no active trading market for our shares. An active trading market for our shares may not develop or be sustained. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active.

 

Shares eligible for future sale may adversely affect the market price of our shares, as the future sale of a substantial amount of outstanding shares in the public marketplace could reduce the price of our shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our shares. A significant portion of our shares is held by a few shareholders and these are “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. Assuming the completion of the Offering, if you purchase shares in this Offering, you will incur immediate dilution of approximately $4.4457 or approximately 88.91% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

 

Prior to Offering, Wunong Shenzhen was a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. We will be in a continuing process of developing, establishing, and maintaining internal controls and procedures that will allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting if and when required to do so under Section 404 of the Sarbanes-Oxley Act of 2002. Although our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the date we are no longer an emerging growth company, our management will be required to report on our internal controls over financial reporting under Section 404.

 

As of December 31, 2019, our management assessed the effectiveness of our internal control over financial reporting. The material weaknesses relate to that the Company does not have in-house accounting personnel with sufficient knowledge of US GAAP and SEC reporting experiences. Management concluded that as of December 31, 2019, our internal control over financial reporting was ineffective.

 

In order to address and resolve the foregoing material weakness, we have begun to implement measures designed to improve our internal control over financial reporting to remediate this material weakness, including hiring outside financial personnel with requisite training and experience in the preparation of financial statements in compliance with applicable SEC requirements.

 

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Certain judgments obtained against us by our shareholders may not be enforceable.

 

Although we are a BVI incorporated company, we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult, impractical or impossible for you to effect service of process within the United States upon us or these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the British Virgin Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

 

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our director and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under British Virgin Islands law.

 

We are incorporated in the British Virgin Islands and conduct substantially all of our operations in China through our wholly-foreign owned enterprise and the variable interest entity. Most of our directors and substantially all of our executive officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the British Virgin Islands or in China in the event that they believe that their rights have been infringed under the securities laws of the United States or otherwise. Even if shareholders are successful in bringing an action of this kind, the laws of the British Virgin Islands and China may render them unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States of China, although the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

Our corporate affairs will be governed by our memorandum and articles of association, the BVI Act and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company and whose management, directors and/or major shareholders were also incorporated, resident, or otherwise established in a United States jurisdiction.

 

As a result of the foregoing, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

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There can be no assurance that we will not be passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our shares to significant adverse United States income tax consequences.

 

We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat Wunong Shenzhen as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of these entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of Wunong Shenzhen under the PFIC rules of the U.S. federal income tax laws, and based upon our income and assets, and the value of our Ordinary Shares, we do not believe that we were a PFIC for the taxable year ended December 30, 2018 or that we will be a PFIC for the taxable year ending December 31, 2019 and we do not anticipate becoming a PFIC in the foreseeable future. The Internal Revenue Service has not taken a position on whether a VIE like Wunong Shenzhen can be treated as owned by us for purposes of the PFIC rules. See the discussion of the PFIC rules under “TAXATION - United States Federal Income Taxation” below.

 

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our Ordinary Shares, fluctuations in the market price of our Ordinary Shares may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which may be affected by how, and how quickly, we use our liquid assets. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the equity interests of Wunong Shenzhen for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

 

If we are a PFIC in any taxable year, a U.S. holder may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the shares and on the receipt of distributions on the shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holder may be subject to burdensome reporting requirements. See the discussion of the PFIC rules under “TAXATION - United States Federal Income Taxation” below. Further, if we are a PFIC for any year during which a U.S. holder holds our Ordinary Shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our Ordinary Shares.  

 

The trading price of our Ordinary Shares is likely to be volatile, which could result in substantial losses to investors.

 

The trading price of our Ordinary Shares is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, akin to the performance and fluctuation of the market prices of other companies with business operations located mainly in Hong Kong or the People’s Republic of China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’ securities after their offerings may affect the perception and attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our shares, regardless of our actual operating performance.

 

In addition to market and industry factors, the price and trading volume for our shares may be highly volatile due to a number of factors, including the following:

 

  regulatory developments affecting us or our industry and customers;
  actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
  changes in the market condition, market potential and competition in the online food retail sector;
  announcements by us or our competitors of new products, services, expansions, investments, acquisitions, strategic partnerships or joint ventures;
  fluctuations in global and Chinese economies;
  changes in financial estimates by securities analysts;
  adverse publicity about us;
  additions or departures of our key personnel and senior management;
  release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
  potential litigation or regulatory investigations

 

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Any of these factors may result in large and sudden changes in the volume and price at which our shares will trade.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENT

 

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, we undertake no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds from the sale of Ordinary Shares of approximately up to $21,699,339, based upon an assumed Offering Price of $5.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting fees and commissions and estimated offering expenses.

 

Each $0.25 increase (decrease) in the assumed Offering Price of $5.00 per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this Offering by $1,250,000, assuming the number of Ordinary Shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting fees and commissions.

 

We intend to use the net proceeds of this Offering as follows:

 

50% to be used for general working capital;
   
30% to be used for research and development;
   
10% to be used for expanding our restaurant business; and
   
10% to be used for brand development and marketing

 

The precise amounts and percentage of proceeds we would devote to particular categories of activity will depend on prevailing market and business conditions as well as particular opportunities that may arise from time to time. This expected use of our net proceeds from this Offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs. Similarly, the priority of our prospective uses of proceeds will depend on business and market conditions are they develop. Accordingly, our management will have significant flexibility and broad discretion in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this Offering differently than as described in this prospectus.

 

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In utilizing the proceeds of this Offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions. None of the proceeds of this Offering can be loaned or contributed to our PRC subsidiaries without additional government registration or approval. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans or make additional capital contributions to our PRC subsidiaries to fund its capital expenditures or working capital. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries. This is because there are no statutory limits on the amount of registered capital for our PRC subsidiaries and we are allowed to make capital contributions to our PRC subsidiaries by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiaries complete the relevant necessary filing and registration procedures in accordance with the applicable laws and regulations. With respect to loans to the PRC subsidiaries by us, (i) if the relevant PRC subsidiary determines to adopt the traditional foreign exchange administration mechanism, or the current foreign debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limits on the amount of loans that we can make to our PRC subsidiary under this circumstance since we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary determines to adopt the foreign exchange administration mechanism as provided in the Notice of the People’s Bank of China (“PBOC”) on Full-coverage Macro-prudent Management of Cross-border Financing (the “PBOC Notice No. 9”), the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries.

 

According to the relevant PRC laws and regulations, in terms of capital contributions, it typically takes about eight weeks to complete the relevant filings and registrations. In terms of loans, the SAFE registration process typically takes about four weeks to complete, provided that all the necessary procedures could be successfully consummated by the relevant PRC subsidiary, as case may be, and/or our company. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary, we cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors— Risks Related to Doing Business in the People’s Republic of China— PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or controlled PRC affiliate or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business”. It is likely that we will need to convert some of our net proceeds in U.S. dollars into Renminbi in order to use as proceeds as contemplated in this section. For details of PRC regulations governing foreign currency conversion, see “Regulations—Regulations Relating to Foreign Exchange – Regulations Relating to Dividend Distribution.”

 

Pending remitting the Offering proceeds to the PRC, we intend to retain our net proceeds in a short-term, interest bearing bank account.

 

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Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future.

 

We will not receive any proceeds from the sale of Ordinary Shares by the selling shareholder.

 

DIVIDEND POLICY

 

The holders of our Ordinary Shares are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our Ordinary Shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.

 

Subject to the BVI Act and our memorandum and articles, our directors may, by resolution, declare dividends at a time and amount as they think fit if they are satisfied, based on reasonable grounds, that, immediately after distribution of the dividend, the value of our assets will exceed our liabilities and we will be able to pay our debts as they fall due. There is no further BVI law restriction on the amount of funds which may be distributed by us by dividend, including all amounts paid by way of the subscription price for Ordinary Shares regardless of whether such amounts may be wholly or partially treated as share capital or share premium under certain accounting principles. Shareholder approval is not (except as otherwise provided in our memorandum or articles) required to pay dividends under BVI law. In accordance with, and subject to, our memorandum and articles, no dividend shall bear interest as against the Company (except as otherwise provided in our memorandum or articles).

 

If we determine to pay dividends on any of our Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our Hong Kong subsidiary, Vande.

 

Current PRC regulations permit our indirect PRC subsidiaries to pay dividends to Vande only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve funds until the accumulative amount of such funds reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of such entity. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation.

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiary and affiliates in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations, we may be unable to pay dividends on our Ordinary Shares.

 

Cash dividends, if any, on our Ordinary Shares will be paid in U.S. dollars. Vande may be considered a non-resident enterprise for tax purposes, so that any dividends Wunong Shenzhen pays to Vande may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.

 

Pursuant to the Arrangement between mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of the PRC enterprise. However, pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (b) the Hong Kong enterprise must have directly owned no less than 25% equity interests in the PRC resident enterprise during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding company, Vande. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Vande intends to apply for the tax resident certificate when Wunong Shenzhen plans to declare and pay dividends to Vande.

 

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EXCHANGE RATE INFORMATION

 

Our financial information is presented in U.S. dollars. Our functional currency is Renminbi (“RMB”), the currency of the PRC. Transactions which are denominated in currencies other than RMB are translated into RMB at the exchange rate quoted by the People’s Bank of China at the dates of the transactions. Exchange gains and losses resulting from transactions denominated in a currency other than the RMB are included in statements of operations as foreign currency transaction gains or losses. Our financial statements have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, “Foreign Currency Translation”, which was subsequently codified within Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Items in the statements of operations and comprehensive loss, and statements cash flows are translated at the average exchange rate of the period. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The relevant exchange rates are listed below:

 

    High     Low     Period End     Average  
2013     6.2438       6.0537       6.0537       6.1478  
2014     6.2591       6.0402       6.2046       6.1620  
2015     6.4896       6.1870       6.4778       6.2827  
2016     6.9580       6.4480       6.9430       6.6400  
2017     6.9575       6.4773       6.5060       6.7568  
January     6.9575       6.8360       6.8786       6.8907  
February     6.8821       6.8517       6.8665       6.8694  
March     6.9132       6.8687       6.8832       6.8940  
April     6.8988       6.8778       6.8900       6.8876  
May     6.9060       6.8098       6.8098       6.8843  
June     6.8382       6.7793       6.7793       6.8066  
July     6.8039       6.7240       6.7240       6.7694  
August     6.7272       6.5888       6.5888       6.6670  
September     6.6591       6.4773       6.6533       6.5690  
October     6.6533       6.5712       6.6328       6.6264  
November     6.6385       6.5967       6.6090       6.6200  
December     6.6210       6.5063       6.5060       6.5931  
2018     6.9737       6.2649       6.8783       6.6199  
January     6.5263       6.2841       6.3990       6.4727  
February     6.3471       6.2649       6.3280       6.3183  
March     6.3565       6.2685       6.2726       6.3174  
April     6.3340       6.2655       6.3325       6.2967  
May     6.4175       6.3325       6.4096       6.3701  
June     6.6235       6.3850       6.6186       6.4651  
July     6.8102       6.6123       6.8038       6.7164  
August     6.9330       6.8018       6.8300       6.8453  
September     6.8880       6.8270       6.8680       6.8551  
October     6.9737       6.8680       6.9737       6.9191  
November     6.9558       6.8894       6.9558       6.9367  
December     6.9077       6.8343       6.8783       6.8837  
2019                                
January     6.8708       6.6958       6.6958       6.7863  
February     6.7907       6.6822       6.6912       6.7367  
March     6.7381       6.6916       6.7112       6.7119  
April     6.7418       6.6870       6.7347       6.7161  
May     6.9182       6.7319       6.9027       6.8519  
June     6.9298       6.8510       6.8657       6.8977  
July     6.8927       6.8487       6.8833       6.5784  
August     6.9387       7.1628       7.1543       7.0629  
September     7.1786       7.0659       7.1218       7.1119  
October     7.1473       7.0379       7.0379       7.0961  
November     7.0427       6.9741       7.0314       7.0211  
December     7.0609       6.9618       6.9618       7.0137
2020                                
January     6.9749       6.8589       6.9161       6.9184  
February     7.0286       6.9650       6.9906       6.9967  
March     7.1099       6.9244       7.0808       7.02045  
April     7.0989       7.0341       7.0622       7.0708  
May     7.1681       7.0622       7.1348       7.10159  
June     7.1263       7.0575       7.0651       7.08156  
July     7.0703       6.9800       6.9744       7.0041  
August     6.9799       6.8474       6.8474       6.927  
September     6.8474       6.7529       6.7896       6.8106  

 

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We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. We do not currently engage in currency hedging transactions.

 

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

 

The following table presents our selected historical financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statement and notes thereto included elsewhere in this prospectus.

 

The following selected consolidated financial and operating data for the six months ended June 30, 2020 and 2019 and the consolidated balance sheet data as of June 30, 2020 and December 31, 2019 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

 

Balance Sheet Summaries at June 30, 2020 and December 31, 2019

 

   June 30,   December 31, 
   2020   2019 
   (Unaudited)     
Total Current Assets  $1,066,203   $1,629,840 
TOTAL ASSETS   2,508,883    3,243,948 
           
Total Current Liabilities   3,211,226    3,222,725 
TOTAL LIABILITIES   5,355,600    4,892,558 
           
Total Stockholder’s Equity (Deficit)   (2,846,717)   (1,648,610)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $2,508,883   $3,243,948 

 

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Income Statement Summaries for the six months ended June 30, 2020 and 2019

 

   Six months ended 
   June 30, 
   2020   2019 
   (Unaudited)   (Unaudited) 
NET REVENUES  $2,990,267   $2,463,019 
COST OF REVENUES   2,407,192    1,786,312 
GROSS PROFIT   583,075    676,707 
Operating Expenses   1,899,349    1,146,644 
INCOME/(LOSS) FROM OPERATIONS   (1,316,274)   (469,937)
NET INCOME/(LOSS)   (1,313,342)   (460,744)
COMPREHENSIVE INCOME/(LOSS)  $(1,283,035)  $(458,610)

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2020:

 

  On an actual basis; and
     
  On a pro forma basis to give effect to the sale of up to 5,000,000 Ordinary Shares by us in this Offering at the assumed Offering Price of $5 per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting commissions and estimated offering expenses.

 

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Ordinary Shares.” You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Ordinary Shares.”

 

As of June 30, 2020

 

   As Reported  

Pro Forma

Adjusted

for the Offering

 
Ordinary Shares  $-   $- 
           
Additional Paid-In Capital  $1,088,375   $22,787,714 
           
Accumulated Deficit  $(4,022,647)  $(4,022,647)
           
Accumulated Other Comprehensive Income  $87,555   $87,555 
Total Equity (Deficit)  $(2,846,717)  $18,852,622 
           
Total Capitalization  $(2,846,717)  $18,852,622 

 

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DILUTION

 

If you invest in our Ordinary Shares, your interest will be diluted to the extent of the difference between the Offering Price per Ordinary Shares and the pro forma net tangible book value per Ordinary Shares after the offering. Our net tangible book value as of June 30, 2020 was $(3,966,220), or $(0.20) per share. Our net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our share stock outstanding before the offering.

 

Dilution results from the fact that the per Ordinary Share Offering Price is substantially in excess of the book value per Ordinary Shares attributable to the existing shareholders for our presently outstanding Ordinary Shares. After giving effect to our issuance and sale of 5,000,000 shares in this Offering at an assumed Offering Price of $5.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma as adjusted net tangible book value as of June 30, 2020 would have been $17,733,119, or $0.71 per share. This represents an immediate increase in net tangible book value to existing shareholders of $0.91 per share. The Offering Price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares in this Offering will suffer an immediate dilution of their investment of $4.29 per share. The following table illustrates this per share dilution to the new investors purchasing shares in this Offering:

 

   Offering 
Assumed Offering Price per Ordinary Share  $5.00 
Net tangible book value per Ordinary Shares as of June 30, 2020  $(0.20)
Increase per Ordinary Shares attributable to this Offering  $0.91 
Pro forma net tangible book value per Ordinary Shares after the Offering  $0.71 
Dilution per Ordinary Share to new investors  $4.29 

 

A $1.00 increase (decrease) in the assumed Offering Price of $5.00 per share would increase (decrease) the pro forma net tangible book value by $4,575,000, the pro forma net tangible book value per share after this Offering by $0.18 per share and the dilution in pro forma net tangible book value per share to investors in this Offering by $0.82 per share, assuming that the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting fees and commissions and offering expenses payable by us.

 

The following chart illustrates our pro forma proportionate ownership, upon completion of this Offering by present shareholders and investors in this Offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this Offering at the assumed Offering Price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

 

   Shares Purchased   Total Consideration   Average Price 
   Amount (#)   Percent (%)   Amount (#)   Percent (%)   Per Share ($) 
Existing shareholders   20,000,000    80%   1,088,375    

4.17

%   0.0544 
New investors   5,000,000    20%   25,000,000    95.83%   5.00 
Total   25,000,000    100.0%   26,088,375    100.0%   1.0435 

 

Sales by the selling shareholder in this Offering will cause the number of shares held by existing shareholders to be reduced to 24,000,090 shares, or 96% of the total number of shares outstanding after this Offering, and will increase the number of shares held by new investors to 5,999,910 shares, or 24% of the total number of shares outstanding after this Offering, excluding any shares purchased by any existing holders in this Offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our results of operations and financial condition should be read together with our unaudited condensed consolidated financial statements and the notes thereto and other financial information, which are included elsewhere in this registration statement. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In addition, our financial statements and the financial information included in this registration statement reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.

 

This section contains forward-looking statements. These forward-looking statements are subject to various factors, risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Further, as a result of these factors, risks and uncertainties, the forward-looking events may not occur. Relevant factors, risks and uncertainties include, but are not limited to, those discussed in the section entitled “Business,” “Risk Factors” and elsewhere in this registration statement. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s beliefs and opinions as of the date of this registration statement. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. See “Cautionary Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a British Virgin Islands company incorporated on December 4, 2018 as “Advancement International Limited” by three shareholders, namely Kindness Global Company Limited, Four Dimensions Global Investment Limited and Wisdom Global Company Limited. Through our contractually controlled and managed company, Wunong Technology (Shenzhen) Co,. Ltd, a People’s Republic of China company (“Wunong Shenzhen”), we operate an electronic online platform designed to provide primarily clean food to customers in China. We also operate a restaurant in China with a grocery section that sells only clean food. Our mission is to provide our customers in China with green food, organic food and pollution-free food (collectively “Clean Food”).

 

On February 15, 2019, we acquired all shares of Shenzhen Vande Technology Co., Limited (“Vande”) pursuant to the Instrument of Transfer, Sold Note and Bought Note recorded with Registrar of Companies in Hong Kong Special Administration Region (SAR).

 

Vande, incorporated on April 6, 2017 in Hong Kong, incorporated Guo Gang Tong (“WFOE”) in the People’s Republic of China with a registered capital of RMB 5,000,000 on December 28, 2018.

 

On March 2, 2019, WFOE entered into a series of contractual agreements with Wunong Shenzhen, a company incorporated in the People’s Republic of China on June 16, 2015 with a registered capital of RMB 5,000,000. These agreements include an Exclusive Technology Consulting Services Agreement, an Equity Interest Pledge Agreement, an Exclusive Purchase Rights Agreement, and a Proxy Agreement, and allow us to:

 

  exercise effective control over Wunong Shenzhen;
  receive substantially all of the economic benefits of Wunong Shenzhen; and
  have an exclusive option to purchase all or part of the equity interests in Wunong Shenzhen when and to the extent permitted by PRC law.

 

As a result of these contractual arrangements, we have become the primary beneficiary of Wunong Shenzhen, and we treat Wunong Shenzhen as a Variable Interest Entity (“VIE”) in accordance with the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”, because the equity investments in Wunong Shenzhen no longer have the characteristics of a controlling financial interest, and we, through WFOE, are the primary beneficiary of Wunong Shenzhen. Accordingly, Wunong Shenzhen has been consolidated.

 

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On August 19, 2019, we changed our name from “Advancement International Limited” to Wunong Net Technology Company Limited.

 

We are an online and mobile commerce company and conduct our business through our online retail store on our Website - www.wnw108.com. We sell over 400 types of food products on our Website. We do not grow, foster or manufacture any food products and all the food products sold on our Website are from our suppliers. We do not sell genetically modified food. We are committed to providing our customers with safe, high-quality, nutritious, tasty and non-genetically modified food products through our portfolio of trusted and well-known suppliers. Optimizing our Website and real-time data, we are able to respond to and match supply with demand for food products in keeping with consumer trends.

 

Food safety, product quality and sustainability are our core values. The food products/commodities sold on our Website are broadly categorized into (i) Green Food, (ii) Organic Food, (iii) intangible cultural heritage food products (“ICH Products”), (iv) agricultural products bearing geographical indications (“Agri GI Products”) and (v) Pollution-Free Products (genetically modified products excepted).

 

As of December 31, 2019, the portfolio of food products sold on our Website comprises 9.9% Organic Food (52 products), 4.9% Green Food (26 products), 2.1% Agri GI Products (11 products), and 83.1% of other food products (including non-genetically modified Pollution-Free Products) (435 products). The mix of food products sold on our Website is ever-changing, depending on food quality and safety, market demand, and customer preferences.

 

We also plan to open franchise restaurants throughout China in 2020. These restaurants will not only offer our food products for sampling but also will be equipped with a grocery section that sells our products. As of the date of this prospectus, we have launched our first restaurant in Shenzhen and plan to roll out other restaurants through franchisees throughout China. Our present restaurant model (which is subject to further refinement) allows a customer to rent our restaurant facilities, cook and serve food utilizing the food products purchased from us.

 

We generate revenue from the sale of food products/commodities on our Website, which includes custom pre-sales of food products/commodities such as crops and from our restaurant.

 

We received an Internet Content Provider (“ICP”) license for value-added Internet information services on December 21, 2018. Because we only sell food products that we have purchased from suppliers on the Website instead of operating an online marketplace which matches third party sellers and buyers, we are legally not required under Chinese law to obtain an ICP license. We have, however, obtained an ICP license just to preserve the option to run the aforementioned online marketplace in the future. The ICP license is a permit issued by the Chinese Ministry of Industry and Information Technology to permit China-based websites to operate in China.

 

How to Assess the Company’s Performance

 

In assessing performance, we consider a variety of performance and financial measures, including principal growth in net revenue, gross profit, distribution, general and administrative expenses, net income from operations. The key measures that we use to evaluate the performance of our business are set forth below:

 

(i)Net Revenue

 

Net revenue is equal to gross sales minus sales returns and sales incentives that the Company offers to its customers, such as discounts that are offset to gross sales. Our net sales are driven by changes in the number of customers, product varieties, selling price, and mix of products sold.

 

(ii)Gross Profit

 

Gross profit is equal to net sales minus cost of goods sold. Cost of goods sold primarily includes inventory costs (net of supplier consideration), inbound freight and other miscellaneous expenses. Cost of goods sold generally changes as we incur higher or lower costs from suppliers and as the customer and product mix changes.

 

(iii)Selling, Marketing, General and Administrative Expenses

 

Selling, marketing, general and administrative expenses primarily consist of salaries and benefits for employees, shipping expense, utilities, maintenance and repairs expenses, insurance expense, depreciation and amortization expenses, selling and marketing expenses, professional fees, and other operating expenses.

 

Key Factors Affecting Our Results of Operation

 

Our business benefits from the significant growth of China’s e-commerce sector and e-grocery market. An Agriculture and Agri-Food Canada report stated that from 2012 to 2016, China’s e-grocery sales saw a compound annual growth rate of 52.9%. Total e-commerce in China registered significant growth with a compound annual growth rate of 51.2% from 2012 to 2016. However, the report stated that the rate at which e-commerce sales were growing was slowing down due to the rise in the numbers of players. Although the e-grocery category was seeing dynamic growth, it continued to account for a small portion (6.5%) of total e-commerce sales in China. (Source: http://www.agr.gc.ca/eng/industry-markets-and-trade/international-agri-food-market-intelligence/reports/e-grocery-market-in-china/?id=1504037238257).

 

This trend in e-commerce is largely driven by a combination of economic, technology and support infrastructure factors that are driving the demand for product variety/quality, convenience, and greater deals and transparency (BMI research, 2017). In recent years, China has seen a rising middle class with rising disposable incomes and spending. As a result, e-commerce sales in China were continually boosted by further device penetration, more players emerging in the channel, and retailers making huge efforts to draw consumers to their websites. Our results of operations will be materially impacted by changes in any one or more of these factors.

 

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For example, although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may not continue. According to the PRC National Bureau of Statistics, the annual rate of growth in the PRC declined from 7.8% in 2013 to 7.3% in 2014, 6.9% in 2015, 6.7% in 2016, 6.8% in 2017 and 6.6% in 2018. (Source: https://en.wikipedia.org/wiki/Historical_GDP_of_China).

 

The Chinese economy advanced 6.2% year-on-year in the second quarter of 2019, slowing from a 6.4% expansion in the previous three-month period. It was the lowest growth rate since the first quarter of 1992, amid ongoing trade tensions with the US, weakening global demand and alarming off-balance-sheet borrowings by local governments. (Source: https://tradingeconomics.com/china/gdp-growth-annual)

 

A further slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the purchase power of the consumers of our products and lead to the decrease of demand for our products and may have a materially adverse effect on our business.

 

Also, changes in the Chinese or regional business or regulatory environment affecting the purchasing power of consumers of our products, changes in the Chinese government policy on food industry generally or a breakout of livestock or crop diseases in the PRC, such as Bovine spongiform encephalopathy (BSE or mad cow disease), Fibromuscular Dysplasia (FMD), swine flu and avian flu and increases in fuel/transportation costs could materially impact our business and affect the results of operations of our operations.

 

Coronavirus (COVID-19) Update

 

Recently, there is an ongoing outbreak of a novel strain of coronavirus (COVID-19) first identified in China and has since spread rapidly globally. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities globally for the past few months. In March 2020, the World Health Organization declared the COVID-19 to be a pandemic.

 

The peak of the COVID-19 pandemic in China was from February through March 2020. During that time, our office was closed and our employees worked remotely at home using conferencing software such as Tencent conference software, WeChat software and Dingding software. Fortunately, we were able to transition to remote working arrangements without much disruption.

 

This period coincided with the traditional Chinese New Year, which is typically a peak shopping season. Compounded with the pandemic and threat of a national lockdown, the first quarter saw increased purchases and orders as customers hoarded food products. We and our suppliers tried our best to fulfill these orders ahead of schedule ahead of the lockdown. Accordingly, the impact on the pandemic on our first quarter online operations was minimal.

 

During this time, we established an epidemic prevention and control team, issued epidemic prevention and safety guidelines, purchased masks, disinfectant and sanitizers for its employees and office.

 

The pandemic came under control in China during the second quarter of 2020. Lockdown measures were lifted and our employees were allowed to return to work, albeit with social distancing and safety measures. We were able to receive orders and fulfill them timely and without any disruption. Unfortunately, while China was gradually returning to business, the pandemic raged elsewhere in the world and impacted China’s economy severely. Manufacturing activity came to a standstill as overseas orders were canceled. Chinese residents saw incomes and consequently, disposable income dwindle. This, coupled with the previous hoarding of food products, resulted in fewer orders for our products during the second quarter as customers tightened their belts and held back spending on perceived “luxury items” (such as premium-priced organic produce) and investing.

 

Fortunately, with the help of member promotion activities and sales promotions, we were still able to show a year-over-year 21% increase in revenue for the half of the year. This, however, fell short of the Company’s original sales forecast for the year.

 

One of the industries most impacted by the COVID-19 pandemic is the restaurant business. Our franchisees were hesitant to invest any capital in opening restaurants until lockdown measures were lifted for the restaurant industry. This caused our restaurant expansion plans to be temporarily suspended. The lockdown measures for restaurants were finally lifted in the third quarter. Customers are now able to dine indoors or outdoors without occupancy limits. We have been able to resume our restaurant expansion plans and the Company signed franchise agreements for 25 restaurants in the Shenzhen area, which will all be set up by year end 2020.

 

While China has the pandemic largely under control now, there are still isolated reports of imported cases and patients getting re-infected. Given the unpredictable but extremely infectious nature of the COVID-19 virus and until an effective vaccine is introduced, it is entirely within the realm of contemplation that a national or regional lockdown may occur again should there be a resurgence. In such a scenario, any or all of the abovementioned scenarios may occur again and the repercussions on the Company’s businesses and operations cannot be predicted with any certainty.

 

Because substantially all of our business operations and our workforce are concentrated in China, should there be a national lockdown and the implementation of containment measures again, we believe there is a risk that our business, results of operations, and financial condition will be adversely affected. Potential impact to our results of operations will also depend on future developments and new information that may emerge regarding the duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or mitigate its impact, almost all of which are beyond our control. The impact of the COVID-19 on our business, financial condition, and results of operations include, but are not limited to, the following:

 

  the supply chain of our products and our ability to fulfil orders;
  our ability to source available labor and materials to renovate and retrofit our restaurants;
  any restrictions on restaurants will also impact our expansion plans and revenue especially if indoor dining capacity is severely curtailed;
  the curtailment of any in-person marketing, advertising and meetings;
  the global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak. It is possible that the price of our ordinary shares will decline significantly after the consummation of this offering, in which case, you may lose your investment.

 

Because of the uncertainty surrounding the COVID-19 outbreak, the business disruption and the related financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time. For a detailed description of the risks associated with the novel coronavirus, see “Risk Factors - Risks Related to Our Business and Industry - We are exposed to the risks of an economic recession, credit and capital markets volatility and economic and financial crisis as a result of the COVID-19 virus pandemic, which could adversely affect the demand for our products, our business operations and expansion plans and our ability to mitigate its impact and provide timely information to our investors and the SEC.”

 

Results of Operations

 

For the six months ended June 30, 2020 and 2019

 

The following table summarizes the results of our operations for the six months ended June 30, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   Six months ended   Six months ended         
   June 30,   June 30,   Variance 
   2020   % of revenue   2019   % of revenue   Amount   % 
                         
NET REVENUES                              
Net Product Revenue  $2,990,267    100%  $2,448,976    99   $541,291    22%
Net Service Revenue   -    -    14,043    1%   (14,043)   (100)%
Total Net Revenues   2,990,267    100%   2,463,019    100%   527,248    21%
COST OF REVENUES   2,407,192    81%   1,786,312    73%   620,880    35%
GROSS PROFIT   583,075    19%   676,707    27%   (93,632)   (14)%
OPERATING EXPENSES                              
Sales and Marketing Expenses   1,137,866    38%   606,009    25%   531,857    88%
General and Administrative Expenses   607,667    20%   480,762    20%   126,905    26%
Research and Development Expenses   153,816    5%   59,873    2%   93,943    157%
Total Operating Expenses   1,899,349    64%   1,146,644    47%   752,705    66%
LOSSFROM OPERATIONS   (1,316,274)   (44)%   (469,937)   (19)%   (846,337)   180%
Other Income, net   2,932    0%   9,193    0    (6,261)   (68)%
LOSS BEFORE INCOME TAX   (1,313,342)   (44)%   (460,744)   (19)%   (852,598)   185%
Provision for Income Taxes   -    -    -    -%   -    -%
NET LOSS   (1,313,342)   (44)%   (460,744)   (19)%   (852,598)   185%
OTHER COMPREHENSIVE LOSS                              
Foreign Currency Translation Adjustment   30,307    1%   2,134    0%   28,173    1,320%
COMPREHENSIVE LOSS  $(1,283,035)   (43)%  $(458,610)   (19)%  $(824,425)   180%

 

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Net Revenue

 

Net revenue is equal to gross sales minus sales returns and sales incentives that we offer to our customers, such as discounts that are offsets to gross sales and certain other adjustments. Our net revenue consists of product revenue and service revenue. Product revenue was derived mainly from sales of Clean Food to customers in China via an online platform and a restaurant operated by the Company.

 

Net revenue increased by $0.5 million or 21%, from $2.5 million for the six months ended June 30, 2019 to $3.0 million for the six months ended June 30, 2020. The revenue increase was primarily due to the Company expanding its sales channels, increasing its sales force, and enhancing user experiences to increase recurring purchases. Starting from January 1, 2020, the Company outsourced its restaurant service to third parties. Due to the impact of the COVID-19 pandemic, we did not open any new franchise restaurants in the first half of 2020.

 

The following table sets forth the breakdown of our net revenue for the six months ended June 30, 2020 and 2019.

 

For the six months ended June 30, 2020

 

   Net   % of Total   Sales   Average 
Product category  revenue   revenue   quantities   selling price 
                 
Grains, oil, and spices  $1,296,132    43.3%   134,518   $9.64 
Beverages, alcohol and tea  $337,580    11.3%   16,104   $20.96 
Other food  $414,413    13.9%   35,623   $11.63 
Meat, poultry and eggs  $623,466    20.8%   26,300   $23.71 
Fresh fruits and vegetables  $127,324    4.3%   22,916   $5.56 
Groceries  $162,915    5.4%   6,778   $24.04 
Dried seafood  $28,437    1.0%   3,836   $7.41 
Restaurant Services  $-    -%   n/a    n/a 
Total  $2,990,267    100%   246,075      

 

For the six months ended June 30, 2019

 

   Net   % of Total   Sales   Average 
Product category  revenue   revenue   quantities   selling price 
                 
Grains, oil, and spices  $1,340,181    54.4%   99,505   $13.47 
Beverages, alcohol and tea  $379,189    15.4%   19,690   $19.26 
Other food  $222,853    9.0%   22,376   $9.96 
Meat, poultry and eggs  $134,559    5.5%   12,222   $11.01 
Fresh fruits and vegetables  $250,392    10.2%   23,354   $10.72 
Groceries  $-    -%   -   $- 
Dried seafood  $121,802    4.9%   11,816   $10.31 
Restaurant Services  $14,043    0.6%   n/a    n/a 
Total  $2,463,019    100%   188,963      

 

Currently, we have seven major product categories for Clean Food: (1) grains, oil, and spices (2) fresh fruits and vegetables (3) meat, poultry and eggs, (4) dried seafood, (5) beverages, alcohol and tea, (6) other food, (7) groceries. Revenue is primarily generated from grains, oil, and spices, which account for 43.3% of the total product revenue for the six months ended June 30, 2020 and 54.4% of the total revenue for the six months ended June 30, 2019. Grains, oil, and spices had average selling prices of $9.64 and $13.47 for the six months ended June 30, 2020 and 2019, respectively. Beverages, alcohol and tea had average selling prices of $20.96 and $19.26 for the six months ended June 30, 2020 and 2019, and accounted for 11.3% and 15.4% of the total product revenue for the six months ended June 30, 2020 and 2019, respectively. Meat, poultry and eggs had average selling prices of $23.71 and $11.01 for the six months ended June 30, 2020 and 2019, and accounted for 20.8% and 5.5% of the total product revenue for the six months ended June 30, 2020 and 2019, respectively.

 

The significant increase of sales was due to the following: (1) we started sales of groceries in the second half of fiscal year 2019, sales from groceries increased by approximately $163,000 for the six months ended June 30, 2020 compared to the six months ended June 30, 2019; (2) we started pre-ordering service for meat, poultry and eggs in mid-2019, orders were completed and we started to recognize revenue from the first quarter of 2020. The new service has contributed $0.1 million of sales for the six months ended June 30, 2020. In addition, we have added 12 new items to this category including duck, lamb and Berkshire pork, which contributed approximately $450,000 in revenue for the six months ended June 30, 2020. The new products made this line as the second largest revenue source among our product lines; (3) we increased the issuance of the promotional coupons to customers during the outbreak of COVID-19 in order to boost our sales. However, due to logistics constraints during the COVID-19 outbreak, fruit, vegetable and other perishable products sales decreased by approximately $123,000 for the six months ended June 30, 2020, compared to the six months ended June 30, 2019.

 

Cost of Revenues and Gross Profit

 

Due to the commencement of the online platform in mid-2018 and expansion of the presence of our website to more customers, cost of sales significantly increased in 2020. Cost of revenue, including tax surcharges, was $2.4 million for the six months ended June 30, 2020, an increase of $0.6 million, or 35% from $1.8 million for the six months ended June 30, 2019. Gross profit was $0.6 million for the six months ended June 30, 2020, a decrease of approximately $94,000 from $0.7 million for the six months ended June 30, 2019.

 

The following tables set forth the calculation of gross profit and gross margin for sales of major product categories of Clean Food for the six months ended June 30, 2020 and 2019.

 

For the six months ended June 30, 2020

 

   Net   Cost of   Tax   Gross   Gross 
Product category  revenue   revenue   surcharges   profit   margin 
Grains, oil, and spices  $1,296,132   $1,055,553   $5,102   $235,477    18%
Beverages, alcohol and tea  $337,580   $237,773   $1,149   $98,658    29%
Other food  $414,413   $311,663   $1,506   $101,244    24%
Meat, poultry and eggs  $623,466   $552,501   $2,670   $68,295    11%
Fresh fruits and vegetables  $127,324   $110,518   $534   $16,272    13%
Groceries  $162,915   $104,644   $506   $57,765    35%
Dried seafood  $28,437   $22,962   $111   $5,364    19%
Restaurant Services  $-   $-   $-   $-    -%
Total  $2,990,267   $2,395,614   $11,578   $583,075    19%

 

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Groceries had the highest gross margin of 35.5% among the six product categories whereas meat, poultry and eggs had the lowest gross margin of 11% among products sold for the six months ended June 30, 2020.

 

For the six months ended June 30, 2019

 

   Net   Cost of   Tax   Gross   Gross 
Product category  revenue   revenue   surcharges   profit   margin 
Grains, oil, and spices  $1,340,181   $981,438   $4,893   $353,850    26%
Fresh fruits and vegetables  $250,392   $175,887   $914   $73,591    29%
Meat, poultry and eggs  $134,559   $107,250   $491   $26,818    20%
Dried seafood  $121,802   $87,932   $445   $33,425    27%
Beverages, alcohol and tea  $379,189   $257,362   $1,384   $120,443    32%
Other food  $222,853   $160,969   $814   $61,070    27%
Restaurant service  $14,043   $6,482   $51   $7,510    53%
Total  $2,463,019   $1,777,320   $8,992   $676,707    27%

 

Beverages, alcohol and tea had the highest gross margin of 32% among the six product categories whereas meat, poultry and eggs had the lowest gross margin of 20% for the six months ended June 30, 2019. Restaurant service revenue has a gross margin of 53%.

 

The 8% overall decrease in gross margin from 27% for the six months ended June 30, 2019 to 19% for the six months ended June 30, 2020 was due to the following: (1) we issued more promotional coupons to our existing customers and new customers during the COVID-19 to increase our sales. With the same cost and the same competitive pricing of our products, the promotional coupons resulted in a decrease in our gross margin. For the six months ended June 30, 2020, sales resulting from the coupons accounted for 5% of our total revenue, compared to less than 1% for the six months ended June 30, 2019; (2) the logistics constraints during the COVID-19 outbreak decreased our turnover for fruits, vegetable and other perishable, which led to a higher charge of inventory write-off and lower gross margin; (3) we added lamb to our meat, poultry and eggs line, which has a lower margin of 7%. This new product lowered the overall profit for this product line for the six months ended June 30, 2020 compared to that for the six months ended June 30, 2019.

 

Sales and Marketing Expenses

 

Sales and marketing expenses were $1.1 million for the six months ended June 30, 2020, an increase of $0.5 million, from $0.6 million for six months ended June 30, 2019. The increase was attributable mainly to higher sales commissions of $0.5 million due to increased sales and increased commission rate from the second half of 2019, especially new customer referral commission, as well as an increase of $0.1 million from salaries and employee benefits.

 

General and Administrative Expenses

 

General and administrative expenses were $0.6 million for the six months ended June 30, 2020, an increase of $0.1 million from $0.5 million for the six months ended June 30, 2019. The increase was mainly attributable to increased salary and employee benefit expenses by $42,000 due to the growth in number of employees and increased consulting and business conference expenses by $0.1 million, due to the efforts to list our Ordinary Shares on the US capital market.

 

Research and Development Expenses

 

Research and development expenses increased by $0.1 million for the six months ended June 30, 2020 from approximately $60,000 for the six months ended June 30, 2019. The increase in research and development expenses is due to the improvement and maintenance work of our online platform.

 

Other Income

 

Other income consists primarily of non-operating income and interest income or expenses. Other income was $2,932 and $9,193 for the six months ended June 30, 2020 and 2019, respectively.

 

Provision for income taxes

 

Our provision for income taxes was $nil for the six months ended June 30, 2020 and 2019 as there were net losses for the two periods. Based upon management’s assessment of all available evidence, we believe that it is more-likely-than-not that the deferred tax assets for NOL carry-forwards will not be realizable; and therefore, a full valuation allowance is established as of June 30, 2020 and 2019.

 

Other comprehensive income

 

Foreign currency translation adjustments amounted to $30,307 and $2,134 for the six months ended June 30, 2020 and 2019, respectively. The balance sheet amounts, with the exception of equity, on June 30, 2020 were translated at 1.00 RMB to $0.1414 as compared to 1.00 RMB to $0.1457 on June 30, 2019. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the six months ended June 30, 2020 and 2019 were RMB 1.00 to $0.1422 and RMB 1.00 to $0.1474, respectively. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in U.S dollar terms without giving effect to any underlying change in our business or results of operation.

 

For the year ended December 31, 2019 and 2018

 

The following table summarizes the results of our operations for the years ended December 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

    Years ended     Years ended              
    December 31,     December 31,     Variance  
    2019     % of revenue     2018     % of revenue     Amount     %  
                                     
NET REVENUES                                                
Net Product Revenue   $ 7,666,506       100 %   $ 1,076,827       100     $ 6,589,679       612 %
Net Service Revenue     16,077       -       -       - %     16,077       100 %
Total Net Revenues     7,682,583       100 %     1,076,827       100 %     6,605,756       613 %
COST OF REVENUES     5,778,167       75 %     848,777       79 %     4,929,390       581 %
GROSS PROFIT     1,904,416       25 %     228,050       21 %     1,676,366       735 %
OPERATING EXPENSES                                                
Sales and Marketing Expenses     1,882,714       25 %     324,905       30 %     1,557,809       479 %
General and Administrative Expenses     1,440,114       19 %     680,823       63 %     759,291       112 %
Research and Development Expenses     340,534       4 %     205,609       19 %     134,924       66 %
Total Operating Expenses     3,663,362       48 %     1,211,337       112 %     2,452,025       202 %
LOSSFROM OPERATIONS     (1,758,946 )     (23 )%     (983,287 )     (91 )%     (775,659 )     79 %
Other Income, net     3,904       0 %     3,189       0       715       22 %
LOSS BEFORE INCOME TAX     (1,755,042 )     (23 )%     (980,098 )     (91 )%     (774,944 )     79 %
Provision for Income Taxes     -       -       -       - %     -       - %
NET LOSS     (1,755,042 )     (23 )%     (980,098 )     (91 )%     (774,944 )     (79 )%
OTHER COMPREHENSIVE LOSS                                                
Foreign Currency Translation Adjustment     26,867       0 %     29,183       3 %     (2,316 )     (8 %)
COMPREHENSIVE LOSS   $ (1,728,175 )     (22 )%   $ (950,915 )     (88 )%   $ (777,260 )     (82 )%

 

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Net Revenue

 

Net revenue is equal to gross sales minus sales returns and sales incentives that we offer to our customers, such as discounts that are offsets to gross sales and certain other adjustments. Our net revenue consists of product revenue and service revenue. Product revenue was derived mainly from sales of Clean Food to customers in China via an online platform and a restaurant operated by the Company.

 

Net revenue increased by $6,605,756, or 613%, from $1,076,827 for the year ended December 31, 2018 to $7,682,583 for the year ended December 31, 2019. The increase was attributable to the increase in product revenue as we started operating our online platform in June 2018. The revenue increase was primarily due to the Company expanding its sales channels, increasing its sales force, and enhancing user experiences to increase recurring membership purchases. To a smaller extent, the Company also began operating its restaurant during this period.

 

The following table sets forth the breakdown of our net revenue for the years ended December 31, 2019 and 2018.

 

For the year ended December 31, 2019

 

   Net   % of Total   Sales   Average 
Product category  revenue   revenue   quantities   selling price 
                 
Grains, oil, and spices  $3,811,172    49.6%   278,026   $13.71 
Beverages, alcohol and tea  $1,060,858    13.8%   58,079   $18.27 
Meat, poultry and eggs  $876,249    11.4%   52,102   $16.82 
Other food  $687,426    9.0%   59,452   $11.56 
Fresh fruits and vegetables  $539,052    7.0%   72,098   $7.48 
Groceries  $462,003    6.0%   3,619   $127.66 
Dried seafood  $229,746    3.0%   21,266   $10.8 
Restaurant Services  $16,077    0.2%   n/a    n/a 
Total  $7,682,583    100%   544,642      

 

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For the year ended December 31, 2018

 

   Net   % of total   Sales   Average 
Product category  revenue   revenue   quantities   selling price 
Grains, oil, and spices  $561,128    52.1%   57,803   $9.71 
Fresh fruits and vegetables  $199,725    18.6%   20,944   $9.54 
Meat, poultry and eggs  $105,855    9.8%   10,665   $9.93 
Other food  $94,890    8.8%   9,828   $9.66 
Dried seafood  $80,920    7.5%   8,728   $9.27 
Beverages, alcohol and tea  $34,309    3.2%   2,034   $16.87 
Total  $1,076,827    100%   110,002      

 

Currently, we have seven major product categories for Clean Food: (1) grains, oil, and spices (2) fresh fruits and vegetables (3) meat, poultry and eggs, (4) dried seafood, (5) beverages, alcohol and tea, (6) other food, (7) groceries. Revenue is primarily generated from grains, oil, and spices, which account for 49.6% of the total product revenue for the year ended December 31, 2019 and 52.10% of the total revenue for the year ended December 31, 2018. Grains, oil, and spices had average selling prices of $13.71 and $9.71 for the years ended December 31, 2019 and 2018, respectively. Beverages, alcohol and tea had average selling prices of $18.27 and $16.87 for the years ended December 31, 2019 and 2018, and accounted for 13.8% and 3.2% of the total product revenue for the years ended December 31, 2019 and 2018, respectively.

 

Cost of Revenues and Gross Profit

 

Due to the commencement of the online platform in mid-2018, cost of sales and gross profit have both significantly increased in 2019. Cost of revenue, including tax surcharges, was $5,778,167 for the year ended December 31, 2019, an increase of $4,929,390, or 581% from $848,777 for the year ended December 31, 2018. Gross profit was $1,904,416 for the year ended December 31, 2019, an increase of $1,676,366 from $228,050 for the year ended December 31, 2018.

 

The following tables set forth the calculation of gross profit and gross margin for sales of major product categories of Clean Food for the years ended December 31, 2019 and 2018.

 

For the year ended December 31, 2019

 

   Net   Cost of   Tax   Gross