F-1 1 ea130096-f1_jowellglobal.htm REGISTRATION STATEMENT

As filed with the U.S. Securities and Exchange Commission on November 23, 2020.

Registration No. 333-               

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

JOWELL GLOBAL LTD.

聚好全球股份有限公司

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

Cayman Islands   5960   Not Applicable
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification number)

 

Mr. Zhiwei Xu

2nd Floor, No. 285 Jiangpu Road

Yangpu District, Shanghai

China 200082

Tel: + (86) 21 5521-0174 

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor
New York, NY 10168

Phone: (800) 221-0102

Fax: (800) 944-6607 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Jeffrey Li, Esq.

FisherBroyles, LLP

1200 G Street NW, Suite 800

Washington, D.C. 20005

(202) 830-5905

 

Louis Taubman, Esq.

Ying Li, Esq.

Guillaume de Sampigny, Esq.

Hunter Taubman Fischer & Li LLC

800 Third Avenue, Suite 2800

New York, NY 10022

(212) 530-2210

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement. 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒ 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐ 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐ 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.                                 Emerging growth company ☒ 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to section 7(a)(2)(B) of the Securities Act. ☐ 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. 

 

 

 

 

Calculation of Registration Fee

 

Title of Class of Securities to be Registered  Amount
to Be Registered
   Proposed Maximum Offering Price per Share   Proposed Maximum Aggregate Offering Price (1)   Amount of Registration Fee(2) 
Ordinary Shares, par value $0.0001 per share(3)   4,271,429   $7.00   $29,900,003   $3,262.09 
Underwriters’ warrants (4)   -    -    -    - 
Ordinary Shares underlying underwriters’ warrants (4)   427,143   $9.10   $3,887,001   $422.07 
Total   4,698,572    -   $33,787,004   $3,686.16 

 

(1) The registration fee for securities to be offered by the Registrant is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes 557,143 additional shares (up to 15% of the ordinary shares offered to the public) that the Underwriter has the option to purchase to cover over-allotments, if any.
(2)

Calculated pursuant to Rule 457(o) under the Securities Act, based on an estimate of the Proposed Maximum Aggregate Offering Price.

(3) In accordance with Rule 416(a), the Registrant is also registering an indeterminate number of additional ordinary shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.
(4)

In accordance with Rule 457(g) under the Securities Act, because the Registrant’s ordinary shares underlying the underwriter’s warrants (as defined below) are registered hereby, no separate registration fee is required with respect to the warrants registered hereby. We have agreed to issue, on the closing date of this offering warrants (the “underwriter’s warrants”) to Network 1 Financial Securities, Inc., in an amount equal to 10% of the aggregate number of ordinary shares sold by us in this offering. The exercise price of the underwriter’s warrants is equal to 130% of the price of our ordinary shares offered hereby. The underwriter’s warrants are exercisable for a period of five years from the effective date of the registration statement of which this prospectus forms a part and will terminate on the fifth anniversary of the effective date of the registration statement.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 

 

 

 

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS Subject to Completion

Dated November 23, 2020

 

 

3,714,286 Ordinary Shares

 

 

 

Jowell Global Ltd.

 

This is the initial public offering of our ordinary shares, par value of US$0.0001 per share (“Ordinary Shares”). We are offering 3,714,286 Ordinary Shares. We expect the initial public offering price to be $7.00 per share. Currently, no public market exists for our Ordinary Shares. We have applied to have our Ordinary Shares listed on the Nasdaq Capital Market (“NASDAQ”). We have reserved the trading symbol JWEL for listing on the NASDAQ. There is no guarantee or assurance that our Ordinary Shares will be approved for listing on NASDAQ. However, we will not complete this offering unless we are so listed.

 

The offering is being made on a “firm commitment” basis by Network 1 Financial Securities, Inc. See “Underwriting.”

 

We are an “emerging growth company,” as that term is used in the Jumpstart Our Business Startups Act of 2012, and will be subject to reduced public company reporting requirements.

 

Investing in our Ordinary Shares is highly speculative and involves a significant degree of risk.  See “Risk Factors” beginning on page 12 of this prospectus for a discussion of information that should be considered before making a decision to purchase our Ordinary Shares.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. 

 

         
   Per Share   Total 
Public offering price  $      $     
Underwriting discounts  $    $  
Proceeds to us, before expenses  $    $  

 

 

 

(1)The underwriter will receive compensation in addition to such discounts as set forth under “Underwriting.”

  

We have granted the underwriter a 45-day option to purchase up to an additional 557,143 Ordinary Shares at the public offering price, less the underwriting discounts, to cover any over-allotments. We have agreed to issue, on the closing date of this offering, the underwriters’ warrants to the representative of the underwriters, Network1 Financial Securities, Inc., to purchase an amount equal to 10% of the aggregate number of Ordinary Shares sold by us in this offering. For a description of other terms of the underwriters’ warrants and a description of the other compensation to be received by the underwriter, see “Underwriting.”

 

The underwriter expects to deliver the Ordinary Shares against payment as set forth under “Underwriting”, on or about ●, 2020.

 

 

 

The date of this prospectus is ●, 2020

 

 

 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
RISK FACTORS 12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 44
USE OF PROCEEDS 45
Dividend Policy 46
CAPITALIZATION 47
DILUTION 48
EXCHANGE RATE INFORMATION 51
ENFORCEABILITY OF CIVIL LIABILITIES 52
CORPORATE HISTORY AND STRUCTURE 53
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 59
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 60
INDUSTRY OVERVIEW 78
BUSINESS 88
MANAGEMENT 111
PRINCIPAL SHAREHOLDERS 116
RELATED PARTY TRANSACTIONS 117
DESCRIPTION OF SHARE CAPITAL 118
SHARES ELIGIBLE FOR FUTURE SALE 124
TAXATION 126
UNDERWRITING 132
EXPENSES RELATING TO THIS OFFERING 139
LEGAL MATTERS 140
EXPERTS 140
WHERE YOU CAN FIND ADDITIONAL INFORMATION 140
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

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About this Prospectus

 

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 any free-writing prospectus. We are offering to sell, and seeking offers to buy, the Ordinary Shares only in jurisdictions where offers and sales are permitted. 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.

 

For investors outside the United States, neither we nor the underwriter have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Ordinary Shares and the distribution of this prospectus outside the United States.

 

We were incorporated under the laws of the Cayman Islands as an exempted company with limited liability and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the SEC, we currently qualify for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934.

 

Until and including ●, 2020 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered to you. Neither we nor the underwriter have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriter take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus and any sale of our Ordinary Shares. Our business, financial condition, results of operations and prospects may have changed since that date

 

Other Pertinent Information

 

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

 

Chinaor the PRCare to the Peoples Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only.

 

“EIT” is to PRC enterprise income tax;

 

“Jowell Global,” “we,” “us,” “our company,” and “our” are to Jowell Global Ltd., a Cayman Islands exempted company with limited liability, and its subsidiary and consolidated entity;

 

“Jowell Tech” is to Jowell Technology Limited, which was incorporated under the laws of Hong Kong on June 24, 2019 and is a wholly owned subsidiary of Jowell Group;

 

“MOFCOM” is to the Ministry of Commerce of the PRC;

 

“Ordinary Share(s)” are to our ordinary shares with a par value of US$0.0001 per share;

 

  “Preferred Share(s)” are to our preferred shares with a par value of US$0.0001 per share;

 

“RMB” and “Renminbi” refer to the legal currency of China;

 

“SAFE” is to the State Administration of Foreign Exchange;

 

“Shanghai Jowell” and “WFOE” are to Shanghai Jowell Technology Co., Ltd. a wholly foreign-owned entity (“WFOE”) incorporated by Jowell Tech under the laws of the People’s Republic of China on October 15, 2019

 

“Shanghai Juhao” is to Shanghai Juhao Information Technology Co., Ltd., incorporated on July 31, 2012 under the laws of the People’s Republic of China, which is our variable interest entity that carries out our main business operations in China;

 

“US$,” “U.S. dollars,” “$” and “dollars” are to the legal currency of the United States; and

 

“VIE” is to variable interest entity.

 

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriter of its over-allotment option.

 

Our business is conducted by our VIE in the PRC, using Renminbi (“RMB”), the currency of China. Our consolidated financial statements are presented in U.S. dollars. In this prospectus, we refer to assets, obligations, commitments, and liabilities in our consolidated financial statements in U.S. dollars. These dollar references are based on the exchange rate of RMB to U.S. 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 U.S. 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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PROSPECTUS SUMMARY

 

This summary highlights certain information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including our financial statements and related notes and the risks described under “Risk Factors” beginning on page 12. We note that our actual results and future events may differ significantly based upon a number of factors.  The reader should not put undue reliance on the forward-looking statements in this document, which speak only as of the date on the cover of this prospectus.

 

All references to “we,” “us,” “our,” “Company,” “Registrant” or similar terms used in this prospectus refer to Jowell Global Ltd., an exempted company with limited liability incorporated under the laws of the Cayman Islands (“Jowell Global”), including its consolidated subsidiaries and variable interest entity (“VIE”), unless the context otherwise indicates. We currently conduct our business through Jowell Technology Limited (“Jowell Tech”), Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”) and Shanghai Juhao Information Technology Ltd. (“Shanghai Juhao”), our operating entity in China.

 

“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan, Hong Kong and Macau, “RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$” or “U.S. Dollars” refers to the legal currency of the United States.

 

Our Business

 

We are one of the leading cosmetics, health and nutritional supplements and household products e-commerce platform in China. We offer our own brand products to customers and also sell and distribute health and nutritional supplements, cosmetic products and certain household products from other companies on our platform. In addition, we allow third parties to open their own stores on our platform for a service fee based upon sale revenues generated from their online stores and we provide them with our unique and valuable information about market needs, enabling them to better manage their sales effort, as well as an effective platform to promote their brands. We currently operate under four sales channels: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live streaming marketing.

 

Shanghai Juhao started its operation in 2012 and was among the first membership-based online-to-offline cosmetics, health and nutritional supplements and household products e-commerce platforms in China. Today, we offer an online platform, LHH Mall, through Shanghai Juhao, selling our own brand products manufactured by third parties as well as international and domestic branded products from 200+ manufacturers. Shanghai Juhao holds an EDI (Electronic Data Interchange) certificate approved by the Shanghai Communication Administration pursuant to the requirement of Ministry of Industry and Information Technology of People’s Republic of China (“MIIT”) dated February 1, 2019 valid for 5 years. As of December 31, 2019, our platform had 1,563,574 VIP members who have registered on our platform, 169 merchants who have opened their own stores on our platform, and 71.6% of products sold on our platform were cosmetics and health and nutritional supplements. The remaining 28.4% of the products sold on our platform were daily household products, such as pots and pans, paper towels, cups, vacuum cleaners, massagers, towels, and small household electrical appliances, etc. As of June 30, 2020, our platform had 1,774,845 VIP members who have registered on our platform, 174 merchants who have opened their own stores on our platform, and 70.88% of products sold on our platform were cosmetics and health and nutritional supplements and the remaining 29.12% of the products sold on our platform were daily household products.

 

Since August 2017, we have also been selling our products through authorized retail stores all across China. Operating under the brand name of “Love Home Store” or “LHH Store”, the authorized retailers may operate as independent stores or store-in-shop (an integrated store), selling products that they purchased through our online platform LHH Mall under their retailers accounts which provide them with major discounts. As of June 30, 2020 and October 31, 2020, we have authorized 22,097 and 23,727 Love Home Stores, respectively in 31 provinces of China, providing offline retail, to the customers of those authorized stores, and wholesale, to the authorized stores, of our products.

 

We have relationships with leading cosmetics, and health and nutritional supplements manufacturers and distributors in China, which allows us not only to have access to high-quality products to sell on our platform, but also to leverage such relationships to supply our own brand products. By connecting these suppliers/distributors with our online sales and offline authorized stores, we have created a system that brings convenience and cost savings to our customers.

 

The global e-commerce market continued to expand in recent years. According to the data from CEVSN Information Consulting Co., Ltd. (“CEVSN”), a market research report company engaged by us to prepare a commissioned industry report that analyzes the industries we work in, in 2019, the number of global online consumers worldwide reached 2.03 billion, with a year-on-year growth of 7.4%. For online retail sales, in 2019, the global e-commerce retail sale exceeded $3.5 trillion (approximately $583 billion), with a year-on-year growth rate of 20.7%, and its percentage in total retail sales steadily increased to about 13.9%.  In 2019, the national online retail sales in China reached RMB 10.63 trillion (approximately $1.64 trillion), an increase of 16.5% over the previous year, among which, the online retail sales of physical goods reached RMB 8.52 trillion (approximately $1.31 trillion), an increase of 19.5%.

 

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According to CEVSN, China is the second largest market for cosmetics and health and nutritional supplements products in the world. According to CEVSN, the market sizes of cosmetics and health and nutritional supplements in China in 2019 are RMB 459.4 billion (approximately $70.68 billion) and RMB 266 billion (approximately $40.92 billion), respectively. The e-commerce channel has gradually become an important sales channel within the cosmetics and health and nutritional supplements markets in China, representing about 29.8%, and about 33.9% of the total sales of cosmetics and health and nutritional supplements in China in 2019, respectively.

 

For the year ended December 31, 2019, our total revenue increased by about $37.6 million or 155.4% from about $24.2 million in 2018 to about $61.8 million in 2019. Our net income though decreased by about $200,000 or 13.5% from about $1.5 million in 2018 to about $1.3 million in 2019. The decrease in our net income is mainly attributable to the implementation of our business expansion with a low margin strategy which resulted in a decrease in net income. For the six months ended June 30, 2020, our total revenue increased by about $11.6 million or 76.5% from about $15.3 million in the six months ended June 30, 2019 to about $27.0 million in the same period in 2020. Our net income increased by about $250,000 or 43.1% from about $581,000 in the six months ended June 30, 2019 to about $832,000 in the same period in 2020. The increase is mainly due to increased sales of our premium brands products, such as Longrich branded products and Bao He Tang branded products. A more detailed discussion on the results of operations can be found under “Management’s Discussion and Analysis of Financial Condition and Results Operations” included in this prospectus.

 

Our Strategy

 

In order to further develop our business and enhance our competitive position, we intend to adopt the following strategies:

 

Develop additional authorized retail stores.

 

Source additional high-quality suppliers.

 

Provide additional services to members.

 

Continuously develop and apply new technologies, including:

 

o

Artificial intelligence.

 

oBlockchain.

 

oBig data.

 

oCloud-based solutions.

 

oInternet of Things.

 

oIntelligent supply chain.  

 

Expand into international market.

 

Systematically expand the scale of our health and nutritional supplements/cosmetology ecosystem between online and off-line stores, including test or trial use of our products offline at authorized stores and online advertising and promotion.

     

Seek strategic partnerships and acquisitions.

 

Our Challenges

 

Successful implementation of our strategy is affected by risks and uncertainties associated with our business, including the following:

 

Our ability to comply with broad and changing regulatory requirements;

 

Our ability to compete effectively in China’s growing cosmetics, health and nutritional supplements and household products markets;

 

Our ability to manage business growth and expansion plans;

 

Our ability to achieve or maintain profitability in the future;

 

Our ability to control the risks associated with the retail and wholesale business of products;

 

Our ability to use and protect data generated by our business;

 

Our ability to manage the various participants in an ecosystem;

 

Our ability to control the risk of claims for cosmetic care, nutritional supplements and product liability;

 

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the Coronavirus Disease 2019 (“COVID-19”) outbreak; and

 

Our ability to respond adequately and promptly to the rapid changes in consumer preferences.

 

Our Sales Channels

 

We currently operate under four sales channels: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live Streaming Marketing.

 

Under the Online Direct Sales model, we sell products under our own brands or third–party products on our online shopping mall directly. We purchase these third-party products directly from manufacturers and suppliers and deliver them to our customers. This model generates the highest profit margin among all our sales models.

 

Authorized Retail Store Distribution refers to our authorized physical retail stores that distribute products all over the country after they have purchased such products from us. Those stores may also use a small program developed by us, which can be used on WeChat, to promote products to their WeChat contacts who can then place orders to purchase products either from those authorized stores or from our platform. We offer major discounts, which can vary between 40% and 60% of the price on our platform, to our authorized stores for orders placed by them on our platform.

 

Third-party Merchants. We hold an EDI certificate approved by the Shanghai Bureau of Communication Management pursuant to the requirement of the Ministry of Industry and Information Technology of the People’s Republic of China (“MIIT”), which allows our online shopping mall to accept third-party platforms and companies to open their stores on our platform and to enrich the product categories of our shopping mall, and give consumers more choices.

 

Live Streaming Marketing. We have started to use the most popular online sales model in recent days, Live Streaming/Broadcasting Marketing. We train our authorized retail store owners to become live streamers participating in the live online broadcasting to market and sell their products. In addition, we constantly look for professional multi-channel network (MCN) agencies to work with their Key Opinion Leaders (KOLs) to promote our products through live streaming on popular channels such as TikTok live, Kuaishou live and Taobao live.

 

Sales of Products

 

We have adopted three complementary sales formats on our internet platform for health and nutritional supplements, household products and cosmetics, which are the main products sold in our mall: curated sales, series sales and flash sales, pursuant to which we either sell products directly to customers as a principal or act as a service provider for third-party merchants who sell products on our internet platform. We provide our customers with the same shopping experience regardless of whether the products are sold by us or by third-party merchants.

 

Curated sales. We believe the curated sales format embraces value, quality and convenience for our customers and enhances our trendsetting image. We curate and recommend a carefully selected collection of branded products for a limited period of time at attractive prices. We carefully select popular cosmetic products that primarily appeal to females. We select and update the products for curated sales every day.

 

Series sales. In addition to the curated sales, we also use our internet platform to produce series sales that conform to the current trends. We select categories of products that correspond to the current theme in the series of topics, where consumers can compare brand, price, scope of application and other parameters. We create topics and shopping scenes, so as to incite consumers to buy those products there. We collaborate with an extensive range of international and domestic suppliers and third-party merchants, who offer diversified and branded beauty and health and nutritional supplements.

 

Flash sales. Our flash sales format features virtual stores of selected third-party merchants. Our flash sales products are selected from products sold under our own brand or third-party merchant products. At least four products are sold at a large discount and in limited quantity every day. Through the flash sales, we can increase consumers’ awareness to our platform, and can also promote certain inventory products and reduce backlog risk for those high inventory products. The third party merchants need to register and reserve the spots for the flash sales with us in advance and we will arrange the products to be sold by flash sales according to the recent sales data for various products and their categories on the platform, so that the selected products can achieve best sales and recognition by the customers.

 

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Risks Associated with Our Business

 

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects that you should consider before making a decision to invest in our Ordinary Shares, including risks and uncertainties related to our corporate structure and the regulatory environment in China.

 

Please see “Risk Factors” beginning on page 12 of this prospectus, and other information included in this prospectus, for a discussion of these and other risks and uncertainties that we face.

 

Corporate History and Structure

 

Jowell Global Ltd. (“Jowell Global” or the “Company”) is an exempted company incorporated in the Cayman Islands with limited liability on August 16, 2019 as a holding company. The Company, through its consolidated variable interest entity (“VIE”), engages primarily in the sale of cosmetic products, nutritional supplements, and household products sourced from manufacturers and distributors, and also offers an online marketplace that enables third-party sellers to sell their products to the Company’s online consumers.

 

A reorganization of the Company’s legal structure (“Reorganization”) was completed on November 1, 2019. The Reorganization involved the incorporation of Jowell Global, a Cayman Islands holding company, Jowell Technology Limited (“Jowell Tech”), a Hong Kong holding company on June 24, 2019, and Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a new wholly foreign-owned entity (“WFOE”) by Jowell Tech under the laws of the People’s Republic of China (“China” or the “PRC”) on October 15, 2019.

 

On October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of contractual arrangements with Shanghai Juhao Information Technology Co., Ltd. (“Shanghai Juhao”) and the shareholders of Shanghai Juhao, as amended on October 10, 2020. These agreements include: 1) an Exclusive Business Cooperation and Management Agreement; 2) an Equity Interest Pledge Agreement; 3) an Exclusive Option Agreements 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant to these agreements, Shanghai Jowell has the exclusive rights to provide consulting services to Shanghai Juhao related to the business operation and management of Shanghai Juhao. For such services, Shanghai Juhao agrees to pay service fees determined based on all of its net profit after tax payments to Shanghai Jowell or Shanghai Jowell has obligation to absorb all of Shanghai Juhao’s losses. The agreements remain in effect until and unless all parties agree to its termination, except the Exclusive Option Agreement that the effective term of 10 years and can be renewed for an additional 10 years. Until such termination, Shanghai Juhao may not enter into another agreement for the provision of management consulting services without the prior consent of Shanghai Jowell. Also, pursuant to the equity interest pledge agreement between the shareholders of Shanghai Juhao and Shanghai Jowell, such shareholders pledged all of their equity interests in Shanghai Juhao to Shanghai Jowell, to guarantee Shanghai Juhao’s performance of its obligations under the Exclusive Business Cooperation and Management Agreement. Without Shanghai Jowell’s prior written consent, the shareholders of Shanghai Juhao shall not transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Shanghai Jowell’s interests. If Shanghai Juhao breaches its contractual obligations under the aforesaid agreement, Shanghai Jowell, as the pledgee, will be entitled to certain rights and entitlements, including priority in receiving payments by the evaluation or proceeds from the auction or sale of all or part of the pledged equity interests of Shanghai Juhao, in accordance with legal procedures. In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore, Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai Juhao. Accordingly, Shanghai Juhao has been consolidated (See Note 2 to the financial statements attached to the registration statement of which this prospectus forms a part of – Consolidation of Variable Interest Entity).

 

On November 6, 2020, the Company effected a reverse stock split of its Ordinary Shares at a ratio of 1-for-3 pursuant to which all existing shareholders of record on that date surrendered an aggregate of 42,298,849 Ordinary Shares, or 66.67% of the then outstanding Ordinary Shares to the Company for no consideration. The shares surrendered were subsequently cancelled (“Reverse Split”). That transaction is considered as a recapitalization prior to the Company’s initial public offering. As of the date of this prospectus, there were 21,149,425 Ordinary Shares outstanding.

 

We have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of matters requiring the votes of shareholders, each Ordinary Share is entitled to one (1) vote and each Preferred Share is entitled to two (2) votes. The Preferred Shares may be converted into Ordinary Shares by its holder at any time at the option of the holder. We will sell Ordinary Shares in this offering. We have authorized 50,000,000 Preferred Shares and our Chairman and Chief Executive Officer Mr. Zhiwei Xu, through Jowell Holdings Ltd., beneficially owns all 750,000 issued and outstanding Preferred Shares and 5,341,380 Ordinary Shares. Based on an assumed initial public offering price of US$ 7.00 per ordinary share, Mr. Zhiwei Xu will hold 27.52%% of the aggregate voting power of our total issued and outstanding shares immediately upon the completion of this offering, assuming the underwriters do not exercise their over-allotment option, and will hold 26.91% of the aggregate voting power of our total issued and outstanding shares immediately upon the completion of this offering assuming the underwriters exercise their over-allotment option in full; and therefore will continue to have, substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions.

 

Since Jowell Global and its subsidiaries are effectively controlled by the same controlling shareholders before and after the Reorganization, they are considered under common control. The above-mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

4

 

 

Upon the Reorganization, the Company has subsidiaries in countries and jurisdictions including PRC and Hong Kong. Details of the subsidiaries of the Company are set out below:

 

Name of Entity  Date of Incorporation  Place of Incorporation  % of Ownership   Principal Activities
Jowell Tech  June 24, 2019  Hong Kong   100   Holding Company
Shanghai Jowell  October 15, 2019  Shanghai, China   100   Holding Company
Shanghai Juhao  July 31, 2012  Shanghai, China   0 (VIE)   Online and Offline Retails

 

The following diagram illustrates our corporate structure, including our subsidiaries and consolidated affiliated entities, as of the date of this prospectus and immediately upon the completion of this offering, assuming no exercise of the over-allotment by the underwriter:

   

 

*Jowell Holdings Limited also holds 750,000 Preferred Shares of the Company with each Preferred Share having two voting rights.

 

Foreign Private Issuer Status

 

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;

 

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;

  

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  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

 

  our insiders are not required to comply with Section 16 of the Exchange Act requiring such individuals and entities to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Variable Interest Entity Arrangements

 

In establishing our business, we have used a VIE structure. In the PRC, investment activities by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, which was promulgated and is amended from time to time by the PRC Ministry of Commerce, or MOFCOM, and the PRC National Development and Reform Commission, or NDRC. In June 2018, the Guidance Catalog of Industries for Foreign Investment was replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2019 Version), or the Negative List. In June, 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Version), or the Negative List, which became effective on July 23, 2020. Industries not listed in the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations. Our Company and WFOE are considered as foreign investors or foreign invested enterprises under PRC law.

 

The business we conduct through our VIE is within the category for which foreign investment is currently restricted under the Negative List or other PRC Laws. In addition, we intend to centralize our management and operation in the PRC without being restricted to conducting certain business activities which are important for our current or future business but are restricted or might be restricted in the future. As such, we believe the agreements between the WFOE and our VIE are necessary and essential to our business operations. These contractual arrangements with our VIE and its shareholders enable us to exercise effective control over our VIE and hence consolidate their financial results.

 

WFOE effectively assumed management of the business activities of our VIE through a series of agreements which are referred to as the VIE Agreements. The VIE Agreements are comprised of a series of agreements, including an Exclusive Business Cooperation and Management Agreement, an Equity Interest Pledge Agreement, an Exclusive Option Agreement, Powers of Attorney and Spousal Consent Letters. Through the VIE Agreements, WFOE has the right to advise, consult, manage and operate the VIE for an annual consulting service fee in an amount equal to a certain percentage of the VIE’s net income. The shareholders of the VIE have pledged all of their right, title and equity interests in the VIE as security for WFOE to collect consulting services fees provided to the VIE through the Equity Interest Pledge Agreement. In order to further reinforce WFOE’s rights to control and operate the variable interest entity, the VIE’s shareholders have granted WFOE an exclusive right and option to acquire all of their equity interests in the VIE through the Exclusive Option Agreement.

 

In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore, Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai Juhao. Accordingly, Shanghai Juhao has been consolidated (See Note 2 to the financial statements attached to the registration statement of which this prospectus forms a part of Consolidation of Variable Interest Entity).

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to (1) presenting 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 in this prospectus, (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions. As a result, investors may find investing in our Ordinary Shares less attractive.

  

6

 

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of such extended transition period.

 

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

Corporate Information

 

Our principal executive offices are located at 2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China 200082. Our telephone number at this address is +86-21-5521-0174. Our registered office in the Cayman Islands is located at P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc. located at 122 East 42nd Street, 18th Floor, New York, NY 10168. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is www.1juhao.com. The information contained on our website is not a part of this prospectus.

 

Recent Developments Related to the COVID-19 Outbreak

 

Beginning in late 2019, there were reports of the COVID-19 (coronavirus) outbreak in Wuhan, China, and the epidemic quickly spread to many provinces, autonomous regions, and cities in China as well as many parts of the world, including the U.S. In March 2020, the World Health Organization declared the COVID-19 a pandemic.

 

In order to prevent and control the spread of the pandemic, the Chinese governments have issued administrative orders to impose travel and public gathering restrictions as well as to work from home and self-quarantine. The COVID-19 epidemic has caused a decrease in the consumer demand for goods and services in the market. In addition, the circulation of production factors such as raw materials and labor has been hindered during the outbreak. Normal business activities such as logistics, production, sales, travels and business meetings have been severely disrupted due to the outbreak and restrictions imposed by the government. The manufacturers have stopped production or reduced production, and social and economic activities have been adversely affected to certain extent during the outbreak.

 

In response to the evolving dynamics related to the COVID-19 outbreak, the Company has followed the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. Our offices and warehouse located in Shanghai and Changshu were closed for the Lunar New Year Holiday Break and remained closed until middle of February as a result of the outbreak. During that period of time, our employees worked remotely from home. Starting from middle February, our offices have been open and employees gradually came back to offices and we implemented safety measures that require all employees to wear facemask and take temperature when coming in and leaving the facilities. All employees travelling from out of the state back to offices were required to take 14 days self- quarantine at home. On March 29, 2020, we fully assumed the normal operations.

 

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 substantial risk that our business, results of operations, and financial condition will be adversely affected by the further outbreak and resurgence of COVID-19.

 

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 outbreak and the actions taken by government authorities and other entities to contain the COVID-19 outbreak or mitigate its impact, almost all of which are beyond our control.

 

7

 

 

During the COVID-19 outbreak, our suppliers were unable to fully supply our demands due to the shortage of upstream raw materials and packaging materials, lack of active workers, reduced production capacity and the disruption of transportation and logistics.

 

Due to the COVID-19 pandemic, most consumers in China have chosen to shop online, which have greatly promoted online sales on the retail e-commerce platforms such as ours. In particular, the sales of bacteriostatic and disinfectant products, such as bacteriostatic hand sanitizer, hands-free sanitizer and alcohol sanitizer have increased significantly in February and March 2020 during the outbreak in China with an increase of $72,260 or 166% and $31,600 or 38%, comparing to the same periods in 2019, respectively. Jiangsu Longrich Group Co., Ltd. and its subsidiaries (collectively, “Longrich Group”), our largest supplier and a related party, obtained the approval from the government to transform its production of cosmetics and health and nutritional supplements to disinfection products and sanitizers on January 27, 2020 and resumed its production on February 10, 2020. It has provided us with huge support for our demand of antibacterial and disinfectant products during the outbreak. The COVID-19 outbreak became gradually under control starting in the 2nd quarter of 2020 in China and the sales for disinfectants and sanitizers have slowed down accordingly.

 

As an online retailer and retail platform, we noticed an increase in sales in January and February 2020 as brick and mortar stores were closed due to the lockdown. Consumers’ purchase behavior also evolved as the fear for contamination remains even after the Chinese government eased its restrictions, and as a result we saw an increase in sales from March 2020 through June 2020.

 

Our offline authorized retail stores were closed during the outbreak, and their sales volumes have decreased greatly during that period of time. These stores have reopened and started to purchase products from us.

 

Many of our customers, distributors, suppliers and other partners are individuals and small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 outbreak and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted.

 

The express delivery companies in China suffered disruptions and delays in their operations during the outbreak. The delivery periods were significantly extended as compared with those prior to the outbreak due to shortage of active staff. In addition, cities and towns in China imposed traffic control and logistics restrictions during the outbreak, and we could not receive our supplies or ship and deliver products to our customers at the usual speed due to the impacts mentioned above during the outbreak. Although our revenue for six months ended June 30, 2020 increased compared to the same period of last year due to more online purchases by our customers during the outbreak, any disruption of our supply chain, logistics providers or customers could adversely affect our business and results of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us. We noticed an increase in our operating costs, specifically freight costs, as consumers’ needs were mainly fulfilled through online retailers like us, which in turn significantly increased the demand for freight services during the outbreak. Additionally, the government-imposed interstate transportation restrictions and quarantine requirement also limited freight service providers’ capacity during the outbreak. The increased demand and the interruption to freight services results in increased average cost for freight services in January and February 2020. Starting from March 2020, businesses in China began to reopen, and the interruptions to businesses were gradually removed. As more freight service companies were able to operate as their full capacity, our average cost for freight services decreased in the period March 2020 to June 2020.

 

Affected by the self-quarantine requirement and travel restrictions in China, many of the Company’s marketing efforts, such as in-person promotion activities and face-to-face meetings, could not be carried out, which greatly affected our new business development. Although most businesses in China have resumed their operations to almost pre-pandemic levels since the end of the second quarter, the Company cannot predict any further outbreak or resurgence of the COVID-19 pandemic in China and its impact to our business and results of operations.

 

In response to the COVID-19 pandemic, we have adjusted our marketing strategy accordingly to: (i) increase online traffic of our platform: we are using online traffic promotion by Tencent companies (WeChat Subscription and Moments advertising), which are more suitable for the current market situation, so that we will increase the spending on such marketing method as well as control the return on investment (ROI) at the same time; (ii) introduce new products: launch new products gradually in connection with the latest market demands, and bring new growth points for financial results with the development and sales of new products; (iii) increase the promotion and publicity of our disinfectant products, guide the stores to use disinfection products as the main lead-in products and attract customers to view and buy our other products while buying disinfectants; (iv) use the trend of the change of shopping habit from offline to online stores during the outbreak to vigorously promote the use of our Juhao cloud stores (the online stores of our authorized physical stores on our platform), enable these store owners to synchronously carry out the offline + offline operation model, gradually open live streaming marketing and product sale model of Juhao cloud store section, guide more store owners to sell products live online to increase their store sale volume, which will lead to more purchases from us.

 

In March 2020, the World Health Organization declared COVID-19 as a pandemic. To date, confirmed cases and deaths numbers are still climbing every day worldwide. To prevent and control the spread of the pandemic, many countries have canceled flights, closed borders, banned non-essential economic activities, and issued stay at home or even city lockdown orders. As a result, the global economy has also been materially negatively affected. This crisis is like no other, the impact is large and there is continued severe uncertainty about the duration and intensity of its impacts. It is extremely uncertain about the China and global growth forecast, which would seriously affect people’s investment desires in China and internationally.

 

Due to increase of our online sales, our revenues in the first half of 2020 increased year over year, however, there is no guarantee that our total revenues will grow or remain at the similar level year over year in the second half of 2020. The situation remains highly uncertain. It is therefore difficult for the Company to estimate the negative impact on our business or operating results due to COVID-19 pandemic.

 

8

 

  

The Offering

 

Securities being offered:   3,714,286  Ordinary Shares. 1
     
Initial offering price:   The purchase price for the shares will be $7.00 per ordinary share.
     
Number of Ordinary Shares outstanding before the offering:   21,149,425 of our Ordinary Shares are outstanding as of the date of this prospectus.
     
     
Number of Ordinary Shares Outstanding After the Offering 2:   24,863,711 Ordinary Shares
     

Gross proceeds to us, net of

underwriting discounts

but before expenses:

  $24,180,002.
     
Use of proceeds:   We intend to use the net proceeds of this offering: (1) approximately $5,000,000 to upgrade our online platform and its infrastructure construction with new technologies, especially artificial intelligence, big data, and cloud-based solutions; (2) approximately $8,000,000 to expand our sales channel, network, number of LHH Stores and to increase the number of product categories on our platform; (3) approximately $5,000,000 to make potential acquisition of emerging technology platforms; and (4) for other general corporate purposes. For more information on the use of proceeds, see “Use of Proceeds” on page 45.
     
Lock-up   All of our directors and officers and certain shareholders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our Ordinary Shares or securities convertible into or exercisable or exchangeable for our Ordinary Shares for a period of six months after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.
     
Transfer Agent   [____]
     
Proposed Nasdaq Symbol:   JWEL
     
Risk factors:   Investing in our Ordinary Shares involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 12.

 

 

1In addition, we may issue up to 557,143 Ordinary Shares pursuant to the underwriters’ over-allotment option.

2Excludes Ordinary Shares underlying underwriters’ warrants and Ordinary Shares pursuant to the underwriters’ over-allotment option.

 

9

 

 

Summary Consolidated Financial and Operating Data

 

The following summary consolidated statements of income data for the years ended December 31, 2019 and 2018, and summary consolidated balance sheet data as of December 31, 2019 and 2018 and summary consolidated cash flow data as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated financial data for the six months ended June 30, 2020 and 2019, and summary consolidated balance sheet data as of June 30, 2020 and December 31, 2019 and summary consolidated cash flow data as of June 30, 2020 and 2019 have been derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied. The consolidated financial statements include the accounts of the Company, its subsidiaries, and the VIE. All intercompany transactions and balances between the Company, its subsidiaries and the VIE are eliminated upon consolidation.

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

The following summary consolidated financial data for the six months ended June 30, 2020 and 2019.

 

   June 30,
2020
   December 31,
2019
 
         
Current assets  $10,847,600   $11,190,351 
Total non-current assets  $65,283   $69,088 
Total assets  $10,912,883   $11,259,439 
Total current liabilities  $5,780,839   $6,884,793 

 

   For the Six Months Ended June 30, 
   2020   2019 
         
Revenue  $26,950,524   $15,267,547 
Operating expenses  $25,856,108   $14,501,240 
Net income  $831,888   $581,478 

  

   For the Six Months Ended June 30, 
   2020   2019 
         
Net cash provided by (used in) operating activities  $7,603,933)  $(68,868)
Net cash used in investing activities  $(479)  $(8,440)
Net cash provided by (used in) financing activities  $(60,868)  $- 
Net increase (decrease) in cash  $7,491,693   $(76,039)

 

10

 

 

The following summary consolidated financial data for the years ended December 31, 2019 and 2018.

 

   December 31,
2019
   December 31,
2018
 
         
Current assets  $11,190,351   $7,310,909 
Total non-current assets  $69,088   $42,742 
Total assets  $11,259,439   $7,353,651 
Total current liabilities  $6,884,793   $4,982,190 

 

   For the years ended December 31, 
   2019   2018 
         
Revenue  $61,775,903   $24,187,596 
Operating expenses  $60,071,451   $22,202,927 
Net income  $1,278,359   $1,477,907 

  

   For the years ended December 31, 
   2019   2018 
         
Net cash provided by (used in) operating activities  $(856,332)  $156,921 
Net cash used in investing activities  $(46,135)  $(40,146)
Net cash provided by (used in) financing activities  $636,702   $(7,318)
Net increase (decrease) in cash  $(216,258)  $98,334 

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

11

 

 

RISK FACTORS

 

An investment in our Ordinary Shares involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our Ordinary Shares. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our Ordinary Shares could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We historically have received a substantial part of our supplies from our related party suppliers, which might cause conflict of interest between the Company and such suppliers.

 

Historically, a substantial part of our supplies came from the Longrich Group, a related party. For the year ended December 31, 2019 and 2018, the Longrich Group accounted for approximately 90% and 83% of the total purchases, respectively. For the six months ended June 30, 2020 and 2019, Longrich Group accounted for approximately 90% and 81% of the total purchases, respectively. Longrich Group is controlled by Mr. Zhiwei Xu, the majority shareholder, Chairman of the Board and Chief Executive Officer of the Company. See Note 11 to the consolidated financial statements for additional information on related parities transaction.

 

Although we believe our transactions with the related parties are negotiated independently on the basis of a fair market value determination, transactions with the entities in which related parties hold ownership interests present potential for conflicts of interest, as the interests of these entities and their shareholders may not align with the interests of the Company and our shareholders with respect to the negotiation of, and certain other matters related to, our purchase products and services from such entities. Conflicts of interest may also arise in connection with the exercise of contractual remedies under these transactions, such as the treatment of events of default.

 

Our Board of Directors has authorized the Audit Committee to review and approve all related party transaction. We rely on the laws of Cayman Islands, which provide that directors owe a duty of care and a duty of loyalty to our company. Nevertheless, we may have achieved more favorable terms if such transactions had not been entered into with related parties and these transactions, individually or in the aggregate, may have an adverse effect on our business and results of operations or may result in government enforcement actions or other litigation.

 

If we lose any or all of them, or any of them increase the prices or change the terms of the business they do with us, our sales may be adversely affected.

 

We rely on a limited number of vendors, and the loss of our significant vendor could harm our business, and the loss of any one of such vendors could have a material adverse effect on our business. 

 

We consider our major vendors to be those vendors that accounted for more than 10% of overall purchases in any given fiscal period. For the year ended December 31, 2019, one major supplier- the Longrich Group, a related party, accounted for approximately 90% of the total purchases. For the year ended December 31, 2018, the same related party supplier accounted for approximately 83% of the total purchases. For the six months ended June 30, 2020 and 2019, the same related party supplier accounted for approximately 90% and 81% of the total purchases, respectively. We have not entered into long-term contracts with this significant vendor and instead rely on individual orders with such vendor. Although we believe that we can locate replacement vendors readily on the market for prevailing prices, any difficulty in replacing a vendor on terms acceptable to us could negatively affect our performance to the extent it results in higher prices or a slower supply chain. 

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If we become subject to additional scrutiny, criticism and negative publicity involving U.S.-listed China-based companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our Ordinary Shares, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S.-listed China-based companies has decreased in value and, in some cases, has become virtually worthless. Many of these companies have been subject to shareholder lawsuits and SEC enforcement actions and have conducted internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our business and this offering. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our business operations will be severely hindered and your investment in our Ordinary Shares could be rendered worthless.

 

We face fierce competition in the health and nutritional supplements and cosmetic markets in China. We may not be able to keep pace with competition in our industry, which could adversely affect our market share and result in a decrease in our future sales and earnings.

 

The competition in the national health and nutritional supplements and cosmetics markets of the China is fierce. We compete primarily on the basis of our technology, comprehensive customer service and brand recognition. Our competitors may compete with us in the following ways:

 

  provide products and services that are similar to ours, or that are more attractive to customers than ours;
     
  provide products and services we do not offer;
     
  offer aggressive rebates to gain market share and to promote their businesses;
     
  adapt at a faster rate to market conditions, new technologies and customer demands;
     
  offer better, faster and more reliable technology; and
     
  market, promote and provide their services more effectively.

 

Our main competitors include health and nutritional supplements and cosmetic retail companies, including traditional offline retail stores, social e-commerce platforms, general business to consumers, or B2C, platforms and traditional distributors, as well as online platforms specialized in health and nutritional supplements or cosmetics. These companies may have much more financial, technological, R&D, marketing, distribution, retail and other resources than we do. They may also have a longer operating history, a larger customer base or a wider and deeper market coverage. In addition, when we expand to other markets, we will face competition from new domestic or foreign competitors, which may also enter our current market.

 

Although we do not compete against other platforms, products and service providers solely based on prices, if our competitors offer their products and services at lower prices, we may be forced to provide aggressive discounts or rebates to our customers and our revenue may decrease.

 

In addition, in recent years, with the emergence of new internet business model and new retail industry, the low-price strategy of e-commerce has led to greater pricing pressure. If this trend continues, it may lead to further competitive pressure on prices. The new partnership and strategic alliance in the health and nutritional supplements and cosmetic industries will also change market dynamics, which may adversely affect our business and competitive position.

 

Technologies adopted by us and our competitors are developing rapidly, and new developments often lead to price competition, outdated products and changes in market patterns. Any significant increase in competition could have a significant negative impact on our revenue and profitability, as well as on our business and prospects. We cannot assure you that we will be able to constantly distinguish our products and services from our competitors, maintain and improve our relationship with different participants in health and nutritional supplements and cosmetic industries, or increase or even maintain our existing market share. We may lose market share. If we cannot compete effectively, our financial situation and operating results may deteriorate seriously.

 

13

 

 

We use third-party logistics and express delivery companies to complete and deliver orders placed on our platform. If these logistics and express companies fail to provide reliable and timely delivery services, our business and reputation, as well as our financial situation and operating results, may be adversely affected.

 

We have contractual arrangements with a number of third-party logistic companies to deliver our products to our customers. We also use them to deliver products from our fulfillment centers to delivery stations or to deliver commodity products. The interruption or failure of these third-party delivery services may hinder timely or correct delivery of our products to our consumers. These disruptions may be caused by events beyond our control or those beyond the control of delivery companies, such as bad weather, natural disasters, transportation disruptions or labor unrest. We may not be able to find replacement delivery companies in a short period of time to provide timely and reliable delivery services, or we may not find them at all. Our business and reputation may be affected if the product is not delivered in proper conditions or on time.

 

In the direct sales business model, we manage inventory and delivery products with our own integrated processing system. In our market business model, many of third party sellers who sell their products on our platform use their own facilities to store products and use their own or third-party delivery systems to deliver products to distributors and consumers that place orders on our platform, which makes it difficult to ensure that such customers and distributors get consistent quality products and services for all products sold through our online platform. If any market seller fails to control the quality of the products it sells on our platform, or if it fails to deliver the products or delays the delivery of the products or delivers products that are substantially different from the product description, or if it sells counterfeit or unauthorized products through our platform, or if it does not have the necessary licenses or permits required by relevant laws and regulations, our reputation and brand name, may be adversely affected. We may also face claims and may be liable for damages related to such claims.

 

Our sales people may not always receive accurate information for the background and regulatory checks on the sellers using our platform or control the quality of the products they sell on our platform, as well as whether they deliver the products they sell on our platform timely and correctly, which may cause a significant negative impact on our business, financial situation, and operating results.

 

System limitations or failures could harm our business.

 

Our businesses depend on the integrity and performance of the technology, computer and network systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in financial losses and decreased customer service and satisfaction. If transaction volumes increase unexpectedly or other unanticipated events occur, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.

 

If we fail to adopt new technologies or adapt our website, mobile application and systems to changing customer requirements or emerging industry standards, our business may be materially and adversely affected.

 

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our internet platform. Our competitors are constantly developing innovations and introducing new products to increase their customer base and enhance user experience. As a result, in order to attract and retain customers and compete against our competitors, we must continue to invest significant resources in research and development to enhance our information technology and improve our existing products and services for our customers. The internet and the online retail industry are characterized by rapid technological evolution, changes in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development of website, mobile application and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to use new technologies effectively or adapt our website, mobile application, proprietary technologies and systems to meet customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations may be materially and adversely affected.

 

14

 

 

We lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a more diversified company.

 

Our current primary business activities focus on the sale of health and nutritional supplements, cosmetics products and household products. Because our focus is limited in this way, any risk affecting the health and nutritional supplements, cosmetics and household products industries could disproportionately affect our business. Our lack of product and business diversification could inhibit the opportunities for growth of our business, revenues and profits. 

 

We may incur net losses in the future.

 

We had incurred profits of $831,888, $1,278,359 and $1,477,907 for six months ended June 30, 2020, and in fiscal year of 2019 and 2018, respectively. We cannot assure you that we will be able to generate net income or will have retained earnings in the future. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow our business, attract clients and partners and further enhance and develop our services and other offerings. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. As a result of the foregoing and other factors, we may incur additional net losses in the future and may not be able to maintain profitability on a quarterly or annual basis.

 

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

 

Although we believe that our current cash and cash equivalents, anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for at least 12 months following this offering, we may need additional cash resources in the future if we experience changes in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

 

We may incur substantial debt in the future, which may adversely affect our financial condition and negatively affect our operations.

 

We may decide in the future to finance our business and operation through incurring debt. The incurrence of debt could have a variety of negative effects, including:

 

default and foreclosure on our assets if our operating revenue is insufficient to repay debt obligations;

 

acceleration of obligations to repay the indebtedness (or other outstanding indebtedness), even if we make all principal and interest payments when due, if we breach any covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;

 

our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;

 

diverting a substantial portion of cash flow to pay principal and interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and

 

creating potential limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate.

 

The occurrence of any of these risks could adversely affect our operations or financial condition.

 

15

 

 

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

 

Our quarterly results of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the market price of our Ordinary Shares. Factors that may cause fluctuations in our quarterly financial results include:

 

  our ability to attract new clients and retain existing clients;

 

  changes in our mix of products and services and introduction of new products and services;
     
  the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;
     
  our decision to manage client volume growth during the period;
     
  the impact of competitors or competitive products and services;
     
  increases in our costs and expenses that we may incur to grow and expand our operations and to remain competitive;
     
  network outages or security breaches;
     
  changes in the legal or regulatory environment or proceedings, including with respect to security, privacy, or enforcement by government regulators, including fines, orders or consent decrees;
     
  general economic, industry and market conditions; and

 

  the timing of expenses related to the development or acquisition of technologies or businesses.

 

Despite our marketing efforts, we may not be able to promote and maintain our brand in an effective and cost-efficient way and our business and results of operations may be harmed accordingly.

 

We believe that developing and maintaining awareness of our brand and business effectively is critical to attracting new and retaining existing clients. Successful promotion of our brand and our ability to attract quality clients depends largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our services. As such, we have entered into a marketing and promotion agreement with a network advertising and promotion company in the PRC to promote our products and platform. Despite our marketing efforts, 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.

 

From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.

 

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our marketplace and better serve our customers. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

 

16

 

 

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;

 

inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

difficulties in retaining, training, motivating and integrating key personnel;

 

diversion of management’s time and resources from our normal daily operations;

 

difficulties in successfully incorporating licensed or acquired technology and rights into our platform and loan products;

 

difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

risks of entering markets in which we have limited or no prior experience;

 

regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

 

assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

failure to successfully further develop the acquired technology;

 

liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

potential disruptions to our ongoing businesses; and

 

unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

 

We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced our existing products and services or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to be profitable.

 

Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this prospectus. While we have the ability to provide different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

 

17

 

 

If the basic salary of certain employees fails to meet the local minimum salary standard, we may be faced with labor dispute or compensation.

 

The remuneration we pay to our employee in general consists of basic salary, subsidy and performance bonus subject to different department. For marketing staff, a great proportion of their remuneration is the performance bonus. In accordance with the Labor Contract Law of People’s Republic of China, if the salary paid by the employer to its employee is below the local minimum salary standard, the labor administrative authorities shall order the employer to pay the shortfall; where payment is not made within the stipulated period, the employer shall be ordered to pay compensation to the employee based on 50% to 100% of the amount payable. In principle, each province has its own local minimum standard and the local minimum salary standard is subject to change each year. Our basic salary has been meeting the current local minimum salary standard. However, we cannot assure you that we can adjust the employees’ basic salary in time to meet the changing minimum standard. In such case, we may be faced with labor dispute or compensation.

 

Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.

 

We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, information technology, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled marketing, technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

 

In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and lenders could diminish, resulting in a material adverse effect to our business.

 

If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

 

We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

 

We do not have any business insurance coverage.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, the Company does not carry any business interruption insurance, product liability insurance or any other business insurance policies. 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. However, as a result the Company may incur uninsured losses, and any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

 

We may have exposure to greater than anticipated tax liabilities.

 

We are subject to enterprise income tax, value-added tax, and other taxes in each province and city in China where we have operations. Our tax structure is subject to review by various local tax authorities. The determination of our provision for income tax and other tax liabilities requires significant judgment. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

 

18

 

 

We may be subject to allegations, lawsuits and negative publicity claiming the sale, distribution, marketing and advertising of counterfeit or substandard products in our retail and wholesale businesses of health and nutritional supplements and cosmetic products.

 

We may face charges, litigation and administrative penalties related to the sale, distribution, marketing and advertising of counterfeit or substandard products in our retail and wholesale businesses of health and nutritional supplements and cosmetic products, which may damage our brand and reputation and have a significant adverse impact on us. The impact on our business, financial situation, operating results and business prospects.

 

Certain products distributed or sold in the retail and wholesale markets of health and nutritional supplements and cosmetic products in China may be manufactured without appropriate license or approval, and/or may have fraudulent labelling errors in their content and/or manufacturer. These products are often referred to as counterfeit or unqualified products.

 

The current regulatory control and enforcement system of counterfeit and inferior products in China is not mature enough to completely eliminate the production and sale of counterfeit products. The selling price of fake and inferior products is usually lower than that of genuine products. In some cases, the appearance of fake and inferior products is very similar to that of genuine products. Therefore, the existence of counterfeit products that we distribute or sell may quickly erode our sales volume and revenue from related products.

 

In addition, counterfeit or substandard products may or may have the same chemical composition as genuine products, which may make them less effective than genuine products, completely ineffective, or more likely to lead to serious side effects. We may not be able to identify counterfeit or substandard products we purchased from suppliers. Any unintentional or unknowingly sale of counterfeit or substandard products in our product distribution or retail business, or illegal use of our brand name by third parties to sell counterfeit or substandard products, may cause negative publicity, fines and other administrative penalties to us, and even lead to lawsuits related to the sale, marketing and advertising of these products. In addition, the persistence of counterfeit and inferior products may enhance the overall negative image of distributors and retailers among consumers, and may seriously damage the reputation and brand of other sellers including us. Similarly, consumers can buy counterfeit and substandard products that compete directly with those distributed or sold in our retail and wholesale businesses, which may have a significant negative impact on the sales of related products in our product portfolio and further affect our business, financial situation, operating results and prospects.

 

If counterfeit products are sold on our internet platform, our reputation and financial results could be materially and adversely affected.

 

Suppliers and third-party merchants on our internet platform are separately responsible for sourcing the products that are sold on our internet platform. Although we have adopted measures to verify the authenticity of products sold on our internet platform and to immediately remove any counterfeit products found on our internet platform, these measures may not always be successful. Potential sanctions under PRC law, if we were to negligently participate or assist in infringement activities associated with counterfeit goods, include injunctions to cease infringing activities, rectification, compensation, administrative penalties and even criminal liability, depending on the gravity of such misconduct. Furthermore, counterfeit products may be defective or inferior in quality as compared to authentic products and may pose safety risks to our customers. If our customers are injured by counterfeit products sold on our internet platform, we may be subject to lawsuits, severe administrative penalties and criminal liability. See “— We may be subject to product liability claims if our customers are harmed by the products sold on our internet platform.” We believe our brand and reputation are extremely important to our success and our competitive position. The discovery of counterfeit products sold on our internet platform may severally damage our reputation and cause customers to refrain from making future purchases from us, which would materially and adversely affect our business operations and financial results.

 

We may be subject to product liability claims if our customers are harmed by the products sold on our internet platform.

 

We sell products manufactured by third parties, some of which may be defectively designed or manufactured, of inferior quality or counterfeit. For example, cosmetic products in general, regardless of their authenticity or quality, may cause allergic reactions or other illness that may be severe for certain customers. Sales and distributions of products on our internet platform could expose us to product liability claims relating to personal injury and may require product recalls or other actions. Third parties that have suffered such injury may bring claims or legal proceedings against us as the retailer of the products or as the marketplace service provider. Although we would have legal recourse against the manufacturers, suppliers or third-party merchants of such products under PRC law, attempting to enforce our rights against the manufacturers, suppliers or third-party merchants may be expensive, time-consuming and ultimately futile. Defective, inferior or counterfeit products or negative publicity as to personal injury caused by products sold on our platform may adversely affect consumer perceptions of our company or the products we sell, which could harm our reputation and brand image. In addition, we do not currently maintain any product liability insurance or third-party liability insurance coverage for the products offered through third-party merchants. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and managerial efforts in defending them and could have a negative impact on our reputation.

 

We collect, process and use data, some of which contains personal information. Any privacy or data security breach could damage our reputation and brand and substantially harm our business and results of operations.

 

As a technology-based platform, our business generates and processes a large quantity of personal, transaction, behavioral and demographic data. We face risks inherent in handling and protecting large volumes of data, including protecting the data hosted in our system, detecting and prohibiting unauthorized data share and transfer, preventing attacks on our system by outside parties or fraudulent behavior or improper use by our employees, and maintaining and updating our database. Any system failure, security breach or third parties attacks or attempts to illegally obtain the data that results in any actual or perceived release of user data could damage our reputation and brand, deter current and potential customers from using our services, damage our business, and expose us to potential legal liability.

 

19

 

 

We also have access to a large amount of confidential information in our day-to-day operations. Each order contains the names, addresses, phone numbers and other contact information of the sender and recipient of an order placed and delivered through our platforms. The content of the item delivered may also constitute or reveal confidential information. Although we have data security polices and measures in place, we cannot assure you that the information will not be misappropriated, as our personnel handle the orders and have access to the relevant confidential information.

 

We are subject to local laws and regulations relating to the collection, use, storage, transfer, disclosure and security of personally identifiable information with respect to our customers and employees including any requests from regulatory and government authorities relating to this data. Further, PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater public scrutiny and attention from regulators, which could increase our compliance costs and subject us to heightened risks and challenges. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.

 

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, 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 agreements with all our employees and officers as well as non-compete agreements with our executive officers to protect our proprietary rights. See “Business—Intellectual Property” and “Regulation—Regulation on Intellectual Property Rights.” Thus, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated, or that such intellectual property will 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 and we might have to invest on research and development on our own technologies in such areas.

 

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. We have in the past and may in the future be subject to legal proceedings and claims relating to the intellectual property rights of others. For example, in 2018 Shanghai Juhao was sued by an individual for copyright infringement for the use Shanghai Juhao’s logo. Although the case was dismissed by the court as Shanghai Juhao had already registered its logo/drawing as its trademark before the plaintiff registered her drawing for copyright, there is no guarantee that there will not be any other similar lawsuits brought against us in the future. 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.

 

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.

 

20

 

 

We face risks related to health epidemics, severe weather conditions and other outbreaks.

 

In recent years, there have been outbreaks of epidemics in various countries, including China. Recently, there was an outbreak of a novel strain of coronavirus (COVID-19) in China, which has spread rapidly to many parts of the world, including the U.S. In March 2020, the World Health Organization declared COVID-19 a pandemic. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of office buildings and facilities in China and in the U.S.

 

Substantially all of our revenues and our sales are concentrated in China. Consequently, our results of operations will likely be adversely, and may be materially, affected, to the extent that the COVID-19 outbreak or any other epidemic harm the Chinese and global economy. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 outbreak and the actions taken by government authorities and other entities to contain the COVID-19 outbreak or treat its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:

 

  temporary closure of offices, travel restrictions or suspension of shipment of our products to our customers Our suppliers have been negatively affected during the outbreak, and could continue to be negatively affected, which could have an effect on their ability to supply and ship products to us if there is a resurgence of COVID-19 in China;

 

  our customers that are negatively impacted by the outbreak of COVID-19 may reduce their budgets to purchase our products, which may materially adversely impact our revenue;

 

  our customers may require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable and require us to record additional allowances for doubtful accounts. We have provided significant sales incentives to our customers and distributors during the outbreak and may continue to provide such incentives in the future, which may in turn materially adversely affect our financial condition and operating results;

 

  the business operations of our authorized physical stores and distributors have been  negatively impacted by the outbreak and could continue to be negatively impacted if there is any resurgence of COVID-19 in China, which may negatively impact their purchase of our products and our distribution channel, or result in loss of customers and business, which may in turn materially adversely affect our financial condition and operating results;

 

  any disruption of our supply chain, logistics providers, customers or our marketing activities could adversely impact our business and results of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to us and customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us;

 

  many of our customers, authorized store owners, distributors, suppliers and other partners are individuals and small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 outbreak and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted;

 

  the global stock markets have experienced, and may continue to experience, significant decline from the COVID-19 outbreak, which could materially adversely affect our valuation and offering price; and

 

21

 

 

Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the coronavirus cannot be reasonably estimated at this time, our consolidated results for the year 2020 may be adversely affected. Our total revenues in the first six months of 2020 increased year over year, however, there is no guarantee that our total revenues will grow or remain at the similar level year over year for 2020.

 

In general, our business could be adversely affected by the effects of epidemics, including, but not limited to, COVID-19, avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, severe weather conditions such as a snowstorm, flood or hazardous air pollution, or other outbreaks. In response to an epidemic, severe weather conditions, or other outbreaks, government and other organizations may adopt regulations and policies that could lead to severe disruption to our daily operations, including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our partners to make internal adjustments, including but not limited to, temporarily closing down business, limiting business hours, and setting restrictions on travel and/or visits with clients and partners for a prolonged period of time. Various impact arising from a severe condition may cause business disruption, resulting in material, adverse impact to our financial condition and results of operations.

 

The relative lack of public company experience of our management team may put us at a competitive disadvantage.

 

Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”). Our senior management does not have much experience managing a publicly-traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may be unable to implement programs and policies in an effective and timely manner or that adequately respond to the increased legal, regulatory and reporting requirements associated with being a publicly traded company. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties, distract our management from attending to the management and growth of our business, result in a loss of investor confidence in our financial reports and have an adverse effect on our business and stock price.

 

Risks Related to Our Corporate Structure

 

If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entities 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.

 

Foreign ownership of internet-based businesses, including value-added telecommunications services, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except for the e-commerce business) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Foreign Investment Entry Clearance Negative List, promulgated in 2019, or the Negative List, and the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended in 2015, 2017, 2019 and 2020, or the Catalog and other applicable laws and regulations. As provided for under the Negative List and the Guidance Catalog, “e-commerce business” is an exception to the above restriction on foreign investment. However, the above amended Catalog does not define the “e-commerce business,” and its interpretation and enforcement involve significant uncertainties, therefore, we cannot assure you that whether our online retail business and distribution of online information falls into the “e-commerce business” and thus, whether we are permitted to conduct our value-added telecommunication services in the PRC through our subsidiaries in which foreign investors own more than 50% of equity interests.

 

We are a Cayman Islands exempted company with limited liability and our PRC subsidiary is considered a foreign invested enterprise. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into among WFOE, our VIE and the shareholders of our VIE. As a result of these contractual arrangements, we exert control over our VIE and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see “Corporate History and Structure.”

 

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In the opinion of our PRC counsel, Yunnan Kangsi Law Firm, our current ownership structure, the ownership structure of our PRC subsidiary and our consolidated VIE, and the contractual arrangements among WFOE, our VIE and the shareholders of our VIE are common practices for the companies listed on stock exchanges in Hong Kong or the U.S. engaging in the businesses on Negative List in China and these contractual arrangements are valid and binding in accordance with their terms and applicable PRC laws and regulations currently in effect. However, Yunnan Kangsi Law Firm 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.

 

If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the market survey service business, the relevant PRC regulatory authorities, including the China Securities Regulatory Commission (CSRC), would have broad discretion in dealing with such violations or failures, including, without limitation:

 

  discontinuing or placing restrictions or onerous conditions on our operations; 
     
  imposing fines, confiscating the income from the WFOE or our VIE, or imposing other requirements with which we or our VIE may not be able to comply; 
     
  requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIE;  
     
  restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China; or
     
  taking other regulatory or enforcement actions that could be harmful to our business.

 

The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIE in our consolidated financial statements, if the PRC government authorities were to find our VIE structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or our right to receive substantially all of the economic benefits and residual returns from our VIE and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.

 

We rely on contractual arrangements with our VIE and the shareholders of our VIE for 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 our VIE, Shanghai Juhao. to operate our platform. For a description of these contractual arrangements, see “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 entities. For example, our consolidated variable interest entities and their 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.

 

If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, 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 our consolidated variable interest entities and their shareholders of their obligations under the contracts to exercise control over our consolidated variable interest entities. The shareholders of our consolidated variable interest entities 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 our consolidated variable interest entities. Although we have the right to replace any shareholder of our consolidated variable interest entities under the contractual arrangement, if any shareholder of our consolidated variable interest entities 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 “Risk Factors—Any failure by our consolidated variable interest entities or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with our consolidated variable interest entities may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

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Any failure by our consolidated VIE or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

If our consolidated VIE 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 our VIE were to refuse to transfer their equity interest in the VIE 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 action 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 well established as in some other jurisdictions, such as in the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are some regulations unfavorable to VIEs. However, despite 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 and there remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. Currently, almost all of the Chinese companies listed on overseas stock exchanges and are in the internet-based business such as e-commerce or online-gaming have adopted a VIE structure. 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 entities, and our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

 

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

 

The shareholders of Shanghai Juhao and their interests in Shanghai Juhao may differ from their interests of our Company as a whole. These shareholders may breach, or cause our consolidated variable interest entities to breach, the existing contractual arrangements we have with them and our consolidated variable interest entities, which would have a material adverse effect on our ability to effectively control our consolidated variable interest entities and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with Shanghai Juhao 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.

 

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 option agreements with these shareholders to request them to transfer all of their equity interests in Shanghai Juhao 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 Shanghai Juhao, 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.

 

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If the custodians or authorized users of our controlling non-tangible assets, including chops and seals of our VIE, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.

 

Under PRC law, legal documents for corporate transactions, including agreements and contracts that our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Market Regulation (“SAMR”), formerly known as the State Administration for Industry and Commerce. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.

 

We use two major types of chops: corporate chops and finance chops. Chops are seals or stamps used by a PRC company to legally authorize documents, often in place of a signature. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops must be approved by department manager and office of the president, and use of finance chops must be approved by our finance department. The chops of our subsidiary and consolidated VIE are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiary and consolidated VIE have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.

 

In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of the office of the president or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal representatives of our subsidiary and consolidated VIE, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiary and consolidated VIE with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, 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 the matter, while distracting management from our operations, and our business operations may be materially and adversely affected.

 

Contractual arrangements in relation to our consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entities 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, our consolidated VIE in China, and the shareholders of our VIE 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 our VIE’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 our VIE 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 our VIE to transfer their equity interests in the VIE at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject our WFOE and VIE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our VIE 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 entities’ tax liabilities increase or if it is required to pay late payment fees and other penalties.

 

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We may lose the ability to use and enjoy assets held by our consolidated VIE that are material to the operation of our business if the entities go bankrupt or become subject to a dissolution or liquidation proceeding.

 

Our consolidated VIE holds certain assets that are material to the operation of our business, including domain names, software and equipment for the online platform. Under the contractual arrangements, our consolidated VIE may not and their 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 the shareholders of our consolidated VIE breach the contractual arrangements and voluntarily liquidate our consolidated VIE or our consolidated VIE declare 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 our consolidated VIE 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.

 

Risks Relating to Doing Business in China

 

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

 

The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, in addition to the general state of the PRC economy. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

The Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.

 

The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

 

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

 

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Increases in labor costs in the PRC may adversely affect our business and results of operations.

 

The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protection afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

 

In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

 

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.

 

In particular, PRC laws and regulations concerning the valued added telecom service and online retail industry are developing and evolving. Although we have taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC, and avoid conducting any activities that may be deemed as illegal under the current applicable laws and regulations, the PRC government authority may promulgate new laws and regulations regulating the valued added telecom service and online retail industry in the future. Even though we are at present fully licensed to conduct our business, we cannot assure you that any new laws or regulations which require new certifications will not be passed in the future and we might not be able to obtain such new certifications to continuously conduct our business as we currently do. Moreover, developments in valued added telecom service and online retail may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may limit or restrict online retail for health and nutritional supplements and cosmetic products like us, which could materially and adversely affect our business and operations. Furthermore, we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry at some point in the future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.

 

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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. As a result, we may not be able to keep ourselves updated with these policies and rules in time. 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. 

 

Because we are a Cayman Islands corporation and all of our business is conducted in the PRC, you may be unable to bring an action against us or our officers and directors or to enforce any judgment you may obtain. It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China.

 

We are incorporated in the Cayman Islands and conduct our operations primarily in China. All of our assets are located outside of the United States and the proceeds of this offering will primarily be held in banks outside of the United States. In addition, majority of our directors and officers reside outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe we have violated your rights, either under United States federal or state securities laws or otherwise, or if you have a claim against us. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may not permit you to enforce a judgment against our assets or the assets of our directors and officers. See “Enforceability of Civil Liabilities.”

 

It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the authorities in China may establish a regulatory cooperation mechanism with its counterparts of another country or region to monitor and oversee cross-border securities activities, such regulatory cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or “Article 177,” which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Article 177 further provides that Chinese entities and individuals are not allowed to provide documents or materials related to securities business activities to foreign agencies without prior consent from the securities regulatory authority of the PRC State Council and the competent departments of the PRC State Council. While detailed interpretation of or implementing rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.

 

Recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed rule changes submitted by Nasdaq, and an act passed by the U.S. Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

 

On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

 

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On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor.

 

On May 20, 2020, the U.S. Senate passed an act requiring a foreign company to certify it is not owned or manipulated by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditor for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange.

 

On June 4, 2020, the U.S. President issued a memorandum ordering the President’s working group on financial markets to submit a report to the President within 60 days of the date of the memorandum that should include recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB to enforce U.S. regulatory requirements on Chinese companies listed on U.S. stock exchanges and their audit firms. However, it remains unclear what further actions, if any, the U.S. executive branch, the SEC, and PCAOB will take to address the problem.

 

On August 6, 2020, the President’s working group released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, the President’s working group recommended enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in their jurisdiction may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective.

 

On August 10, 2020, the SEC announced that the SEC Chairman had directed the SEC staff to prepare proposals in response to the report of the President’s working group, and that the SEC was soliciting public comments and information with respect to the development of these proposals.

 

The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections.

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in May 2018. However, the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.

 

Substantial uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

On March 15, 2019, the National People’s Congress, or the NPC, approved the Foreign Investment Law, which has taken effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment through contractual arrangements would not be interpreted as a type of indirect foreign investment activity under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations

 

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We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

 

We only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment in businesses providing value-added telecommunication services (VATS) in China, including internet information provision services. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.

 

The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, MIIT, and the Ministry of Public Security). The primary role of this new agency is to facilitate policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration, and to deal with cross-ministry regulatory matters in relation to the internet industry.

 

Our online platform, operated by our VIE Shanghai Juhao, may be deemed to be providing commercial internet content-related services and online data processing and transaction processing services, which would require Shanghai Juhao to obtain an Electronic data interchange (EDI) License. Each of EDI License is under the category of value-added telecommunications business operating licenses, or VATS License. The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, issued by the MIIT in July 2006, prohibits domestic telecommunications service providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. The circular also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. According to the recent practice in China, if any commercial internet content-related service or online data processing and transaction processing service is to be carried out via mobile apps, such mobile apps are required to be registered on the VATS License of the operator of such mobile apps. Our Juhao mobile app has been registered on the VATS License held by Shanghai Juhao. However, Shanghai Juhao did not apply for a value-added telecommunications business license until 2017 as its business operations were small and service fees generated by third party stores was immaterial for the Company. Although our PRC counsel believes that it is unlikely such operation without appropriate license will be considered as a material violation of the applicable regulation b and that the possibility that the Company be penalized is remote due to the immaterial amount generated from the valued-added telecommunication business, if there is any enforcement action by government agencies due to such violation which affects our eligibility of existing license or future license application, it may significantly disrupt our business, subject us to sanctions, enforcement, or have other harmful effects on our operation and financial conditions.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. Although we believe that we have obtained necessary license to practice our business, we cannot assure you that we will be always able to meet all of requirements in the future to renew the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones.

 

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

 

We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiary 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 subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our WFOE to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “Risk Factors—Risks Related to Our Corporate Structure—Contractual arrangements in relation to our consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.”

 

Under PRC laws and regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of its 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 subsidiary 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.”

 

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 this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

We are an offshore holding company conducting our operations in China through our PRC subsidiaries and our VIE. We may make loans to our PRC subsidiaries and VIE subject to the approval from governmental authorities and limitation of amount, or we may make additional capital contributions to our wholly foreign-owned subsidiaries in China.

 

Any loans to our wholly foreign-owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our wholly foreign-owned subsidiaries in China 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. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

 

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China.

 

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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 VIE or future capital contributions by us to our wholly foreign-owned subsidiaries in China. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries or VIE when needed. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering 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.

 

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

 

Substantially all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets and the proceeds from this offering. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiary 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 Ordinary 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.

 

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 Ordinary Shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from this 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 market price of our Ordinary 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 your investment.

 

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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 company in the Cayman Islands relies on dividend payments from our PRC subsidiary 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 subsidiary is 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. 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. As of the date of this prospectus, we believe that we have made adequate employee benefit payments. If we fail to make adequate payments in the future, we may be required to make up the contributions for these plans. If we fail to make or supplement contributions of social security premiums within the stipulated period, the social security premiums collection agency may enquire into the deposit accounts of the employer with banks and other financial institutions. In an extreme situation, where we failed to contribute social security premiums in full amount and do not provide guarantee, the social security premiums collection agency may apply to a Chinese court for seizure, foreclosure or auction of our properties of value equivalent to the amount of social security premiums payable, and the proceeds from auction shall be used for contribution of social security premiums.  If we are subject to deposit, seizure, foreclosure or auction in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, as amended, and, if required, we cannot predict whether we will be able to obtain such approval.

 

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, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear.

 

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Our PRC counsel, Yunnan Kangsi Law Firm, has advised us based on their understanding of the current PRC laws, rules and regulations that the M&A Rules is not applicable to our listing and trading of our Ordinary Shares on the NASDAQ in the context of this offering, given that:

 

we established our PRC subsidiary, WFOE, by means of direct investment rather than by merger with or acquisition of PRC domestic companies; and

 

no explicit provision in the M&A Rules classifies the respective contractual arrangements among WFOE and Shanghai Juhao, and their respective shareholders as a type of acquisition transaction falling under the M&A Rules.

 

Also, our PRC counsel has advised us that since the M&A Rules became effective, many Chinese companies have adopted VIE structure and listed and traded their stocks on the NASDAQ, and none of them has been required to obtain such approval.

 

However, there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and the CSRC’s opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If the CSRC or any other PRC regulatory agencies subsequently determines that we need to obtain the CSRC’s approval for this offering or if the CSRC or any other PRC government agencies promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for this offering, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. Sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiary, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Ordinary Shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of Ordinary Shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of Ordinary Shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if the CSRC or other PRC regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of Ordinary Shares.

 

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 M&A Rules discussed in the preceding risk factor 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 MOFCOM 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 MOFCOM be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by MOFCOM 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 MOFCOM, 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 MOFCOM 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.

 

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’s ability to increase its 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.

 

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If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited from distributing its 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 subsidiary.

 

Our major shareholders have completed the initial registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. To our knowledge, certain of our minority shareholders of the Company who are also PRC resident individual shareholders have not completed their SAFE Circular 37 registration yet. Also, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or continuously comply with all requirements under SAFE Circular 37 or other related rules. The failure or inability of the relevant shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, such as restrictions on our cross-border investment activities, on the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulations on Stock Incentive Plans.”

 

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.

 

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Taxation—People’s Republic of China Taxation.” 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 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 we 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 Ordinary 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 your investment in our Ordinary Shares.

  

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Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of our operations in China.

 

From time to time, the Company may receive requests from certain U.S. agencies to investigate or inspect the Company’s operations, or to otherwise provide information. While the Company will be compliant with these requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services to us or with whom we associate, especially as those entities are located in China. Furthermore, an on-site inspection of our facilities by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the unpredictability of the Chinese enforcers, and may therefore be impossible to facilitate.

 

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

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.

 

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.

 

On October 17, 2017, the SAT promulgated the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source (“Bulletin 37”), which became effective on December 1, 2017, and Circular 698 was then replaced effective December 1, 2017. Bulletin 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises.

 

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 7 and Bulletin 37, and may be required to expend valuable resources to comply with Circular 59, Circular 7 and Bulletin 37 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 7 and Bulletin 37 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 7 and Bulletin 37, 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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In addition, in accordance with the Individual Income Tax Law promulgated by the Standing Committee of NPC, later amended on August 31, 2018 and effective January 1, 2019, where an individual carries out other arrangements without reasonable business purpose and obtains improper tax gains, the tax authorities shall have the right to make tax adjustments based on a reasonable method, and levy additional tax and collect interest if there is a need to levy additional tax after making tax adjustments. As a result, our beneficial owners, who are PRC residents, may be deemed to have carried out other arrangements without reasonable business purpose and obtained improper tax gains for such indirect transfer, and thus be levied tax.

 

Risks Related to Our Ordinary Shares and This Offering 

 

There has been no public market for our shares prior to this offering, and if an active trading market does not develop you may not be able to resell our shares at or above the price you paid, or at all. 

 

Prior to this public offering, there has been no public market for our Ordinary Shares. We have applied to have our Ordinary Shares listed on NASDAQ.  If an active trading market for our Ordinary Shares does not develop after this offering, the market price and liquidity of our Ordinary Shares will be materially adversely affected. The public offering price for our Ordinary Shares will be determined by negotiations between us and the underwriter and may bear little or no relationship to the market price for our Ordinary Shares after the public offering. You may not be able to sell any Ordinary Shares that you purchase in the offering at or above the public offering price.  Accordingly, investors should be prepared to face a complete loss of their investment. 

 

Our dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Ordinary Shares may view as beneficial.

 

We have adopted a dual-class share structure such that our shares consist of Ordinary Shares and Preferred Shares. In respect of matters requiring the votes of shareholders, each ordinary share is entitled to one vote and each Preferred Share is entitled to two (2) votes. The Preferred Shares may be converted into Ordinary Shares by its holder. We will sell Ordinary Shares in this offering. 

 

We have authorized 50,000,000 Preferred Shares and our Chairman and Chief Executive Officer Mr. Zhiwei Xu, through Jowell Holdings Ltd. beneficially owns all of the 750,000 issued and outstanding Preferred Shares. Based on an assumed initial public offering price of US$ 7.00 per ordinary share, these Preferred Shares will constitute approximately 6%% of the aggregate voting power of our total issued and outstanding shares immediately upon the completion of this offering, assuming the underwriters do not exercise their over-allotment option and 5.9%% of the aggregate voting power of our total issued and outstanding shares immediately upon the completion of this offering, assuming the underwriters exercise their over-allotment option in full.

 

As a result of this dual-class share structure, the holder of our Preferred Shares will have concentrated control over the outcome of matters put to a vote of shareholders and have significant influence over our business, including decisions regarding mergers, consolidations, liquidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. The holder of Preferred Shares may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ordinary share. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Ordinary Shares may view as beneficial.

 

Our Ordinary Shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. 

 

Assuming our Ordinary Shares begin trading on NASDAQ, our Ordinary Shares may be “thinly-traded”, meaning that the number of persons interested in purchasing our Ordinary Shares at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broad or active public trading market for our Ordinary Shares may not develop or be sustained. 

 

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If securities or industry analysts do not publish research or reports about our business, or if the publish a negative report regarding our Ordinary Shares, the price of our Ordinary Shares and trading volume could decline.

 

Any trading market for our Ordinary Shares may depend in part on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade us, the price of our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our Ordinary Shares and the trading volume to decline.

 

The market price for our Ordinary Shares may be volatile. 

 

The trading price of our Ordinary Shares may be volatile and could fluctuate widely due to factors beyond our control. This may happen because of the broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in 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 attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our Ordinary Shares, regardless of our actual operating performance.

 

The market price for our Ordinary Shares may be volatile and subject to wide fluctuations due to factors such as: 

 

the perception of U.S. investors and regulators of U.S. listed Chinese companies;

 

actual or anticipated fluctuations in our operating results;

 

changes in financial estimates by securities research analysts;

 

negative publicity, studies or reports;

 

conditions in Chinese online retail and e-commerce for health and nutritional supplements and cosmetic products markets;

 

our capability to catch up with the technology innovations in the industry;

 

changes in the economic performance or market valuations of other online retail and e-commerce for health and nutritional supplements and cosmetic products companies;

 

announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;

 

addition or departure of key personnel;

 

fluctuations of exchange rates between RMB and the U.S. dollar; and

 

general economic or political conditions in China.

 

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.  These market fluctuations may also materially and adversely affect the market price of our Ordinary Shares. 

 

Volatility in our ordinary share price may subject us to securities litigation.

 

The market for our Ordinary Shares may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources. 

 

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

 

Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business.

 

In order to raise sufficient funds to enhance operations, we may have to issue additional securities at prices which may result in substantial dilution to our shareholders.

 

If we raise additional funds through the sale of equity or convertible debt, our current shareholders’ percentage ownership will be reduced. In addition, these transactions may dilute the value of Ordinary Shares outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our Ordinary Shares. We cannot provide assurance that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.

 

We are not likely to pay cash dividends in the foreseeable future.

 

We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from WFOE. WFOE may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of RMB into U.S. dollars or other hard currency, and other regulatory restrictions.  

 

You may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the United States and it may be difficult for a shareholder of ours to effect service of process or to enforce judgements obtained in the United States courts.

 

Our corporate affairs are governed by our current memorandum and articles of association and by the Companies Law (2020 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law. Decisions of the Privy Council (which is the final court of appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court of the United Kingdom and the Court of Appeal are generally of persuasive authority but are not binding on the courts of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provide significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the United States federal courts. The Cayman Islands courts are also unlikely to impose liabilities against us in original actions brought in the Cayman Islands, based on certain civil liability provisions of United States securities laws.

 

Currently, all of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. All of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

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

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies. 

 

We are a foreign private issuer within the meaning of the rules under 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;

 

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.

 

We currently intend to file annual reports on Form 20-F and reports on Form 6-K as a foreign private issuer. Accordingly, our shareholders may not have access to certain information they may deem important. 

 

Because we are a foreign private issuer and are exempt from certain NASDAQ corporate governance standards applicable to U.S. issuers, you may have less protection than you would have if we were a domestic issuer.

 

The Nasdaq Listing Rules require listed companies to have, among other things, a majority of its board members be independent. As a foreign private issuer, however, we are permitted to follow home country practice in lieu of the above requirements. The Company currently intends to follow the requirements of the Nasdaq Listing Rules without relying on the exemption provided for foreign private issuers under Marketplace Rule 5615(a)(3). However, we may choose to rely on such exemption to follow certain corporate governance practices of our home country practice in the future. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors. Thus, although a director must act in the best interests of the Company, it is possible that fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result. In addition, the Nasdaq Listing Rules also requires U.S. domestic issuers to have a compensation committee, a nominating/corporate governance committee composed entirely of independent directors, and an audit committee with a minimum of three members. We, as a foreign private issuer, are not subject to these requirements. The Nasdaq Listing Rules may require shareholder approval for certain corporate matters, such as requiring that shareholders be given the opportunity to vote on all equity compensation plans and material revisions to those plans, certain ordinary share issuances. We intend to comply with the requirements of the Nasdaq Listing Rules in determining whether shareholder approval is required on such matters and to appoint a nominating and corporate governance committee. However, we may consider following home country practice in lieu of the requirements under the Nasdaq Listing Rules with respect to certain corporate governance standards in the future which may afford less protection to investors.

 

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Although as a foreign private issuer we are exempt from certain corporate governance standards applicable to US domestic issuers, if we cannot satisfy, or continue to satisfy, the initial listing requirements and other rules of Nasdaq Capital Market, our securities may not be listed or may be delisted, which could negatively impact the price of our securities and your ability to sell them.

 

We will seek to have our securities approved for listing on the Nasdaq Capital Market upon consummation of this offering. We cannot assure you that we will be able to meet those initial listing requirements at that time. Even if our securities are listed on Nasdaq Capital Market, we cannot assure you that our securities will continue to be listed on Nasdaq Capital Market.

 

In addition, following this offering, in order to maintain our listing on the Nasdaq Capital Market, we will be required to comply with certain rules the Nasdaq Capital Market, including those regarding minimum stockholders’ equity, minimum share price, minimum market value of publicly held shares, and various additional requirements. Even if we initially meet the listing requirements and other applicable rules of the Nasdaq Capital Market, we may not be able to continue to satisfy these requirements and applicable rules. If we are unable to satisfy the Nasdaq Capital Market criteria for maintaining our listing, our securities could be subject to delisting.

 

If the Nasdaq Capital Market delists our securities from trading, we could face significant consequences, including:

 

a limited availability for market quotations for our securities;

 

reduced liquidity with respect to our securities;

 

a determination that our Ordinary Shares is a “penny stock,” which will require brokers trading in our Ordinary Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Ordinary Shares;

 

limited amount of news and analyst coverage; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

We are an “emerging growth company” within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make it more difficult to compare our performance with other public companies.

 

We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used.

 

As an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may make our Ordinary Shares less attractive to investors.

 

For as long as we remain an “emerging growth company”, as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, 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 non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.  Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile. 


 

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If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences.

 

A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either

 

At least 75% of our gross income for the year is passive income; or
The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%.

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.

 

If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our Ordinary Shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.

 

Depending on the amount of cash we raise in this offering, together with any other assets held for the production of passive income, it is possible that, for our 2020 taxable year or for any subsequent year, more than 50% of our assets may be assets which produce passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we treat our consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value.

 

For a more detailed discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC, see “Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”

 

Our memorandum and articles of association, as amended, contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our Ordinary Shares.

 

Our amended and restated memorandum and articles of association, as amended, contain certain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares without action by our shareholders, the terms and rights of that series. These provisions could have the effect of depriving our shareholders to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

 

Our board of directors may refuse or delay the registration of the transfer of Ordinary Shares in certain circumstances.

 

Except in connection with the settlement of trades or transactions entered into through the facilities of a stock exchange or automated quotation system on which our Ordinary Shares are listed or traded from time to time, our board of directors may resolve to refuse or delay the registration of the transfer of our Ordinary Shares. Where our directors do so, they must specify the reason(s) for this refusal or delay in a resolution of the board of directors. Our directors may also refuse or delay the registration of any transfer of Ordinary Shares if the transferor has failed to pay an amount due in respect to those Ordinary Shares. If our directors refuse to register a transfer, they shall, as soon as reasonably practicable, send the transferor and the transferee a notice of the refusal or delay in the approved form.

 

This, however, will not affect market transactions of the Ordinary Shares purchased by investors in the public offering. Where the Ordinary Shares are listed on a stock exchange, the Ordinary Shares may be transferred without the need for a written instrument of transfer, if the transfer is carried out in accordance with the rules of the stock exchange and other requirements applicable to the Ordinary Shares listed on the stock exchange.

 

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

 

Upon consummation of this offering, we will incur significant legal, accounting and other expenses as a public company 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 NASDAQ Capital Market, impose various requirements on the corporate governance practices of public companies. We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.  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 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.

 

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Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we 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.

  

We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our Ordinary Shares.

 

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ending December 31, 2020, the first fiscal year beginning after this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting and, after we cease to be an “emerging growth company,” a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.

 

One material weakness that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of the generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting requirements to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We plan to implement a number of measures to address the material weaknesses upon consummation of our initial public offering, including but not limited to, engaging experienced accounting staff to assist us in establishing appropriate policies and procedures in accordance with U.S. GAAP.

 

We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.

 

If we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Ordinary Shares to decline, and we may be subject to investigation or sanctions by the SEC.

 

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

At such time that our independent registered public accounting firm is required to formally attest to the effectiveness of our internal control over financial reporting, it may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

 

Our Chairman of the Board and Chief Executive Officer will have substantial influence over our company and his interests may not be aligned with the interests of our other shareholders.

 

Mr. Zhiwei Xu, our Chairman and member of our Board of Directors and Chief Executive Officer currently personally owns 5,341,380 outstanding Ordinary Shares and 750,000 Preferred Shares (each such Preferred Shares entitles the holder thereof to the rights to votes equal to two (2) Ordinary Shares) of the Company. As a result of his significant shareholding, Mr. Xu has, and will continue to have, substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. He may take actions that are not in the best interests of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the market price of our Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders. For more information regarding our principal shareholders and their affiliated entities, see “Principal Shareholders.”

 

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our Ordinary Shares may be volatile which could subject us to securities litigation and make it more difficult for you to sell your shares. 

 

As a company conducting a relatively small public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. While the underwriters are required to sell shares in this offering to at least 300 unrestricted round lot shareholders (a round lot shareholder is a shareholder who purchases at least 100 shares) in order to ensure that we meet the Nasdaq initial listing standards, we have not otherwise imposed any obligations on the underwriters as to the maximum number of shares they may place with individual investors. If, in the course of marketing the offering, the underwriters were to determine that demand for our shares was concentrated in a limited number of investors and such investors determined to hold their shares after the offering rather than trade them in the market, other shareholders could find the trading and price of our shares affected (positively or negatively) by the limited availability of our shares. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

 

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

our goals and strategies;

 

our future business development, financial conditions and results of operations;

 

the expected growth of the online cosmetic products, health and nutritional products and other consumer products marketplace in China;

 

fluctuations in interest rates;

 

our expectations as to increase of consumers and users of our platform;

 

our expectations regarding demand for and market acceptance of our products and services;

 

our expectations regarding our relationships with suppliers and logistic companies;

 

competition in our industry;

 

relevant government policies and regulations relating to our industry; and
   
 impact of COVID-19 on our business and financial conditions.

 

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should thoroughly read this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. Our industry may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of our Ordinary Shares. In addition, the rapidly changing nature of the online consumer finance marketplace industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

44

 

 

USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $7.00 per Ordinary Share, which is the midpoint of the price range shown on the front page of this prospectus, we estimate that we will receive net proceeds from this offering, after deducting the estimated underwriting discounts, Underwriter non-accountable expense allowance, and the estimated offering expenses payable by us, of $22,816,314 if the Underwriter does not exercise its over-allotment option, and $26,404,314 if the Underwriter exercises its over-allotment option in full.

 

We plan to use the net proceeds of this issue as follows:

 

  Approximately $5,000,000 to upgrade our online platform and its infrastructure construction with new technologies, especially artificial intelligence, big data, and cloud-based solutions;

 

  Approximately $8,000,000 to expand our sales channel, network, number of LHH Stores and to increase the number of product categories on our platform; and

 

Approximately $5,000,000 to make potential acquisition of emerging technology platforms, although we currently do not have specific acquisition target; and

 

The remaining balance for general corporate purposes, which may include working capital requirements.

 

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this 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. See “Risk Factors—Risks Related to our Ordinary Shares and this Offering and —You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase the price of our Ordinary Shares.”

 

In utilizing the proceeds of this issue, according to Chinese laws and regulations, we can only provide funds to our Chinese subsidiaries through loans or investment. On the premise of meeting the applicable requirements for government registration and approval, we can provide inter-company loans to our Chinese subsidiaries within the statutory limit, or provide additional capital contributions to our Chinese subsidiaries to finance their capital expenditure or working capital. We cannot assure you that if we do, we will be able to get these government registration or approval in time. SeeRisk Factors - Risks Related to Doing Business in 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 this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” 

 

We plan to use approximately $0.50 million out of the proceeds to pay the costs and expenses associated with being a public company. This portion of the offering proceeds will be immediately available to us following the closing of the offering as it will not be remitted to China.

 

Approximately $17 million of the proceeds will be immediately remitted to China following the completion of this offering to fund the registered capital of the WFOE. Except that, in using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions and to our consolidated variable interest entities only through loans, subject to the approval of government authorities and limit on the amount of capital contributions and loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our wholly foreign-owned subsidiary in China or make additional capital contributions to our wholly-foreign-owned subsidiary to fund its capital expenditures or working capital. For an increase of registered capital of our wholly foreign-owned subsidiary, we need to file with MOFCOM or its local counterparts. If we provide funding to our wholly foreign-owned subsidiary through loans, the total amount of such loans may not exceed the amount that equals to 2.5 times of the shareholders equity of the borrower. Such loans must be registered with SAFE or its local branches, which usually takes up to 20 working days to complete. 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 Doing Business in 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 this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

45

 

 

DIVIDEND POLICY

 

We intend to keep any future earnings to finance the expansion of our business, and we do not anticipate that any cash dividends will be paid in the foreseeable future.

 

Under the Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts due in the ordinary course of business.

 

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 Jowell Tech.

 

Current PRC regulations permit our indirect PRC subsidiary to pay dividends to Jowell Tech only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in the PRC is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in the PRC 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 its board of directors. 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 complying with the administrative requirements necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries 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. Jowell Tech may be considered a non-resident enterprise for tax purposes, so that any dividends our PRC subsidiary pay to Jowell Tech 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%. See “Taxation—People’s Republic of China Enterprise Taxation.”

 

In order for us to pay dividends to our shareholders, we will rely on payments made from Shanghai Juhao to Shanghai Jowell, and the distribution of such payments to Jowell Tech as dividends from Shanghai Jowell. Certain payments from Shanghai Juhao to Shanghai Jowell are subject to PRC taxes, including business taxes and value-added taxes. In addition, if Shanghai Juhao incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

 

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 a PRC project. The 5% withholding tax rate, however, does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong project 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 any dividends paid by our PRC subsidiary to its immediate holding company, Jowell Tech. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Jowell Tech intends to apply for the tax resident certificate if and when Shanghai Jowell plans to declare and pay dividends to Jowell Tech. See “Risk Factors—Risks Relating to Doing Business in China— We rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.”

 

46

 

 

CAPITALIZATION

 

The following tables set forth our capitalization as of June 30, 2020:

 

  on an actual basis;

 

  on an unaudited adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the assumed initial public offering price of $7.00 per share, after deducting the underwriting discounts,  non-accountable expense allowance and estimated offering expenses payable by us.

 

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

   June 30, 2020 
   Actual   As adjusted
(Over-allotment option not exercised)(1)(2)
   As adjusted
(Over-allotment option exercised in full) (1) (2)
 
Stockholders’ Equity  :               
Ordinary Shares, US$0.0001 par value, 450,000,000 shares authorized, 20,000,000 shares issued and outstanding on an actual basis  ; 24,863,711 Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is not exercised, and 25,420,854 Ordinary Shares issued and outstanding, as adjusted assuming the over-allotment option is exercised in full   2,000    2,486    2,542 
Preferred shares, US$0.0001, 50,000,000 shares authorized and 750,000 preferred shares issued and outstanding   75    75    75 
Additional paid-in capital   4,171,235    36,987,062    40,575,006 
Statutory surplus reserve   94,837    94,837    94,837 
Retained earnings   897,931    897,931    897,931 
Accumulated other comprehensive loss   (34,034)   (34,034)   (34,034)
Total Stockholders’ Equity   5,132,044    37,948,357    41,536,357 
Total Capitalization  $5,132,044   $37,948,357   $41,536,357 

 

(1)   Including 1,149,425 (after Reverse Split) Ordinary Shares were issued to three third party investors for aggregated proceeds of $10,000,000 on October 21, 2020.
(2)   Reflects the net proceeds we expect to receive, after deducting underwriting discounts, non-accountable expense allowance and other estimated offering expenses payable by us. We expect to receive net proceeds of (a) approximately $22,816,314, if the underwriter’s over-allotment option is not exercised ($26,000,002 offering, less underwriting discounts of $1,820,000 and offering expenses of approximately $1,103,686 and a corporate finance fee of approximately $260,000) or (b) approximately $26,404,314, if the underwriter’s over-allotment option is exercised in full ($29,900,003 offering, less underwriting discounts of $2,093,000 and offering expenses of approximately $1,103,686 and a corporate finance fee of approximately $299,000).

 

A $1.00 increase (decrease) in the assumed initial public offering price of $7.00 per Ordinary Share would increase (decrease) each of total shareholders’ equity and total capitalization by $3.42 million if the Underwriter’s over-allotment option is not exercised and by $3.93 million if the Underwriter’s over-allotment option is exercised in full, assuming 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 discounts, non-accountable expense allowance, and estimated expenses payable by us.

  

47

 

 

DILUTION

  

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to Reverse Split on November 6, 2020.

 

If you invest in our Ordinary Shares, your interest will be diluted for each Ordinary Share you purchase to the extent of the difference between the initial public offering price per Ordinary Share and our net tangible book value per Ordinary Share after this offering. Dilution results from the fact that the initial public offering price per Ordinary Share is substantially in excess of the net tangible book value per Ordinary Share attributable to the existing shareholders for our presently outstanding Ordinary Shares.

 

Our net tangible book value as of June 30, 2020, was $5,132,044, or $0.26 per Ordinary Share. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the net tangible book value per Ordinary Share (as adjusted for the offering) from the initial public offering price per Ordinary Share and after deducting the underwriting discounts, non-accountable expense allowance and the estimated offering expenses payable by us.

 

Dilution to New Investors if the Offering Amount is Sold without Exercise of the Over-allotment Option

 

After giving effect to our sale of 3,714,286 Ordinary Shares offered in this offering based on the assumed initial public offering price of $7.00 per Ordinary Share, after deduction of the underwriting discounts, non-accountable expense allowance and the estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2020, would have been $37.95 million, or $1.53 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $1.27 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $5.47 per Ordinary Share to investors purchasing Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only.

 

The following table illustrates this per share dilution:

 

   No Exercise of Over-Allotment Option 
Assumed Initial public offering price per Ordinary Share  $7.00 
Net tangible book value per Ordinary Share as of June 30, 2020  $0.26 
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $1.27 
Pro forma net tangible book value per Ordinary Share immediately after this offering  $1.53 
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $5.47 

 

48

 

 

A $1.00 increase (decrease) in the assumed public offering price of $7.00 per Ordinary Share would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by $3.42 million, the pro forma as adjusted net tangible book value per Ordinary Share after giving effect to this offering by $0.14 per Ordinary Share, and the dilution in pro forma as adjusted net tangible book value per Ordinary Share to new investors in this offering by Ordinary Shares $0.86 per Ordinary Share, assuming no change to the number of Ordinary Shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts, non-accountable expense allowance, and estimated offering expenses.

 

The following table sets forth, on an as adjusted basis as of June 30, 2020, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares purchased from us, the total consideration paid and the average price per Ordinary Share paid before deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses.

 

   Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
Over-allotment option not exercised  Number   Percent   Amount   Percent   Share 
                     
   ($ in thousands) 
Existing shareholders   20,000,000    80.44%  $4,173    10.39%  $0.21 
Private placement investors   1,149,425    4.62%   10,000    24.89%   8.70 
New investors   3,714,286    14.94%   26,000    64.72%   7.00 
Total   24,863,711    100%  $40,173    100%  $1.62 

 

Dilution to New Investors if the Offering Amount is Sold with Full Exercise of the Over-allotment Option

 

After giving effect to our sale of 4,271,429 Ordinary Shares offered in this offering based on the assumed initial public offering price of $7.00 per Ordinary Share, after deduction of the underwriting discounts, non-accountable expense allowance and the estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2020, would have been $41.54 million, or $1.63 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $1.37 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $5.37 per Ordinary Share to investors purchasing Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only.

 

The following table illustrates this per share dilution:

 

   Full Exercise of Over-Allotment Option 
Assumed Initial public offering price per Ordinary Share  $7.00 
Net tangible book value per Ordinary Share as of June 30, 2020  $0.26 
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $1.37 
Pro forma net tangible book value per Ordinary Share immediately after this offering  $1.63 
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $5.37 

 

49

 

 

A $1.00 increase (decrease) in the assumed public offering price of $7.00 per Ordinary Share would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by $3.93 million, the pro forma as adjusted net tangible book value per Ordinary Share after giving effect to this offering by $0.15 per Ordinary Share, and the dilution in pro forma as adjusted net tangible book value per Ordinary Share to new investors in this offering by Ordinary Shares $0.85 per Ordinary Share, assuming no change to the number of Ordinary Shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts, non-accountable expense allowance, and estimated offering expenses.

 

The following table sets forth, on an as adjusted basis as of June 30, 2020, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares purchased from us, the total consideration paid and the average price per Ordinary Share paid before deducting the underwriting discounts, non-accountable expense allowance, and estimated offering expenses.

 

   Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
Over-allotment option exercised in full  Number   Percent   Amount   Percent   Share 
                     
   ($ in thousands) 
Existing shareholders   20,000,000    78.68%  $4,173    9.47%  $0.21 
Private placement investors   1,149,425    4.52%   10,000    22.69%   8.70 
New investors   4,271,429    16.80%   29,900    67.84%   7.00 
Total   25,420,854    100%  $44,073    100%  $1.73 

   

50

 

 

EXCHANGE RATE INFORMATION

 

Our business is primarily conducted in China and all of our revenues are received and denominated in RMB. Capital accounts of our condensed financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred.  Assets and liabilities are translated at the exchange rates as of the balance sheet date.  Income and expenditures are translated at the average exchange rate of the period. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at the rates used in translation.

 

The Company’s financial information is presented in U.S. dollars (“USD”). The functional currency of the Company is the Chinese Yuan, Renminbi (“RMB”), the currency of the PRC. Any 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 prevailing at the dates of the transactions, and exchange gains and losses are included in the statements of operations as foreign currency transaction gain or loss. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with 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 for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholder’s equity. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

 

The exchange rates in effect as of December 31, 2019 and 2018 were RMB1 for $0.1435 and $0. 1454, respectively. The average exchange rates for the years ended December 31, 2019 and 2018 were RMB1 for $0.1447 and $0. 1511, respectively. The exchange rates in effect as of June 30, 2020 and December 31, 2019 were RMB1 for $0.1413 and $0. 1435, respectively. The average exchange rates for the six months ended June 30, 2020 and 2019 were RMB1 for $0.1422 and $0.1474, respectively.

 

As of October 31, 2020, the exchange rate was RMB 1 to $0.1492.

 

51

 

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

political and economic stability;

 

an effective judicial system;

 

a favorable tax system;

 

the absence of exchange control or currency restrictions; and

 

the availability of professional and support services.

 

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

The Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

Cayman Islands companies may not have standing to sue before the federal courts of the United States.

 

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated. Currently, all of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. All of our officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, and Yunnan Kangsi Law Firm, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

Maples and Calder (Hong Kong) LLP has informed us that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be automatically enforceable in the Cayman Islands. We have also been advised by Maples and Calder (Hong Kong) LLP that a judgment obtained in any federal or state court in the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

 

There is uncertainty as to whether the courts of the Cayman Islands would recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. Such uncertainty relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company or its directors and officers. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands.

 

Yunnan Kangsi Law Firm has further advised us that the recognition and enforcement of foreign judgments are subject to compliance with the PRC Civil Procedures Law and relevant civil procedure requirements in the PRC. 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 reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments.

 

Although in 2017 an intermediate court of Wuhan, Hubei Province recognized and enforced the judgment from a Los Angeles Court, based on reciprocal treatment because a California court recognized and enforced a judgment of Hubei Province, China, in 2009, such recognition and enforcement is case specific and did not set as a binding precedent. There is no guarantee for further recognition and enforcement in the future. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law 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 or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit.

 

52

 

 

CORPORATE HISTORY AND STRUCTURE

 

Jowell Global Ltd. (“Jowell Global” or the “Company”) is an exempted company incorporated in the Cayman Islands with limited liability on August 16, 2019 as a holding company. The Company, through its consolidated Variable Interest Entity (“VIE”), serves consumers using its online retail platforms (mainly www.1juhao.com) and mobile applications as well as its off-line authorized retail stores, engages primarily in sale of cosmetic products, nutritional supplements, and household products sourced from manufacturers and distributors, and it also offers an online marketplace that enables third-party sellers to sell their products to the Company’s online consumers.

 

A reorganization of the Company’s legal structure (“Reorganization”) was completed on November 1, 2019. The Reorganization involved the incorporation of Jowell Global, a Cayman Islands holding company, Jowell Technology Limited (“Jowell Tech”), a Hong Kong holding company on June 24, 2019, and Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a new wholly foreign-owned entity (“WFOE”) by Jowell Tech under the laws of the People’s Republic of China (“China” or the “PRC”) on October 15, 2019.

 

On November 6, 2020, the Company effected a reverse stock split of its Ordinary Shares at a ratio of 1-for-3 pursuant to which all existing shareholders of record on that date surrendered an aggregate of 42,298,849 Ordinary Shares, or 66.67% of the then outstanding Ordinary Shares to the Company for no consideration. The shares surrendered were subsequently cancelled (“Reverse Split”). The transaction is considered as a recapitalization prior to the Company’s initial public offering. As of the date of this prospectus, there were 21,149,425 Ordinary Shares outstanding.

 

On October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of contractual arrangement with Shanghai Juhao Information Technology Co., Ltd. (“Shanghai Juhao”) and the shareholders of Shanghai Juhao, as amended on October 10, 2020. These agreements include: 1) an Exclusive Business Cooperation and Management Agreement; 2) an Equity Interest Pledge Agreement, pursuant to the equity interest pledge agreement between the shareholders of Shanghai Juhao and Shanghai Jowell, such shareholders pledged all of their equity interests in Shanghai Juhao to Shanghai Jowell, to guarantee Shanghai Juhao’s performance of its obligations under the Exclusive Business Cooperation and Management Agreement. Without Shanghai Jowell’s prior written consent, the shareholders of Shanghai Juhao shall not transfer or assign the pledged equity interests, or incur or allow any encumbrance that would jeopardize Shanghai Jowell’s interests. If Shanghai Juhao breaches its contractual obligations under the aforesaid agreement, Shanghai Jowell, as the pledgee, will be entitled to certain rights and entitlements, including priority in receiving payments by the evaluation or proceeds from the auction or sale of all or part of the pledged equity interests of Shanghai Juhao, in accordance with legal procedures; 3) an Exclusive Option Agreement; 4) Powers of Attorney and 5) Spousal Consent Letters. Pursuant to these agreements, Shanghai Jowell has the exclusive rights to provide consulting services to Shanghai Juhao related to the business operation and management of Shanghai Juhao. For such services, Shanghai Juhao agrees to pay service fees determined based on all of its net profit after tax payments to Shanghai Jowell or Shanghai Jowell has obligation to absorb all of the Shanghai Juhao’s losses. The agreements remain in effect until and unless all parties agree to its termination, except the Exclusive Option Agreement that the effective term of 10 years and can be renewed for an additional 10 years. Until such termination, the Shanghai Juhao may not enter into another agreement for the provision of management consulting services without the prior consent of Shanghai Jowell. In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore, Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai Juhao. Accordingly, Shanghai Juhao has been consolidated (See Note 3 – Consolidation of Variable Interest Entity).

 

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Since Jowell Global and its subsidiaries are effectively controlled by the same controlling Shareholders before and after the Reorganization, they are considered under common control. The above-mentioned transactions were accounted for as a recapitalization. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

 

Upon the Reorganization, the Company has subsidiaries in countries and jurisdictions including PRC and Hong Kong. Details of the subsidiaries of the Company are set out below:

 

Name of Entity  Date of Incorporation  Place of Incorporation  % of Ownership   Principal Activities
Jowell Tech  June 24, 2019  Hong Kong   100   Holding Company
Shanghai Jowell  October 15, 2019  Shanghai, China   100    Holding Company
Shanghai Juhao  July 31, 2012  Shanghai, China   0 (VIE)   Online Retails

 

The following diagram illustrates our corporate structure, including our subsidiaries and consolidated affiliated entities, as of the date of this prospectus and immediately upon the completion of this offering, assuming no exercise of the over-allotment option by the underwriter: 

 

 

*Jowell Holdings Limited also holds 750,000 Preferred Shares of the Company with each Preferred Share having two voting rights.

 

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Foreign Private Issuer Status

 

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;

 

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

 

our insiders are not required to comply with Section 16 of the Exchange Act requiring such individuals and entities to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Variable Interest Entity Arrangements

 

In establishing our business, we have used a VIE structure. In the PRC, investment activities by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, which was promulgated and is amended from time to time by the PRC Ministry of Commerce, or MOFCOM, and the PRC National Development and Reform Commission, or NDRC. In June 2018, the Guidance Catalog of Industries for Foreign Investment was replaced by the Special Administrative Measures (Negative List) for Foreign Investment Access (2019 Version) In June, 2020, the MOFCOM and the NDRC promulgated the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Version), or the Negative List, which became effective on July 23, 2020. Industries not listed in the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations. Our Company and the WFOE are considered as foreign investors or foreign invested enterprises under PRC law.

 

The business we conduct or will conduct through our each variable interest entity is within the category which foreign investment is currently restricted under the Negative List or other PRC Laws. In addition, we intend to centralize our management and operation in the PRC without being restricted to conducting certain business activities which are important for our current or future business but are restricted or might be restricted in the future. As such, we believe the agreements between the WFOE and each variable interest entity are necessary and essential to our business operations. These contractual arrangements with each variable interest entity and its shareholders enable us to exercise effective control over the variable interest entities and hence consolidate their financial results as our VIE.

 

In our case, the wholly foreign-owned enterprise (“WFOE”) effectively assumed management of the business activities of each our variable interest entity through a series of agreements which are referred to as the VIE Agreements. The VIE Agreements are comprised of a series of agreements, including an Exclusive Business Cooperation and Management Agreement, an Equity Pledge Agreement, an Exclusive Option Agreement, Powers of Attorney and Spousal Consent Letters. Through the VIE Agreements, the WFOE has the right to advise, consult, manage and operate the variable interest entity for an annual consulting service fee in the amount of certain percentage of the variable interest entity’s net income. The shareholders of the variable interest entity have pledged all of their right, title and equity interests in the variable interest entity as security for the WFOE to collect consulting services fees provided to the variable interest entity through the Equity Pledge Agreement. In order to further reinforce the WFOE’s rights to control and operate the variable interest entity, the variable interest entity’s shareholders have granted the WFOE an exclusive right and option to acquire all of their equity interests in the variable interest entity through the Exclusive Option Agreement.

 

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In essence, Shanghai Jowell has gained effective control over Shanghai Juhao. Therefore, Shanghai Juhao is considered a VIE under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”, because the equity investments in Shanghai Juhao no longer have the characteristics of a controlling financial interest, and the Company, through Shanghai Jowell, is the primary beneficiary of Shanghai Juhao. Accordingly, Shanghai Juhao has been consolidated (See Note 2 – Consolidation of Variable Interest Entity).

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to (1) presenting 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 in this prospectus, (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions. As a result, investors may find investing in our Ordinary Shares less attractive.

  

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of such extended transition period.

 

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

Corporate Information

 

Our principal executive offices are located at 2nd Floor, No. 285 Jiangpu Road, Yangpu District, Shanghai, China 200082. Our telephone number at this address is +86-21-5521-01874. Our registered office in the Cayman Islands is located at P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc. located at 122 East 42nd Street, 18th Floor, New York, NY 10168. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.

 

Our website is www.1juhao.com. The information contained on our website is not a part of this prospectus.

 

Recent Developments Related to the COVID-19 Outbreak

 

Beginning in late 2019, there were reports of the COVID-19 (coronavirus) outbreak in Wuhan, China, the epidemic quickly spread to many provinces, autonomous regions, and cities in China as well as many parts of the world, including the U.S. In March 2020, the World Health Organization declared the COVID-19 a pandemic.

 

In order to prevent and control the spread of the pandemic, the Chinese governments have issued administrative orders to impose travel and public gathering restrictions as well as to work from home and self-quarantine. The COVID-19 epidemic has caused a decrease in the consumer demand for goods and services in the market. In addition, the circulation of production factors such as raw materials and labor has been hindered during the outbreak. Normal business activities such as logistics, production, sales, travels and business meetings have been severely disrupted due to the outbreak and restrictions imposed by the government. The manufacturers have stopped production or reduced production, and social and economic activities have been adversely affected to certain extent during the outbreak.

 

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In response to the evolving dynamics related to the COVID-19 outbreak, the Company has followed the guidelines of local authorities as it prioritizes the health and safety of its employees, contractors, suppliers and retail partners. Our offices and warehouse located in Shanghai and Changshu were closed for the Lunar New Year Holiday Break and remained closed until middle of February as a result of the outbreak. During that period of time, our employees worked remotely from home. Starting from middle February, our offices have been open and employees gradually came back to offices and we implemented safety measures that require all employees to wear facemask and take temperature when coming in and leaving the facilities. All employees travelling from other provinces back to the office were required to take 14 days self- quarantine at home. On March 29, 2020, we fully assumed the normal operations.

 

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 substantial risk that our business, results of operations, and financial condition will be adversely affected by the further outbreak and resurgence of COVID-19.

 

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 outbreak and the actions taken by government authorities and other entities to contain the COVID-19 outbreak or mitigate its impact, almost all of which are beyond our control.

 

During the COVID-19 outbreak, our suppliers were unable to fully supply our demands due to the shortage of upstream raw materials and packaging materials, lack of active workers, reduced production capacity and the disruption of transportation and logistics.

 

Due to the COVID-19 pandemic, most consumers in China have chosen to shop online, which have greatly promoted online sales on the retail e-commerce platforms such as ours. In particular, the sales of bacteriostatic and disinfectant products, such as bacteriostatic hand sanitizer, hands-free sanitizer and alcohol sanitizer have increased significantly in February and March 2020 during the outbreak in China with an increase of $72,260 or 166% and $31,600 or 38%, comparing to the same periods in 2019, respectively. Longrich Group, our largest supplier and a related party, obtained the approval from the government to transform its production of cosmetics and health and nutritional supplements to disinfection products and sanitizers on the third day of Lunar New Year (January 27, 2020) and resumed its production on February 10, 2020. It has provided us with huge support for our demand of antibacterial and disinfectant products during the outbreak. The COVID-19 outbreak became gradually under control starting in the 2nd quarter of 2020 in China and the sales for disinfectants and sanitizers have slowed down accordingly.

 

As an online retailer and retail platform, we noticed an increase in sales in January and February 2020 as brick and mortar stores were closed due to the lockdown. Consumers’ purchase behavior also evolved as the fear for contamination remains even after the Chinese government eased its restrictions, and as a result we saw an increase in sales from March 2020 through June 2020.

 

Our offline authorized retail stores (Love Home Stores or “LHH” Stores) were closed during the outbreak, and their sales volumes have decreased greatly. These stores have a significant inventory of products stocked up before the Lunar New Year and will unlikely purchase more products from our online shopping mall for a certain period of time until they can absorb these inventories.

 

Many of our customers, distributors, suppliers and other partners are individuals and small and medium-sized enterprises (SMEs), which may not have strong cash flows or be well capitalized, and may be vulnerable to an epidemic outbreak and slowing macroeconomic conditions. If the SMEs that we work with cannot weather the COVID-19 outbreak and the resulting economic impact, or cannot resume business as usual after a prolonged outbreak, our revenues and business operations may be materially and adversely impacted.

 

The express delivery companies in China suffered disruptions and delays in their operations during the outbreak. The delivery periods were significantly extended as compared with those prior to the outbreak due to shortage of active staff. Also, cities and towns in China imposed traffic control and logistics restrictions during the outbreak, we could not receive our supplies or ship and deliver products to our customers at the usual speed due to the impacts mentioned above during the outbreak. Although our revenue for six months ended June 30, 2020 increased compared to the same period of last year due to more online purchases by our customers during the outbreak, any disruption of our supply chain, logistics providers or customers could adversely impact our business and results of operations, including causing our suppliers to cease manufacturing products for a period of time or materially delay delivery to customers, which may also lead to loss of customers, as well as reputational, competitive and business harm to us.

 

We noticed an increase in our operating costs, specifically freight costs, as consumers’ needs were mainly fulfilled through online retailers like us, which in turn significantly increased the demand for freight services during the outbreak. Additionally, the government-imposed interstate transportation restrictions and quarantine requirements also limited freight service providers’ capacity. The increased demand and the interruption to freight services results in an increase in the average cost for freight services in January and February 2020. Starting from March 2020, businesses in China began to reopen, and the interruptions to businesses were gradually removed. As more freight service companies were able to operate as their full capacity, our average cost for freight services decreased in the period March 2020 to June 2020.

 

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Affected by the self-quarantine requirement and travel restrictions in China, many Company’s marketing efforts, such as in-person promotion activities and face-to-face meetings, could not be carried out, which greatly affected our new business development. Although most businesses in China have resumed their operations to almost pre-pandemic levels since the end of the second quarter, the Company cannot predict any further outbreak or resurgence of the COVID-19 pandemic in China and its impact to our business and results of operations.

 

In response to the COVID-19 pandemic, we have adjusted our marketing strategy accordingly to: (i) increase online traffic of our platform: we are using online traffic promotion by Tencent companies (WeChat Subscription and Moments advertising), which are more suitable for the current market situation, so that we will increase the spending on such marketing method as well as control the return on investment (ROI) at the same time; (ii) introduce new products: launch new products gradually in connection with the latest market demands, and bring new growth points for financial results with the development and sales of new products; (iii) increase the promotion and publicity of our disinfectant products, guide the stores to use disinfection products as the main lead-in products and attract customers to view and buy our other products while buying disinfectants; (iv) use the trend of the change of shopping habit from offline to online stores during the outbreak to vigorously promote the use of our Juhao cloud stores (the online stores of our authorized physical stores on our platform), enable these store owners to synchronously carry out the offline + offline operation model, gradually open live streaming marketing and product sale model of Juhao cloud store section, guide more store owners to sell products live online to increase their store sale volume, which will lead to more purchases from us.

 

In March 2020, the World Health Organization declared the COVID-19 as a pandemic. To date, confirmed cases and deaths numbers are still climbing every day worldwide. To prevent and control the spread of the pandemic, many countries have canceled flights, closed borders, banned non-essential economic activities, and issued stay at home or even city lockdown orders. As a result, the global economy has also been materially negatively affected. This crisis is like no other, the impact is large and there is continued severe uncertainty about the duration and intensity of its impacts. It is extremely uncertain about the China and global growth forecast, which would seriously affect people’s investment desires in China and internationally.

 

Due to increase of our online sales, our revenues in the first half of 2020 increased year over year, however, there is no guarantee that our total revenues will grow or remain at the similar level year over year in the second half of 2020. The situation remains highly uncertain. It is therefore difficult for the Company to estimate the negative impact on our business or operating results due to COVID-19 pandemic.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following summary consolidated statements of operations data for the years ended December 31, 2019 and 2018, and summary consolidated balance sheets data as of December 31, 2019 and 2018 and summary consolidated cash flow data as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated financial data for the six months ended June 30, 2020 and 2019, and summary consolidated balance sheet data as of June 30, 2020 and December 31, 2019 and summary consolidated cash flow data as of June 30, 2020 and 2019 have been derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

 

Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

The following table presents summary consolidated financial data for the six months ended June 30, 2020 and 2019.

 

   June 30,
2020
   December 31,
2019
 
         
Current assets  $10,847,600   $11,190,351 
Total non-current assets  $65,283   $69,088 
Total assets  $10,912,883   $11,259,439 
Total current liabilities  $5,780,839   $6,884,793 

 

   For the Six Months Ended
June 30,
 
   2020   2019 
         
Revenue  $26,950,524   $15,267,547 
Operating expenses  $25,856,108   $14,501,240 
Net income  $831,888   $581,478 

 

   For the Six Months Ended
June 30,
 
   2020   2019 
         
Net cash provided by (used in) operating activities  $7,603,933)  $(68,868)
Net cash used in investing activities  $(479)  $(8,440)
Net cash provided by (used in) financing activities  $(60,868)  $- 
Net increase (decrease) in cash  $7,491,693   $(76,039)

 

The following table presents summary consolidated financial data for the years ended December 31, 2019 and 2018.

 

   December 31,
2019
   December 31,
2018
 
         
Current assets  $11,190,351   $7,310,909 
Total non-current assets  $69,088   $42,742 
Total assets  $11,259,439   $7,353,651 
Total current liabilities  $6,884,793   $4,982,190 

 

   For the years ended
December 31,
 
   2019   2018 
         
Revenue  $61,775,903   $24,187,596 
Operating expenses  $60,071,451   $22,202,927 
Net income  $1,278,359   $1,477,907 

 

   For the years ended
December 31,
 
   2019   2018 
         
Net cash provided by (used in) operating activities  $(856,332)  $156,921 
Net cash used in investing activities  $(46,135)  $(40,146)
Net cash provided by (used in) financing activities  $636,702   $(7,318)
Net increase (decrease) in cash  $(216,258)  $98,334 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of financial condition and results of operations contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

Overview

 

Jowell Global Ltd. (“Jowell Global” or “we”) is an exempted company incorporated in the Cayman Islands with limited liability on August 16, 2019, as a holding company. We, through our consolidated variable interest entity (“VIE”), focuses on providing consumers with convenient and high-quality online retail experience through our retail platforms, mainly on our website, www.1juhao.com, and mobile app, as well as authorized retail stores. We also offer programs that enable third-party sellers to distribute their products through our platforms. In an effort to differentiate our services, we focus on and specialize in the online retail of cosmetic products, health and nutritional supplements and household products.

 

We completed a reorganization of our legal structure on November 1, 2019. The reorganization involved the incorporation of Jowell Global, Jowell Technology Limited (“Jowell Tech”), a Hong Kong holding company; the incorporation of Shanghai Jowell Technology Co., Ltd. (“Shanghai Jowell”), a new wholly foreign-owned entity (“WFOE”) formed by Jowell Tech under the laws of the People’s Republic of China (“China” or the “PRC”).

 

As part of the reorganization, on October 31, 2019 and November 1, 2019, Shanghai Jowell entered into a series of agreements with Shanghai Juhao Information Technology Co., Ltd. (“Shanghai Juhao”) and its shareholders, as amended on October 10, 2020. These agreements include: 1) an Exclusive Business Cooperation and Management Agreement (“EBCMA”); 2) an Equity Interest Pledge Agreement (“EIPA”); 3) an Exclusive Option Agreement (“EOA”); 4) Powers of Attorney (“POA”) and 5) Spousal Consent Letters. Through these agreements, Shanghai Jowell has established the exclusive rights to receive the profits and obligation to absorb losses from Shanghai Juhao. The agreements remain in effect unless all parties agree to its termination, except the EOA which has an effective term of 10 years and can be renewed for an additional 10 years upon the end of the initial term. Until such termination, Shanghai Juhao may not enter into another agreement for the similar provision without obtaining consent from Shanghai Jowell. Shanghai Jowell has gained effective control over Shanghai Juhao and Shanghai Juhao is considered a Variable Interest Entity under the Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation”.

 

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Jowell Global, Jowell Tech, and Shanghai Jowell are holding companies with no material operations of their own and do not hold any material assets. We conduct our operations primarily through our VIE and its subsidiaries in China. We established our VIE structure through aforementioned VIE agreements. These VIE agreements are subject to restrictions under current PRC laws and regulations. In the opinion of our PRC counsel, Yunnan Kangsi Law Firm, our current ownership structure, the ownership structure of our PRC subsidiary and our consolidated VIE, and the contractual arrangements among WFOE, our VIE and the shareholders of our VIE are common practices for the companies listed on stock exchange in Hong Kong or the U.S. engaging in the businesses on Negative List in China and these contractual arrangements are valid and binding in accordance with their terms and applicable PRC laws and regulations currently in effect. However, Yunnan Kangsi Law Firm 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. If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the online data processing and transaction processing services business, the relevant PRC regulatory authorities, including the China Securities Regulatory Commission (CSRC), would have broad discretion in dealing with such violations or failures, including, without limitation: requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIE. For more detail, see “Risk Factors – Risks Related to Our Corporate Structure - If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entities 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.”

 

In 2012, Shanghai Juhao started its operation, which was among the first membership -based e-commerce platforms for online-to-offline sales of cosmetics, health and nutritional supplements and household products in China. Today, we offer an online platform LHH Mall which holds an EDI (Electronic Data Interchange) certification approved by the Shanghai Communication Administration pursuant to the requirement of Ministry of Industry and Information Technology of China, selling our own brand products manufactured by third parties as well as international and domestic branded products from 200+ other manufacturers. As of December 31, 2019, our platform has 1,563,574 VIP members who have registered on our platform, 169 merchants who have opened their own stores on our platform, and 71.6%  of the products sold on our platform were cosmetics and health and nutritional supplements. We also sell household products, such as pots and pans, paper towels, cups, vacuum cleaners, massagers, towels on our platform, and those products account for 28.4 % of the products sold on our platform. As of June 30, 2020, our platform had 1,774,845 VIP members who have registered on our platform, 174 merchants who have opened their own stores on our platform, and 70.88% of products sold on our platform were cosmetics and health and nutritional supplements and the remaining 29.12% of the products sold on our platform were daily household products.

 

We believe that we are industry forerunners in turning data insight into valuable business intelligence in China. We continue to innovate and develop new solutions for our e-commerce platform, which is supported by a strong IT infrastructure. We currently offer innovative service modules on our platforms such as data analysis, CRM (customer relationship management), classification management, supply chain management, online shopping consultation, price intelligence system, and precision marketing. Aimed at operational excellence, our service modules are designed and built to satisfy the needs of participants for integrated and easy-to-use software systems. Our technology and data solutions for our authorized Love Home Store enables users to monitor sales volume and pricing of products through our smart supply chain. With service location-specific data, users are able to understand the needs of specific products in real time and gain valuable market insight. We can use this information to recommend purchasing and inventory strategies to Love Home Store users in order to fundamentally improve their procurement processes.

 

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Since August 2017 we have been also selling our products in authorized retail stores all across China. Operating under the brand name “Love Home Store” or “LHH Store”, the authorized retailers may operate as independent stores or store-in-shop (an integrated store), selling our products that they purchased through our online platform LHH Mall under their special retailers accounts with us which provide them with major discounts. As of June 30, 2020 and October 31, 2020, we authorized more than 22,097 and 23,727 Love Home stores in 31 provinces of China, respectively, providing offline retail and wholesale of our products.

 

Our authorized LHH Stores as of October 31, 2020:

 

 

In recent years, global e-commerce market continues to expand. According to the CEVSN Information Consulting Co., Ltd. in 2019, the number of global online consumers reached 2.03 billion people, with a year-on-year growth of 7.4%. For online retail sales, in 2019, the global e-commerce retail sale reached $3.5 trillion (approximately $583 billion), with a year-on-year growth rate of 20.7%, and its percentage in total retail sales steadily increased to about 13.9%. In 2019, the national online retail sales in China reached RMB 10.63 trillion (approximately $1.64 trillion), an increase of 16.5% over the previous year, among which, the online retail sales of physical goods reached RMB 8.52 trillion (approximately $1.31 trillion), an increase of 19.5%.

 

China is the second largest market for cosmetics and health and nutritional supplements in the world. According to the data of CEVSN, the sales for cosmetics and health and nutritional supplements in 2019 are RMB 459.4 billion (approximately $70.68 billion) and RMB 266 billion (approximately $40.92 billion) respectively. The e-commerce channel has gradually become an important sales channel in cosmetics and health and nutritional supplements market, of which the percentage of e-commerce sales in cosmetics industry is about 29.8%, and that in health and nutritional supplements industry is about 33.9%.

 

The increasing demand for quality of life in China has driven an increase in expenditure on cosmetics, health and nutritional supplements and household products. These markets show considerable long-term growth potential, under both per-capita and percentage-of-GDP calculations. For example, compared with the per-capita consumption levels of the US, Japan, and South Korea, China is still at a lower expenditure for these products, resulting in a growth potential that is 3-6 times greater. 

 

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Key Factors Affecting Our Results

 

Our business and results of operations are affected by general factors affecting the online retail markets for health and nutritional supplements and cosmetics in China, including China’s overall economic growth, the increase in per capita disposable income, the growth in consumer spending and the retail industry and the expansion of internet penetration. Unfavorable changes in any of these general factors could affect the demand for the products we sell and could materially and adversely affect our results of operations.

 

While our business is influenced by general factors affecting China’s online retail industry, our operating results are more directly affected by certain company specific factors, including:

 

  our ability to attract and retain customers at reasonable cost;

 

  our ability to establish and maintain relationships with suppliers, third-party merchants and other service providers;

 

  our ability to invest in growth and new technologies while improving operating efficiency;

 

  our ability to control marketing expenses, while promoting our brand and internet platform cost-effectively;

 

  our ability to source new products to meet customer demands; and

 

  Our ability to continue to expand offline LHH Stores and increase the interactions between our online platform and offline stores.  
     
  our ability to compete effectively and to execute our strategies successfully

 

Results of Operations

 

Certain tables within this section may not reflect the exact amount or percentage due to rounding.

 

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 during such periods.

 

   Six Months ended   Six Months ended         
   June 30, 2020   June 30, 2019   Variance 
   $ Amount   % of revenue   $ Amount   % of revenue   $ Amount   % 
   (in thousands, except for percentages) 
Revenue  $26,951    100.0%  $15,268    100.0%  $11,683    76.5%
Operating Expenses:                              
Cost of Sales   24,175    89.7%   13,451    88.1%   10,724    79.7%
Fulfilment   755    2.8%   622    4.1%   133    21.4%
Marketing   186    0.7%   129    0.8%   57    44.2%
General and administrative expenses   740    2.7%   299    2.0%   440    147.2%
Total operating expenses   25,856    95.9%   14,501    95.0%   11,355    78.3%
Income from Operations   1,094    4.1%   766    5.0%   328    42.8%
Other Income (Expense)   15    0.1%   9    0.1%   6    61.6%
Income Before Income Taxes   1,110    4.1%   776    5.1%   334    43.0%
Provision (Benefit) for Income Taxes   278    1.0%   194    1.3%   84    43.0%
Net Income  $832   $3.1%   581    3.8%   250    43.1%

 

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Revenue

 

Through our website at www.1juhao.com and mobile app, we engage primarily in the sales of cosmetic products, health and nutritional supplements and household products sourced from manufacturers and distributors in China. Currently, we have three types of revenue streams deriving from our three major product categories: cosmetic products, health and nutritional supplements and household products. Other than revenue from product sales, we also earn service fees charged to third party merchants for using our platform, which was immaterial and is grouped in “Others” presented below. The following sets forth the breakdown of our revenue by revenue stream for the six months ended June 30, 2020 and 2019, respectively.

 

   Six Months Ended June 30,   Variance 
   2020   %   2019   %   Amount   % 
   (in thousands, except for percentages) 
Cosmetic products  $7,403    27.5%  $6,786    44.4%  $617    9.1%
Health and Nutritional supplements   10,838    40.2%   3,008    19.7%   7,830    260.3%
Household products   8,660    32.1%   5,474    35.9%   3,187    58.2%
Other   49    0.2%   -    0.0%   49    NA%
Total  $26,951    100.0%  $15,268    100.00%  $11,634    76.5%

 

The increase of revenue in cosmetic products during the six months ended June 30, 2020 compared to the same periods in prior year is mainly attributable to a 3.0% increase in quantity sold and a 5.91% increase in the weighted average unit price for products sold. The increase in quantities sold is mainly due to the expansion of our customer base since 2019 as we have contracted with certain large customers which significantly increased the quantity of cosmetic products sold, as well as the change of consumer shopping behaviors during and after the outbreak as more of them are shopping online comparing to the same period of 2019. The increase in the weighted average unit price is mainly attributable to our successful launch of our premium cosmetic product brand, Yasi, in 2019, whose unit price is significantly higher than other similar products. In addition, the increase in sales of disinfectant products during the Covid-19 outbreak also contributed to the increase in the revenue of our cosmetic products category under which most of our disinfectant products are categorized in the Company. Comparing to the six months ended June 30, 2019, we sold approximately 33% more disinfectant and sanitizer products and recognized approximately $149,000 more revenue from such sales in the six months ended June 30, 2020. The increased revenues from disinfectant and sanitizer products represented approximately 24% of the total revenue increase in our cosmetic product category in the first six months of 2020. Our disinfectant and sanitizer products include disinfectant soap, different types of disinfectant water, hand sanitizers, other sanitizers (such as bleach and rubbing alcohol, etc.). Besides hand sanitizer, which is categorized as household product, all other disinfectant and sanitizer products are categorized under cosmetic products.

 

Our health and nutritional supplements revenue increased from $3.0 million in the six months ended June 30, 2019 to about $10.8 million in the six months ended June 30, 2020 by $7.8 million or 260.3%. The increase in health and nutritional supplements revenue is mainly due to increase in both units sold and weighted average unit price. Comparing to the six months ended June 30, 2019, in the same period in 2020, we sold approximately 441,000 more units and the weighted average unit price of the products sold increased from about $11.76 per unit to $15.54 per unit. The increase in quantity of products sold is mainly attributable to our continual expansion of our customer base in China and our efforts in actively seeking additional collaborations with retailers and distributors. The increase in the weighted average unit price of the products sold is mainly due to an increase in sales of our premium brands products, such as Longrich branded products and Bao He Tang branded products.

 

Comparing to the six months ended June 30, 2019, in the six months ended June 30, 2020, our household products revenue increased by about $3.2 million or 58.2%. The increase is primarily attributable to 81.7% increase in weighted average unit price for products sold and is partially offset by 12.9% decrease in quantity sold. The increase in weighted average unit price for products sold and decrease in quantity of products sold comparing the two periods is mainly due to we sold more higher unit price products such as Longrich energy pot and Longrich water purifier in the six months ended June 30, 2020 than in the same period in 2019.

 

Income from Operations

 

   Six Months Ended   Six Months Ended     
   June 30, 2020   June 30, 2019   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
   (in thousands, except for percentages) 
Income from Operations  $1,094    4.1%  $766    5.0%  $328    42.8%

 

Income from operations in the six months ended June 30, 2020 and 2019 was $1.1 million and $766,000, respectively. The increase in income from operations is mainly due to the increase in our revenue comparing the two periods as a result of our expansion of our sales through consistently applied our low margin strategy.

 

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Operating Expenses

 

Operating expenses primarily consist of cost of sales, fulfilment expenses, marketing expenses and general and administrative expenses.

 

   Six Months Ended   Six Months Ended         
   June 30, 2020   June 30, 2019   Variance 
   Amount   %   Amount   %   Amount   % 
   (in thousands, except for percentages) 
Operating Expenses:                        
Cost of Sales  $24,175    93.5%   13,451    92.8%   10,724    79.7%
Fulfilment   755    2.9%   622    4.3%   133    21.4%
Marketing   186    0.7%   129    0.9%   57    44.2%
General and administrative expenses   740    2.9%   299    2.1%   440    147.2%
Total operating expenses   25,856    100.0%   14,501    100.0%   11,355    78.3%

 

Our total operating expenses increased by about $11.4 million or 78.3% from $14.5 million in the six months ended June 30, 2019 to $25.9 million in the six months ended June 30, 2020. All categories of our operating expenses increased in the six months ended June 30, 2020 compared to the same period in prior year. The increase is attributable to the increase in sales and related to the expansion of our operations.

 

Cost of Sales

 

Cost of sales primarily consists of the purchase price of merchandise that we sell directly on our platform and inbound shipping costs. The cost of sales for all of our three revenue streams increased for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

 

Compared to the six months ended June 30, 2019, cost of sales of cosmetic products increased by about $718,000 or 11.5% from $6.2 million in the six months ended June 30, 2019 to about $6.9 million in the six months ended June 30, 2020. The increase is due to an increase in the average unit cost of $0.12 or 8.3%. The increase is also attributable to 127,677 units or 3.0% increase in quantity of products sold during six months ended June 30, 2020, compared to the same period of 2019. The increase in average unit cost is mainly due to our successful launch of new premium products since 2019. The increase in quantity sold is attributable to increase of sales of disinfectant products during the Covid-19 outbreak and the expansion of our customer base. Compared to the six months ended June 30, 2019, we sold approximately 33% more disinfectant products in the same period of 2020 due to the Covid-19 outbreak. The increase in sales of disinfectant products contributed to approximately $207,000 or 29% to the increase in the cost of sales of cosmetic products comparing the six months ended June 30, 2020 with the same period in prior year.

 

The cost of sales of health and nutritional supplements increased by about $7.2 million or 258.5% from $2.8 million in the six months ended June 30, 2019 to $9.9 million in the six months ended June 30, 2020. The increase is due to increase in both quantity sold and unit cost of the products sold. Compared to the six months ended June 30, 2019, we sold about 442,000 units or 172.7% more health and nutritional products in the six months ended June 30, 2020. The average unit cost increased from $10.83 in the six months ended June 30, 2019 to about $14.23 in the six months ended June 30, 2020. The increase in unit cost of products sold is primarily due to increase in sales of premium branded products during six months ended June 30, 2020, compared to the same period of 2019. The increase in quantity sold is mainly due to our continual expanded our customer base.

 

The cost of sales of household products increased by about $2.9 million or 64.6% from $4.4 million in the six months ended June 30, 2019 to $7.3 million in the six months ended June 30, 2020. The increase results from 89.0% increase in the average unit cost and is partially offset by decrease of 684,254 units or 12.9% in the quantity sold. The increase in unit costs of products sold and the decrease in quantity sold of our household products is due to we sold more higher unit price products in the six months ended June 30, 2020 than the same period in prior year.

 

Fulfillment Expenses

 

Fulfillment expenses increased by $133,000 or 21.4% in the six months ended June 30, 2020 compared to the same period in 2019. Our fulfilment expenses primarily consist of costs related to order fulfillment, including charges we paid for order preparing, packaging, outbound freight, and physical storage. The increase in our fulfillment expenses is primarily attributable to the increase in outbound freight costs resulting from increased sales. Additionally, in the six months ended June 30, 2020, fulfillment expenses constitute of 2.9% of our total operating expenses, compared to 4.3% in the six months ended June 30, 2019. The decrease in fulfillment expenses to total operating expenses is mainly due to decrease in average freight costs per kilogram during six months ended June 30, 2020, compared to the same period of 2019. The decrease in average freight costs were mainly due to increased sales to customers who lived closer to our distribution centers.

 

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Marketing Expenses

 

Marketing expenses increased by $57,000 or 44.2% in the six months ended June 30, 2020 compared to the same period in 2019. The increase in selling expenses is consistent with the increase in sales and was primarily attributable to increases in advertisement expenses.

 

General and Administrative Expenses

 

Compared to the six months ended June 30, 2019, in the six months ended June 30, 2020 general and administrative expenses increased by $0.4 million or 147.2%. The increase was primarily attributable to an increase in our payroll expenses of approximately $0.4 million due to our continual expansion and recruitment of employees.

 

Income Before Income Taxes

 

Our income before income taxes was $1.1 million for the six months ended June 30, 2020, an increase of $0.3 million or 43.0% from $0.8 million in the six months ended June 30, 2019. The increase was primarily attributable to the increase in our revenue during six months ended June 30, 2020, compared to the same period of 2019 and that we were able to maintain our operating margin during our continual expansion.

 

Provision for income taxes

 

Our provision for income taxes was $0.3 million in the six months ended June 30, 2020, an increase of $84,000 or 43.0% from $0.2 million in the six months ended June 30, 2019. We are subject to income taxes on an entity basis on income derived from the location in which each entity is domiciled. In 2019 and 2018, only Shanghai Juhao was subject to a unified 25% enterprise income tax rate under the Enterprise Income Tax (“EIT”) Law of the PRC.

 

Other comprehensive income

 

Foreign currency translation adjustments amounted to a loss of $75,000 in the six months ended June 30, 2020 and a loss of $3,000 in the six months ended June 30, 2019. The balance sheet amounts with the exception of equity as of June 30, 2020 were translated at 1.00 RMB to 0.1413 US$ as compared to 1.00 RMB to 0.1456 US$ as of 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 1.00 RMB to 0.1422 US$ and 1.00 RMB to 0.1474 US$, 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.

 

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For the Years 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.

 

   Year ended   Year ended         
   December 31, 2019   December 31, 2018   Variance 
   $ Amount   % of revenue   $ Amount   % of revenue   $ Amount   % 
   (in thousands, except for percentages) 
Net Revenues  $61,776    100.0%  $24,188    100.0%  $37,588    155.4%
Operating Expenses:                              
Cost of Sales   56,081    90.8%   20,186    83.5%   35,895    177.8%
Fulfilment   2,122    3.4%   983    4.1%   1,139    115.8%
Marketing   723    1.2%   537    2.2%   186    34.6%
General and administrative expenses   1,146    1.8%   497    2.0%   649    130.6%
Total operating expenses   60,072    97.2%   22,203    91.8%   37,869    170.6%
Income from Operations   1,704    2.8%   1,985    8.2%   (281)   (14.2%)
Other Income (Expense)   1    0.0%   -    0.0%   1    100%
Income Before Income Taxes   1,705    2.8%   1,985    8.2%   (280)   (14.1%)
Provision (Benefit) for Income Taxes   427    0.7%   507    2.1%   (80)   (15.8%)
Net Income  $1,278   $2.1%   1,478    6.1%   (200)   (13.5%)

 

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Revenue

 

Through our website at www.1juhao.com and mobile app, we engage primarily in the sales of cosmetic products, health and nutritional supplements and household products sourced from manufacturers and distributors in China. Currently, we have three types of revenue streams deriving from our three major product categories: cosmetic products, health and nutritional supplements and household products. Other than revenue from product sales, we also earn service fees charged to third party merchants for using our platform, which was immaterial for years ended December 31, 2019 and 2018, and is grouped in “Others” presented below. Total revenue for the year ended December 31, 2019 increased by about $37.6 million or 155.4% from about $24.2 million in 2018 to about $61.8 million in 2019. The increase was primarily due to an increase in weighted average selling prices of cosmetic products sold and an increase in the quantity of health and nutritional supplements and household products sold.

 

The following table further sets forth the breakdown of our revenue by revenue stream for the years ended December 31, 2019 and 2018, respectively:

 

   Years Ended December 31,   Variance 
   2019   %   2018   %   Amount   % 
   (in thousands, except for percentages) 
Cosmetic products  $18,471    29.9%  $11,696    48.35%  $6,775    57.9%
Health and Nutritional supplements   22,672    36.7%   5,435    22.47%   17,237    317.1%
Household products   20,633    33.4%   7,056    29.17%   13,577    192.4%
Others   -    -%   1    0.01    (1)   (100.0)%
Total  $61,776    100.0%  $24,188    100.00%  $37,588    155.4%

 

The increase of revenue generated from sales of cosmetic products in 2019 compared to 2018 is mainly attributable to an increase in the weighted average selling price of cosmetic products. Compared to 2018, the weighted average selling prices of cosmetic products sold in 2019 increased by about 96.6%. The increase is partially offset by an approximate 19.7% decrease in the quantity of products sold in 2019 comparing to 2018. In cooperation with our distributor, we successfully launched a new premium brand, Yasi, during the second half of 2019, with a higher selling price than other cosmetic products. The new brand was well received by consumers, which contributed to increase in our weighted average selling price in the cosmetic products revenue stream.

 

The increase of health and nutritional supplements revenue in 2019 compared to 2018 is mainly attributable to a 465.3% increase in the quantity of products sold. The increase is partially offset by a 26.2% decrease in the weighted average selling price. In 2019, we continued our marketing and promotion programs and provided attractive discounts on nutritional supplement products. We benefited from our business expansion with a low margin strategy and were able to generate significantly more revenue through increase in quantity of products sold.

 

The increase of household products revenue in 2019 compared to 2018 is mainly attributable to a 139.58% increase in the quantity of products sold and a 22.1% increase in the weighted average selling price. In addition to the implementation of our business expansion with a low margin strategy, we also saw a high demand for certain premium Longrich branded products, such as Longrich energy pot and Longrich water purifier. These combined factors contributed to the increase in both quantity sold and weighted average selling price.

 

Income from Operations

 

   Year Ended   Year Ended     
   December 31, 2019   December 31, 2018   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
   (in thousands, except for percentages) 
Income from Operations  $1,704    2.8%  $1,985    8.2%  $(281)   (14.2%)

 

Income from operations in 2019 and 2018 was $1.7 million and $2.0 million, respectively. The decrease in income from operations is mainly due to the implementation of our business expansion with a low margin strategy which resulted in an increase in cost of revenue relative to revenue.

  

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Operating Expenses

 

Operating expenses primarily consist of cost of sales, fulfilment expenses, marketing expenses and general and administrative expenses.

 

   Year ended   Year ended         
   December 31, 2019   December 31, 2018   Variance 
   Amount   %   Amount   %   Amount   % 
   (in thousands, except for percentages) 
Operating Expenses:                              
Cost of Sales  $56,081    93.4%   20,186    90.9%   35,895    177.8%
Fulfilment   2,122    3.5%   983    4.4%   1,139    115.8%
Marketing   723    1.2%   537    2.4%   186    34.6%
General and administrative expenses   1,146    1.9%   497    2.3%   649    130.6%
Total operating expenses   60,072    100.0%   22,203    100.0%   37,869    170.6%

 

Our total operating expenses increased by about $37.9 million or 170.6% from $22.2 million in 2018 to $60.1 million in 2019. All categories of our operating expenses increased in 2019 compared to the prior year. The increase is attributable to the increase in sales and related to the expansion of our operations.

 

Cost of Sales

 

Cost of sales primarily consists of the purchase price of merchandise that we sell directly on our platform and inbound shipping costs. The cost of sales in all of our three revenue streams increased in 2019 compared to 2018.

 

Compared to 2018, cost of sales of cosmetic products increased by about $7.5 million or 77.8% from $9.6 million in 2018 to about $17.1 million in 2019. The increase is due to an increase in the average unit cost of $0.83 or 121.3%. The increase is partially offset by 2.8 million units or 19.7% decrease in quantity sold. Our successful launch of new premium products result in the increase in average unit cost.

 

The cost of sales of health and nutritional supplements increased by about $16.1 million or 327.3% from $4.9 million in 2018 to $21.1 million in 2019. The increase is primarily due to we sold approximately 1.2 million units more products in 2019 than in 2018. The increase is partially offset by decrease in the average cost per unit of 24.41%. There is an increasing demand for the recently released of new health and nutritional supplements on our platform, such as cordyceps capsules and herbal wine products, which had a relatively lower average unit cost.

 

The cost of sales of household products increased by about $12.3 million or 217.1% from $5.7 million in 2018 to $18.0 million in 2019. The increase results from a 139.6% increase in the quantity of products sold and a 32.4% increase in the average unit cost. The increase in the average unit cost and quantity of products sold is mainly due to increased demands of premium Longrich branded water purifier and energy pot in 2019.

 

Fulfillment Expenses

 

Fulfillment expenses increased by $1.1 million or 115.8% in 2019 compared to 2018. Our fulfilment expenses primarily consist of costs related to order fulfillment, including charges we paid for order preparing, packaging, outbound freight, and physical storage. The increase in our fulfillment expenses is primarily attributable to the increase in outbound freight costs resulting from increased sales.

 

Marketing Expenses

 

Marketing expenses increased by $0.2 million or 34.6% in 2019 compared to 2018. The increase in selling expenses is consistent with the increase in sales and was primarily attributable to increases in costs associated with our promotional events.

 

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General and Administrative Expenses

 

Compared to 2018, in 2019 general and administrative expenses increased by $0.6 million or 130.6%. The increase was primarily attributable to an increase in our payroll expenses of approximately $0.4 million due to our continual expansion and recruitment of employees.

 

Income Before Income Taxes

 

Our income before income taxes was $1.7 million for the year ended December 31, 2019, a decrease of  $0.3 million or 14.1% from $2.0 million in the year ended December 31, 2018. The decrease was primarily attributable to our continual implementation of business expansion with low margin strategy.

 

Provision for income taxes

 

Our provision for income taxes was $0.4 million in 2019, a decrease of $80,000 or 15.8% from $0.5 million in 2018. We are subject to income taxes on an entity basis on income derived from the location in which each entity is domiciled. In 2019 and 2018, only Shanghai Juhao was subject to a unified 25% enterprise income tax rate under the Enterprise Income Tax (“EIT”) Law of the PRC.

 

Other comprehensive income

 

Foreign currency translation adjustments amounted to a gain of $2,000 in 2019 and a loss of $110,000 in 2018. The balance sheet amounts with the exception of equity as of December 31, 2019 were translated at 1.00 RMB to 0.1435 US$ as compared to 1.00 RMB to 0.1454 US$ as of December 31, 2018. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for 2019 and 2018 were 1.00 RMB to 0.1447 US$ and 1.00 RMB to 0.1511 US$, 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.

 

The impact attributable to changes in revenue and expenses due to foreign currency translation is summarized as follows.

 

   Year Ended   Year Ended 
   December 31,
2019
   December 31,
2018
 
   (in thousands) 
Impact on revenue  $(512)  $(919)
Impact on operating expenses  $(510)  $(844)
Impact on net income  $(11)  $(56)

 

For 2019, if using the RMB 1.00 to $0.1435 (foreign exchange rate as of December 31, 2019) to translate our revenue, operating expense and net income, our reported revenue, operation expense and net income would decrease by $512,000, $510,000 and $11,000, respectively.

 

For 2018, if using the RMB 1.00 to $0.1454 (foreign exchange rate as of December 31, 2018) to translate our revenue, operating expense and net income, our reported revenue, operation expense and net income would decrease by $919,000, $844,000 and $56,000, respectively.

 

Liquidity and Capital Resources 

 

We are a holding company incorporated in the Cayman Islands. We conduct our operations primarily through our consolidated VIE in China. As a result, our ability to pay dividends depends upon dividends paid by Shanghai Juhao. If Shanghai Juhao incurs debt on its behalf in the future, the instruments governing its debt may restrict its ability to pay dividends to us. In addition, Shanghai Juhao is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, Shanghai Juhao is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. Additionally, Shanghai Juhao may allocate a portion of its after-tax profits based on PRC accounting standards to its enterprise expansion fund and staff bonus and welfare funds, at its discretion. Shanghai Juhao may also allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. There is no material impact of Covid-19 to our liquidity.

 

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As of December 31, 2019 and 2018, we had cash of approximately $12,000 and $0.2 million, respectively. We did not have any other short-term investments. Our current assets were approximately $11.2 million and $7.3 million as of December 31, 2019 and 2018, respectively. Our current liabilities were approximately $6.9 million and $5.0 million as of December 31, 2019 and 2018, respectively. Our current ratio as of December 31, 2019 and 2018 are 1.63:1 and 1.47:1, respectively. Total shareholders’ equity as of December 31, 2019 and 2018 was approximately $4.4 million and $2.4 million, respectively.

 

We have historically funded our working capital needs from operations, loans from related parties, and capital from shareholders. Presently, our principal sources of liquidity are generated from our operations. Our working capital requirements are influenced by the level of our operations, the inventory turnover, and the timing of accounts receivable collections.

 

As of June 30, 2020, we had cash of approximately $7.50 million and working capital of $5.1 million. All the cash as of June 30, 2020 was held by our VIE with banks and financial institutions inside China as we conducted our operations primarily through our consolidated VIE in China. Based on our current operating plan, we believe that our existing resources, including cash generated from operations, will be sufficient to meet our working capital requirement for our current operations over the next twelve months. In order to fully implement its business plan and sustain continued growth, the Company may also need to raise capital from outside investors.

 

The following table sets forth summary of our cash flows for the six months ended June 30, 2020 and 2019:

 

   For the Six Months
Ended June 30,
 
   2020   2019 
   (in thousands) 
Net cash provided by (used in) operating activities  $7,604   $(69)
Net cash used in investing activities   -    (8)
Net cash used in financing activities   (61)   - 
Effect of exchange rate change on cash and cash equivalents   (51)   1 
Net increase (decrease) in cash and cash equivalents   7,492    (76)
Cash and cash equivalents, beginning of the period   12    228 
Cash and cash equivalent, end of the period  $7,503   $152 

 

The following table sets forth summary of our cash flows for 2019 and 2018:

 

   For the Years ended
December 31,
 
   2019   2018 
   (in thousands) 
Net cash provided by (used in) operating activities  $(856)  $157 
Net cash used in investing activities   (46)   (40)
Net cash provided by (used in) financing activities   637    (7)
Effect of exchange rate change on cash and cash equivalents   49    (11)
Net increase (decrease) in cash and cash equivalents   (216)   99 
Cash and cash equivalents, beginning of the period   228    129 
Cash and cash equivalent, end of the period  $12   $228 

 

Operating Activities

 

Net cash provided by operating activities was approximately $7.6 million in the six months ended June 30, 2020, compared to cash used in operating activities of approximately $69,000 in the six months ended June 30, 2019. The increase in net cash provided by operating activities was primarily attributable to the following factors:

 

  Increase in cash provided by utilization of advances to suppliers – related parties of about $8.9 million comparing the six months ended June 30, 2020 with the same period in prior year. We made a significant advance to one of our related parties, who is the sole vendor of Longrich branded products at the end of 2019 as we planned to use such advance for purchase of Longrich branded products in 2020. The utilization of such advance payment in 2020 reduced our cash payments in 2020 in acquiring Longrich branded products.  

 

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The increase in cash provided by operating activities is partially offset by the following factor:

 

  Decrease in cash saved from purchase of inventory of approximately $453,000 comparing the six months ended June 30, 2020 with the same period in prior year. Our inventory turnover days are 16 days to 35 days historically. We have consistently managed our inventory based on sales expectation in the following to reduce any unnecessary inventory associated costs. As we expected to see sales in July, 2020 to be consistent with our sales in January, 2020, we maintained our inventory as of June 30, 2020 at the similar level as of December 31, 2019, which reduced the cash saved from purchase of inventory.
     
  Increase in cash used for payments for outstanding accounts payable of approximately $627,000 comparing the six months ended June 30, 2020 with the same period in prior year. The increase in cash used for payments for outstanding accounts payable is mainly due to timing of balances due to our vendors.

 

Net cash used in operating activities was approximately $0.9 million in 2019, compared to cash provided by operating activities of approximately $0.2 million in 2018. The decrease in net cash provided by operating activities was primarily attributable to the following factors:

 

  Increase in cash used for advances to suppliers – related parties of about $1.6 million. One of our related parties is the sole vendor of Longrich branded products. Additionally, we cooperated with this related party to develop new brands and products, expecting to have expanded products lines to meet differentiated consumer demands. The increase in advances to suppliers – related parties is mainly associated with the new products development and also to secure future supplies of Longrich branded products.
     
  Decrease in cash provided by accrued expenses and other liabilities of approximately $981,000. Our accrued expense and other liabilities as of December 31, 2019 and 2018 mainly consists of deposits made by resellers and distributors who purchased products from our website. We generally require new resellers and distributors to make deposit with us to ensure they do not conduct any illegal or unethical business activities and also to reduce the counter party credit risk. However, in 2019, we waived deposits for some of our distributors to encourage them to make more purchases, which contributed to the decrease in cash provided by accrued expense and other liabilities.

 

The decrease in cash provided by operating activities is partially offset by the following factor:

 

  Decrease in cash used for inventory of approximately $1.3 million. Our inventory turnover days are 16 days to 35 days historically. To efficiently manage our inventory without significantly increasing the inventory associated costs, we managed our inventory closely based on sales expectation. Our sales increased significantly in the past three years due to our expansion. To meet the increased demand of our products, we increased the level of inventory in 2019 compared to the prior year. In 2019, we hosted multiple nation-wide promotion events, including the “double 11” day and “double 12” day in November and December, 2019, on which we provided more extensive price markdowns, compared to the events in 2018. Accordingly, the promotion events significantly reduced our inventory turnover rate in 2019, compared to 2018.

 

Investing Activities

 

Net cash used in investing activities was approximately $Nil and $8,000 in the six months ended June 30, 2020 and 2019, respectively. Cash used in investing activities in six months ended June 30, 2019 was for software acquired from third-party that support our app development.

 

Net cash used in investing activities was approximately $46,000 and $40,000 in 2019 and 2018, respectively. Cash used in investing activities in both years were for software acquired from third-party that support our app development.

 

Financing Activities

 

Net cash used in financing activities was $61,000 and $Nil in the six months ended June 30, 2020 and 2019, respectively. Cash used in financing activities in the six months ended June 30, 2020 was for payment of related party loans that became due.

 

Net cash provided by financing activities was $637,000 in 2019 and net cash used in financing activities was $7,000 in 2018. On October 8, 2019, the shareholders of Shanghai Juhao approved an increase in the registered capital of Shanghai Juhao and contributed approximately $2.3 million in October, 2019. In July, 2019, our VIE Shanghai Juhao’s Board of Directors approved to make cash dividend of $1.6 million. The dividend was paid in July, 2019.

 

Cash Transfer within the Company and Restrictions on Dividends Distribution

 

The Company’s sales, purchases and expense transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China, the central bank of China. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance. Currently, our subsidiary in the PRC may purchase currencies to transfer cash within the Company among subsidiaries in and out of the PRC for, among other things, payment of cash dividends to us, if any, by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future and therefore limit our ability to transfer cash within the Company among subsidiaries in and out of the PRC. The limitation over cash transfer within the Company does not raise additional liquidity risk as all of our liabilities are also denominated in RMB and we conduct our business primarily through our consolidated VIE in China.

 

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We rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have. Under PRC laws and regulations, our PRC subsidiary may pay dividends only out of its accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, our subsidiary in the PRC is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in the PRC 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 its board of directors. 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. Therefore, these statutory reserves, along with the registered capital of the PRC entities are considered as restricted. Amounts restricted that include paid in capital and statutory reserve funds, as determined pursuant to PRC GAAP, are $4,268,147, $4,268,147 and $1,964,982 as of June 30, 2020, December 31, 2019 and 2018, respectively. 

 

Off-balance Sheet Commitments and Arrangements

 

We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

Assets Held By and the Operations of Entities Apart From the Consolidated VIE

 

The Company and its subsidiaries are all holding companies, except for its consolidated VIE. The only assets held by the Company and its subsidiaries are the cash in their bank accounts. The uncertainties in the PRC legal system could cause the relevant regulatory authorities to find our current VIE Agreements with VIE to be in violation of any existing or future PRC laws or regulations and could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the nominee shareholders of the VIE may have interests that are different from those of the Company, which could potentially increase the risk that they would seek to act contrary to the terms of the VIE Agreements with the VIE. In addition, if the nominee shareholders will not remain the shareholders of the VIE, breach, or cause the VIE to breach, or refuse to renew the existing contractual arrangements the Company has with them and the VIE, the Company may not be able to effectively control the VIE and receive economic benefits from them, which may result in deconsolidation of the VIE.

 

Impact of COVID-19 Pandemic

 

Beginning in late 2019, there were reports of the COVID-19 (coronavirus) outbreak in Wuhan, China, the epidemic quickly spread to many provinces, autonomous regions, and cities in China as well as many parts of the world, including the U.S. In March 2020, the World Health Organization declared the COVID-19 a pandemic. With an aim to contain the COVID-19 outbreak, the Chinese government has imposed various strict measures across the country including, but not limited to, travel restrictions, mandatory quarantine requirements, and postponed resumption of business operations until after the Chinese New Year holiday.

 

As an online retailer and retail platform, we noticed an increase in sales in January and February 2020 as brick and mortar stores were closed due to the lockdown. Consumers’ purchase behavior also evolved as the fear for contamination remains even after the Chinese government eased its restrictions, and as a result we saw an increase in sales from March 2020 through June 2020. In addition, we noticed an increase in our operating costs, specifically freight costs, as consumers’ needs were mainly fulfilled through online retailers like us, which in turn significantly increased the demand for freight services. Additionally, the government-imposed interstate transportation restrictions and quarantine requirement also limited freight service providers’ capacity. The increased demand and the interruption to freight services results in increased average cost for freight services in January and February 2020. Starting from March 2020, businesses in China began to reopen, and the interruptions to businesses were gradually removed. As more freight service companies were able to operate as their full capacity, our average cost for freight services decreased in the period March 2020 to June 2020. Overall, our results of operation and consolidated financial position in the six months ended June 30, 2020 was not significantly impacted by COVID-19. However, it is not possible to determine the ultimate impact of the COVID-19 pandemic on our business operations and financial results, which is highly dependent on numerous factors, including the duration and spread of the pandemic and any resurgence of COVID-19 in China or elsewhere, actions taken by governments, the responses of businesses and individuals to the pandemic.

 

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Critical Accounting Policies, Judgments and Estimates

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently applied. The consolidated financial statements include the accounts of the Company, its subsidiaries, and the VIE. All intercompany transactions and balances between the Company, its subsidiaries and the VIE are eliminated upon consolidation.

 

Consolidation of Variable Interest Entity

 

A VIE is an entity that either has a total equity investment that is insufficient to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary of, and must consolidate, the VIE.

 

Shanghai Jowell is deemed to have a controlling financial interest through a series of contracture agreements and be the primary beneficiary of Shanghai Juhao because it has both of the following characteristics: 

 

  (1) The power to direct activities at Shanghai Juhao that most significantly impact such entity’s economic performance, and
     
  (2) The obligation to absorb losses of, and the right to receive benefits from, Shanghai Juhao that could potentially be significant to such entity.

 

Pursuant to the contractual arrangements with Shanghai Juhao, Shanghai Juhao shall pay service fees equal to all of its net profit after tax payments to Shanghai Jowell. Such contractual arrangements are designed so that the Shanghai Juhao would operate for the benefit of Shanghai Jowell and ultimately, the Company.

 

Use of estimates

 

In preparing the consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant items subject to such estimates and assumptions include, but not limited to, the useful lives of property and equipment; allowance for doubtful accounts and advance to suppliers; assumptions related to the consolidation of entities in which the Company holds variable interests and the valuation of inventories. Actual results could differ from those estimates.

 

Revenue recognition

 

The Company, through its website www.1juhao.com and mobile applications, engages primarily in online sale of cosmetic products, health and nutritional supplements and household products sourced from manufacturers and distributors in China, and also offers an online marketplace that enables third-party sellers to sell their products to the Company’s customers. Customers place their orders for products or services online primarily through the Company’s websites and mobile applications. Payment for the purchased products or services is generally made either before delivery or upon delivery.

 

On January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (FASB ASC Topic 606) using the modified retrospective approach. The results of applying Topic 606 using the modified retrospective approach were insignificant and did not have a material impact on the Company’s consolidated financial condition, results of operations, cash flows, business process, controls or systems.

 

Consistent with the criteria of ASC 606, the Company recognizes revenues when the Company satisfies a performance obligation by transferring a promised goods or services to a customer. Goods or services are transferred when the customer obtains control of it, which generally occurs upon the delivery of the products to customers.

 

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In accordance with ASC 606, the Company evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When the Company is a principal, that the Company obtains control of the specified goods or services before they are transferred to the customers, the revenues should be recognized in the gross amount of consideration to which it expects to be entitled in exchange for the specified goods or services transferred. When the Company is an agent and its obligation is to facilitate third parties in fulfilling their performance obligation for specified goods or services, revenues should be recognized in the net amount for the amount of commission which the Company earns in exchange for arranging for the specified goods or services to be provided by other parties. Revenue is recorded net of value-added taxes.

 

The Company recognizes revenue net of discounts and return allowances when the products are delivered and title passes to customers. Significant judgement is required to estimate return allowances. For online direct sales business with return conditions, the Company reasonably estimate the possibility of return based on the historical experience, changes in judgments on these assumptions and estimates could materially impact the amount of net revenues recognized. The Company generally grants customers 7 days of free return upon receiving goods according to PRC law regarding online purchased products.

 

The Company primarily sells cosmetic products, health and nutritional supplements and household products through online direct sales. The Company recognizes the product revenues from the online direct sales on a gross basis as the Company is a principal because it controls the promised good or service before transferring it to a customer. This control is determined by the following indicators 1) The Company is the primary obligor in the sales transaction and responsible for fulfilling the promise to provide the product and service. 2) The Company bears the inventory risk. The Company will first indemnify customers for product damages and then request reimbursements from suppliers if the suppliers are determined to be responsible for the damages. 3) The Company has discretion in establishing the prices and control over the entire transaction.

 

Other than revenue from online direct sales, the Company also earns service fees charged to third-party sellers for participating in the Company’s online marketplace, where the Company generally is acting as agent and its performance obligation is to arrange for the provision of the specified goods or services by those third-party sellers.

 

Unearned revenue consists of payments received or awards to customers related to unsatisfied performance obligations at the end of the period, included in deferred revenues in the Company’s Consolidated Balance Sheets.

 

Revenue is recognized at a point in time when the goods are transferred to customers, and no remaining performance obligation in future periods. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. The Company has no material incremental costs of obtaining contracts with customers that the Company expects the benefit of those costs to be longer than one year which need to be recognized as assets.

 

Income taxes

 

The Company’s subsidiaries in China and Hong Kong are subject to the income tax laws of the PRC and Hong Kong. No taxable income was generated outside the PRC for the years ended December 31, 2019 and 2018. The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or future deductibility is uncertain.

 

ASC 740-10-25 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures.

 

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JOBS Act

 

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We will qualify as an “emerging growth company” and under the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.  

 

Quantitative and Qualitative Disclosures about Market Risks

 

Liquidity risk

 

We are exposed to liquidity risk, which is the risk that we will be unable to provide sufficient capital resources and liquidity to meet our commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, we will turn to other financial institutions to obtain short-term funding to meet the liquidity shortage.

 

Inflation risk

 

Inflationary factors, such as increases in personnel and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenue if the revenues from our products do not increase with such increased costs.

 

Interest rate risk

 

Our exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand, interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase, however, may raise the cost of any debt we incur in the future.

 

Foreign currency translation and transaction

  

Our operating transactions and assets and liabilities are mainly denominated in RMB. RMB is not freely convertible into foreign currencies for capital account transactions. The value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The main objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for (1) public business entities, (2) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file financial statements with the SEC. In July 2018, the FASB issued an update that provided an additional transition option that allows companies to continue applying the guidance under the lease standard in effect at that time in the comparative periods presented in the consolidated financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. In November 19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-02 to be January 1, 2021 for non-issuers. Early adoption is permitted for all entities. We evaluated and deemed this standard has no material impact on the Company’s consolidated financial statements.

 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. This ASU is effective for annual and interim periods beginning after December 15, 2019 for issuers and December 15, 2020 for non-issuers. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar financial assets. The updates should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified retrospective approach). In November 19, 2019, the FASB issued ASU 2019-10 to amend the effective date for ASU 2016-13 to be fiscal years beginning after December 15, 2022 and interim periods therein. We do not believe this guidance will have a material impact on its consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05 — Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”), which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”) that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate internationally. We do not believe this guidance will have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” to improve the effectiveness of disclosures in the notes to financial statements related to recurring or nonrecurring fair value measurements by removing amounts and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The new standard requires disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We evaluated and deemed this standard has no material impact on the Company’s consolidated financial statements.

 

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows. 

 

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INDUSTRY OVERVIEW

 

We have engaged CEVSN Information Consulting Co., Ltd. (“CEVSN”) to prepare a commissioned industry report that analyzes the cosmetics, health and nutritional supplements and household products industries in China. All information and data presented in this section have been derived from CEVSN’s industry report, unless otherwise noted. The following discussion includes projections for future growth, which may not occur at the rates that are projected or at all.

 

Global E-Commerce Industry

 

In recent years, the global e-commerce market continued to expand. According to the CEVSN, from the perspective of user numbers, in 2019, the global online shopping consumer number reached 2.03 billion, with a year-on-year growth of 7.4%, and the global online shopping penetration rate is about 27.1%. With the further increase of the online shopping penetration, the growth rate will slow down gradually. 

 

Figure 1 numbers of global online shopping consumers from 2016 to 2022

 

 

Source: 2018 Global E-Commerce Industry Bluebook and CEVSN (YOY : Year Over Year)

 

In 2019, global e-commerce is expected to exceed $3.5 trillion, with a year-on-year growth rate of 20.7%, and expected to represent 13.9% of the total retail sales. It is expected that in 2021, the global online retail sales will exceed $5 trillion, accounting for nearly 18% of the total global retail sales.

 

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Figure 2 Global retail e-commerce transaction scale in 2016-2022

 

 

 

Source: 2018 Global E-Commerce Industry Bluebook and CEVSN (YOY : Year Over Year)

 

In 2015, China surpassed the United States as the world’s largest e-commerce market. In 2019, the sales volume of e-commerce in China increased by more than 30%, approaching $2 trillion, accounting for more than half of the global online retail sales. The U.S. market followed with about $600.63 billion, accounting for nearly 15% in 2019.

 

According to CEVSN, in 2015, the total amount of e-commerce transactions in China was about RMB 20.5 trillion, which increased to RMB 32.8 trillion in 2019, with a compound annual growth rate (“CAGR”) of 12.47%.

 

Figure 3 Changes of total e-commerce transactions in China in 2015-2019

 

 

 

Source: Analysis of CEVSN (YOY : Year Over Year)

 

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Retail Sales of Consumer Products Market in China

 

In 2019, the total retail sales of consumer goods in China reached RMB 41.16 trillion, an increase of 8.0% over the previous year (excluding the inflation factor, the actual increase was 6.0%, and the following numbers reflect growth without excluding inflation except as otherwise disclosed). Among that, the retail sales of consumer goods excluding automobiles reached RMB 37.23 trillion, an increase of 9.0%.

 

In 2019, the national online retail sales of consumer goods in China reached RMB 10.63 trillion, an increase of 16.5% over the previous year. Among them, the online retail sales of physical goods reached RMB 8.5239 trillion, an increase of 19.5% and accounting for 20.7% of the total retail sales of consumer goods.

 

Cosmetics Products Market in China

 

China is the second largest cosmetics market in the world. According to Euromonitor statistics in 2019, the global cosmetics market reached $488 billion in 2018, of which the Chinese cosmetics market accounted for 12.7%. According to the latest data released by the National Bureau of Statistics of China in 2020, the volume of sales of China’s cosmetics industry continued to grow in 2019 reaching RMB459.4 billion, with a year-on-year growth rate of 12.1%.

 

Figure 4 Market scale and growth rate of China’s cosmetics industry in 2015-2019

 

 

 

Source: Euromonitor, National Bureau of Statistics of China, Analysis of CEVSN (YOY : Year Over Year)

 

According to the data released by Euromonitor in 2019 and the National Bureau of Statistics of China in 2020, China’s cosmetics market has maintained a rapid growth in recent years. In 2015, the cosmetics market in China was RMB 311.3 billion and increased to RMB 459.4 billion yuan in 2019, with a CAGR of 10.23%.

 

According to the data of China’s cosmetics market released by Euromonitor in 2019 and the National Bureau of Statistics of China in 2020, China’s cosmetics market size has increased on a year-on-year basis in 2019, however, when compared with the United States, Japan and South Korea, China’s per capita cosmetics consumption remains much behind these counties.

 

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Figure 5 Comparison of cosmetics consumption per capita between China, Japan and South Korea (in US$)

 

 

 

Source: Euromonitor, Analysis of CEVSN (YOY : Year Over Year)

 

Cosmetics industry channels are mainly divided into five categories in China:

 

1. Cosmetic Shop or Cosmetic Store: cosmetic stores are mainly cosmetics franchise stores or chain stores, providing customers with multi brands and one-stop consumption services. In the first and second tier cities, cosmetic stores are mostly in the form of chain stores. Most domestic brands, to some extent, develop and grow their business and sales through CS stores. At present, there are more than 200,000 cosmetics stores in China, which are all over the country. The influence of the cosmetic stores channel on the cosmetics sales market is very important.

 

2. Department Store: department store is another common channel for cosmetics sales through large department stores (such as Bailian, Yintai, Parkson, etc.), which is usually a gathering place for high-end consumers, as international brands, such as Lancome, Estee Lauder, Shiseido, or Chanel, often choose to set up counters there.

 

3. KA channel: KA refers to Key Account, which means the sales channel of large stores (such as Wal-Mart, Carrefour, CR Vanguard, etc.), also known as the supermarket channel. The price of cosmetics in the supermarket is not as high as other sales channels. At the same time, the products in the supermarket are generally picked and purchased by consumers freely, so the popular brands displayed on the cosmetics shelves of the supermarket are usually household names, such as L’Oréal, Nivea, Pechoin, Inoherb, etc.

 

4. Direct sales channel: the manufacturer directly promotes and sells its products to consumers without distributors.

 

5. E-commerce channel: online sales of cosmetics through e-commerce platform.

 

In 2019, e-commerce channel accounts for 29.8%; direct sales channel accounts for 9.4%; department store accounts for 17.4%; CS channel accounts for 20.9%; KA channel accounts for 22.5% of sales of cosmetics in China.

 

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Figure 6 Percentage of various channels in cosmetics industry in 2019

 

 

Source: Euromonitor, Research data, Annual reports of listed companies, Analysis of CEVSN

 

Cosmetics E-commerce Market 

 

The market of China’s cosmetics e-commerce industry in 2015 was about RMB 57.88 billion, which increased to RMB 136.67 billion in 2019, with a CAGR of about 24%.

 

Figure 7 Size and growth of China’s cosmetics e-commerce market in 2015-2019

 

 

 

Source: Euromonitor, National Bureau of Statistics of China, Analysis of CEVSN (YOY : Year Over Year)

 

Health and Nutritional Supplements Market in China

 

China ranks second in the global health and nutritional supplements market after the U.S. The health and nutritional supplements market in the U.S. is a mature market with a CAGR of around 4%. Since 2015, China’s health and nutritional supplements market has maintained a fast development, with a CAGR of 7.28%. However, China’s per capita consumption of health and nutritional supplements still lags far behind those developed countries. According to CEVSN, in the past five years, the market has maintained a rapid growth. With the increase of domestic consumption, the aging population and the improvement of residents’ health awareness, China’s health and nutritional supplements market should further develop. 

 

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Figure 8 Market size and growth rate of China’s health and nutritional supplements industry in 2015-2019

 

 

Source: Euromonitor, China National Bureau of Statistics, Analysis of CEVSN (YOY : Year Over Year)

 

Since 2015, China’s health and nutritional supplements market has maintained a fast development, with a CAGR of 7.28%. In 2019, impacted by a special enforcement action of the Domestic Market Supervision Bureau against the health and nutritional supplements businesses and stores that are not in compliance with laws and regulations and close down of such businesses and stores, the rapid expansion trend of the health and nutritional supplements market in China slowed down. The market reached about RMB266 billion in 2019, with a year-on-year growth rate reduced to 3.2%.

 

Although the year-on-year growth rate of the China’s health and nutritional supplements market slowed down in 2019, it still continued its expansion trend. In addition, with the aggravation of domestic aging problem and the improvement of residents’ health awareness, the domestic health and nutritional supplements market in China has a driving force for sustainable development. In addition, according to data statistics of CEVSN, the per capita consumption of health and nutritional supplements in China is significantly lower than that in developed countries, so there is a big space for market development.

 

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Figure 9 Comparison of per capita health consumption between China and other countries (in US$)

 

 

 

Source: Euromonitor, Analysis of CEVSN

 

Health and nutritional supplements industry channels are mainly divided into four categories in China:

 

1. Direct sales channel: the manufacturer directly promotes and sells to consumers without distributors.

 

2. E-commerce channel: online sales of health and nutritional supplements through e-commerce platform.

 

3. Drugstore channel: sales of health and nutritional supplements through drugstores.

 

4. Supermarket channel: sales of health and nutritional supplements through supermarket channel.

 

In 2019, the percentage of various channels in health and nutritional supplements industry is as follows: direct sales channel accounts for 46.6%; e-commerce channel accounts for 33.9%; drugstore channel accounts for 17.4%; supermarket channel accounts for 2.1%.

 

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Figure 10 Percentage of various channels in health and nutritional supplements industry in 2019

 

 

 

Source: Euromonitor, Research data, Annual reports of listed companies, Analysis of CEVSN

 

Health and nutritional supplements E-commerce Market 

 

In 2015, the market size of China’s health and nutritional supplements e-commerce industry was about RMB 41.77 billion; it increased to RMB 90.17 billion in 2019, with a CAGR of 21.22%.

 

Figure 11 Size and growth of China’s health and nutritional supplements e-commerce market in 2015-2019

 

 

 

Source: Euromonitor, National Bureau of Statistics of China, Analysis of CEVSN (YOY : Year Over Year)

 

As the second largest market of health and nutritional supplements in the world, China’s market demand has maintained rapid growth in recent years. Per capita consumption of health and nutritional supplements in China is significantly lower than that in developed countries, so the health and nutritional supplements market is expected to sustainably develop. At the same time, with China’s population gradually aging and the improvement of health and fitness awareness of young and old people, China’s health and nutritional supplements is expected to face a strong demand, and sustained growth of health and nutritional supplements market is expected to further promote the expansion of the health and nutritional supplements e-commerce market.

 

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Household Products Market in China

 

Based on the publicly available information of NBS, CMM and Euromonitor and measured data by CEVSN, China’s household products market size maintained a growth from 2015 to 2017, with a CAGR of 2.1%, however, in recent two years, affected by the macro economic environment, the market size of household products in 2018 and 2019 showed a decline comparing to 2017, with the CAGR of - 4.9%.

 

Figure 12 Market Size and Growth of Household Goods in 2015-2019 in China

 

Unit: 100 million yuan 

 

 

Sources: NBS, CMM, Euromonitor, CEVSN (YOY : Year Over Year)

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Household Products E-commerce E-Market in China

 

According to the publicly available data of NBS, CMM and Euromonitor and measured data by CEVSN, China’s online sales of household products have maintained a rapid growth in recent years. In 2015, the e-commerce market size for household products was RMB 310.3 billion (approximately $44.3 billion), which increased to RMB 479.71 billion (approximately $68.5 billion) in 2019, and the CAGR reached 9.1%, although the growth rate has slowed down in 2018 and 2019 due to the macro economic environment.

 

Figure 13 E-commerce scale and growth of household goods in 2015-2019 in China

 

Unit: 100 million yuan

 

 

 

Sources: NBS, CMM, Euromonitor, CEVSN (YOY : Year Over Year)

 

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Business

 

Overview

 

We are China’s leading cosmetics, health and nutritional supplements and household products e-commerce platform. We offer our own brand products to customers and also sell and distribute health and nutritional supplements, cosmetic products and certain household products from other companies on our platform. In addition, we allow third parties to open their own stores on our platform for a service fee based upon their sale revenues generated from their online stores and we provide them with our unique and valuable information about market needs, enabling them to better manage their sales effort, as well as an effective platform to promote their brands. We currently operate under four sales channels: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live streaming marketing.

 

Shanghai Juhao started its operation in 2012 and is among the first group of membership-based online-to-offline cosmetics, health and nutritional supplements and household products e-commerce platforms in China. Today, we offer an online platform LHH Mall through Shanghai Juhao which holds an EDI (Electronic Data Interchange) certification approved by the Shanghai Communication Administration pursuant to the requirement of MIIT dated February 1, 2019 valid for 5 years, selling our own brand products manufactured by third parties as well as international and domestic branded products from 200+ manufacturers. As of December 31, 2019, our platform had 1,563,574 VIP members who have registered on our platform, 169 merchants who have opened their own stores on our platform, and 71.6% of products sold on our platform were cosmetics and health and nutritional supplements. We also sell household products, such as pots and pans, paper towels, cups, vacuum cleaners, massagers, towels on our platform, and those products account for 28.4 % of the products sold on our platform. As of June 30, 2020, our platform had 1,774,845 VIP members who have registered on our platform, 174 merchants who have opened their own stores on our platform, and 70.88% of products sold on our platform were cosmetics and health and nutritional supplements and the remaining 29.12% of the products sold on our platform were daily household products. 

 

Since August 2017 we have been also selling our products in our authorized retail stores all across China. Operating under the our brand name of “Love Home Store” or “LHH Store”, the authorized retailers may operate as independent stores or store-in-shop (an integrated store), selling products that they purchased through our online platform LHH Mall under their special retailers accounts with us which provide them with major discounts. As of June 30, 2020 and October 31, 2020, we have authorized more than 22,097 and 23,727 Love Home Stores in 31 provinces of China, respectively, providing offline retail of our products.

 

We have relationships with leading cosmetics and health and nutritional supplements manufacturers and distributors in China, which not only to provide us with high-quality products, but also supply chain services to our platform. By connecting these suppliers/distributors with our online sales and offline authorized stores, we have created a closed-circle to brings tremendous convenience and cost savings to our customers.

 

Our Strategy

 

In order to further develop our business and enhance our competitive position, we intend to adopt the following strategies:

 

  Develop additional authorized retail stores, including community stores, franchise stores, direct retail stores, or joint venture stores. We plan to integrate and acquire cosmetics stores beauty chains store, or hair dressers that have synergies with our current business. We plan to expand internationally by gradually developing authorized retail stores in Asia, Africa, Europe and the United States and seek international cooperative partners, with the goal of reaching 24,500 stores in China by the end of 2020 and 31,000 stores in China and internationally  in 2021.

  

 

Add additional high-quality suppliers. In 2019, our products supplied by many suppliers and more than 90% of the consumer cosmetic products sold on our platform are produced by leading cosmetic manufacturers in China, including products from our related parties. We will continue to use cloud based solutions and big data technology to collect and analyze suppliers’ products, qualifications, production capacity, technology, management and credibility so as to identify and cooperate with high-quality suppliers.

  

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  Provide additional services to our members. We continuously work on improving our membership based system and to provide additional services to our members. This includes cloud based solutions, big data analysis, price preference strategies, reasonable matching of related products and other online services. We plan to build physical demonstration stores by ourselves or cooperate with third parties in mature markets and shipping centers to showcase our standard authorized stores and products, coach the store owners to upgrade their stores, provide good nearby supply and service to the stores, and regular training of store owners of operation and marketing skills and abilities.

 

  Development and application of new technologies. We will continue to develop small programs, APPs, and other online service tools, aiming to improve user experience. We believe that this will, for example, increase our intelligent supply chain capabilities, reduce distribution costs, improve precision marketing, improve consumer feedback data quality, and optimize the experience for LHH store users. In particular, we will continue to enhance the functions of our smart procurement services and automatic re-ordering system that will be implemented by our AI-driven predictive analysis. We will also invest in the development of our customer service system. Overall, we will continue to invest in R&D to strengthen our technical capabilities in the following key areas:

 

  Artificial intelligence. We have developed and will continue to improve the artificial intelligence used in our procurement systems. For example, we are developing an artificial intelligence product recommendation system to provide better choices to our consumers.
     
  Blockchain. The application of blockchain technology is one of our strategic objectives. In the future, we intend to use blockchain technology to improve the security and efficiency of our system in various areas, including product anti-counterfeiting, product tracking, logistics tracking, supplier credibility and credit granting, cross-border payment, and to use blockchain technology to store business activities and shopping and spending patterns in the ecosystem and transform them into valuable market information.
     
  Big data. We will continue to improve our big data capabilities to provide better and more relevant products, services, and experiences to our customers.
     
  Cloud-based solutions. We provide our authorized stores and consumers with a series of cloud based solutions, including authorized store inventory management, cloud stores and big data analysis services. We will continue to develop new solutions and applications in this area.
     
  Internet of Things. We will work with our business partners to incorporate various types of wearable devices to enhance our data collection capabilities and provide health management service.
     
  Intelligent supply chain. We will continue to improve our intelligent supply chain capabilities, including model accuracy and the efficiency of the algorithm.

 

  Expand into international market. We strive to bring the high-quality products to hundreds of millions of families in China and internationally. With the improvement of living standards in the world and a growing percentage of the population paying attention to daily health and nutritional supplements and cosmetic products, we believe the markets for cosmetics and health and nutritional supplements will continue to expand and we plan to open new stores in countries outside of China in 2021 and introduce international users and customers to our platform. We have also formulated the Super Brand plan to introduce 1,000 domestic and foreign SKUs (Stock Keeping Unit), including Private Brand, Star Brand, International Brand and other high-end brand products.

 

  Systematically expanding the scale of our daily health and nutritional supplements /cosmetology ecosystem. We create value for various participants in the daily health and nutritional supplements/cosmetology ecosystem including: (i) consumers who purchase health and nutritional supplements and other daily household products and professional services; (ii) local, authorized LHH Stores; (iii) suppliers, such as health and nutritional supplements suppliers and distributors; and (iv) merchants who use our platform to distribute and sell their products. As we add more LHH Stores, merchants, and distributors to our network, we will also add all of their final consumers to our ecosystem, resulting in a multiplier effect. As of December 31, 2019, we have authorized more than twenty thousand LHH Stores in China. As we continue to expand the LHH Stores and final consumer base, we can attract more dealers and merchants to our platform to increase the breadth of our product offerings. This will create a virtuous circle to further strengthen and grow our ecosystem, which will improve the efficiency of our intelligent supply chain and reduce operation costs. Our goal is to transfer most of the cost savings to our ecosystem participants.

 

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Seek strategic partnerships and acquisitions. We will leverage the experience and expertise of our team to selectively assess and pursue acquisitions, investments, joint ventures, and partnerships that we believe will be highly strategic and value-adding to our operations and technologies. We will assess each opportunity from the perspective of growth and synergy potential based on its strategic impact on our platform.

 

Our Challenges

 

Successful implementation of our strategy is affected by risks and uncertainties associated with our business, including the following:

 

Our ability to comply with broad and changing regulatory requirements;

 

Our ability to compete effectively in China’s growing health and nutritional supplements market;

 

Our ability to manage business growth and expansion plans;

 

Our ability to achieve or maintain profitability in the future;

 

Our ability to control the risks associated with the retail and wholesale business of products;

 

Our ability to use and protect data generated by our business;

 

Our ability to manage the various participants in an ecosystem;

 

Lack of necessary approval, license or permit, or non-compliance with relevant laws and regulations;

 

Our ability to control the risk of claims for cosmetic care and product liability; and

 

We maintain the best inventory level and the ability to classify products.

 

We may not be able to respond adequately and promptly to the rapid changes in government regulations, e-commerce competition and consumer preferences.

 

There are certain risks in our retail and wholesale business of health and nutritional supplements products, cosmetics and household products, including:

 

Failure to successfully implement effective advertising, marketing and promotional programs to maintain and enhance our awareness of our brands, products and services;

 

Failure to implement effective pricing and other strategies for market competition;

 

Failure to respond to changes in customer and consumer needs and preferences in a timely manner;

 

Not enough health and nutritional supplements, cosmetics and household products to meet the needs of our customers and consumers in the mall;

 

Overall consumer spending on health and nutritional supplements and cosmetics products in China;

 

Failure to obtain and maintain regulatory or government licenses, approvals and permits, or to pass Chinese government inspections or audits; and

 

Risk and liability for any contamination, damages or other losses caused by the use, misuse or misdiagnosis of products sold by the Company.

 

We face additional risks and uncertainties related to our corporate structure and the regulatory environment in China. Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face

 

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Our Sales Channels

 

We currently utilize four sales formats: Online Direct Sales, Authorized Retail Store Distribution, Third-party Merchants and Live Streaming Marketing.

 

The Online Direct Sales model is mainly selling the products under our own brands or third party products on our online shopping mall directly. We purchase these third party products directly from manufacturers and suppliers and deliver them to our customers. This model generates the highest profit-margin among all our sales models.

 

Authorized Retail Store Distribution refers to our authorized physical retail stores that distributed products all over the country and they purchase their products from us and distribute them to consumers. Those stores may also use a small program developed by us which can be used on WeChat to promote products to their WeChat contacts who can place orders to purchase products either from those authorized stores or from our platform which we provide sale discounts for such orders placed on our platform but directed from our authorized stores. The material terms of the Love Home Health Franchise Store Contract with such store owners/franchisees include: (i) Shanghai Juhao will provide training to franchisee, which should pass the examination of Shanghai Juhao to be qualified as an authorized store; (ii) the franchisee shall obtain the business license, tax registration certificate and other relevant certificates required for operation according to law at its own costs; (iii) the franchisee shall abide by the rules and policies issued by Shanghai Juhao; (iv) during the term of the agreement, the franchisee may use Shanghai Juhao’s trademark and service mark and Shanghai Juhao authorizes the franchisee to sell the products or services of Shanghai Juhao; (v) Shanghai Juhao may inspect the operation of the franchisee from time to time; (vi) during the term of the agreement, the franchisee’s store structure, internal and external decoration shall comply with the standards set by Shanghai Juhao; (vii) the franchisee shall purchase the products from Shanghai Juhao for at least RMB 4,000 every two months; (viii) the franchisee shall sell the products (or provide services) at the price specified by Shanghai Juhao; (ix) the franchisee shall not transfer the operation right without authorization of Shanghai Juhao, and shall not conduct business beyond its authorized territory (the area within 1.5 km radius of the address of the franchisee); (x) the franchisee will receive a 20% discount of the retail price of the products sold directly on the LHH mall members; and (xi) the term of the agreement is usually one year subject to renewal.

 

Third-party Merchants. We hold an EDI certificate approved by Shanghai Bureau of Communication Management pursuant to the requirement of the Ministry of Industry and Information Technology of the People’s Republic of China (“MIIT”), which allows our online shopping mall to accept third-party platforms and companies to open their stores on our platform and to enrich the product categories of our shopping mall, and give consumers more choices. The material terms of the Juhao Mall Marketplace and Service Agreement for third party stores in Juhao Mall with such store owners include: (i) the third party store/merchant is responsible for settling stores, sales, inventory management, express transportation and after-sales services and Shanghai Juhao will provide assistance and charge relevant service fees; (ii) the merchant is responsible for the sales of its products in its online store, and the sales price shall be determined by the merchant, but shall not be lower than the minimum price agreed by the parties; (iii) if the merchant’s customers make payment through Shanghai Juhao’s online platform, Shanghai Juhao is obliged to pay the received payment to the merchant every month according to the payment method agreed in the agreement; (iv) if the customer finds that the product has shortage, defective or damage, or the variety, model, specification, color, quantity, shelf life and quality of the products is inconsistent with the order, he/she may reject the product and the merchant shall timely reissue or replace the product; (v) the merchant guarantees that the quality of the products it sells has met the national or international standards and met the general performance and use requirements of such product; (vi) the merchant guarantees to Shanghai Juhao that there is no dispute with any third party on intellectual property rights and other rights of the products sold on Juhao’s platform; (vii) the merchant shall provide after-sale service and support for the products that it sold; (viii) Shanghai Juhao charges a fix service fee equals to 5% of the merchant’s store revenue and will also charge a performance fee between 0-5% based upon the monthly performance of the merchant store, i.e. the higher the sales reaches, the lower performance fee will apply and it will be no performance fee if the sales reaches RMB 100,000 in such month; and (ix) the term of the agreement is usually one year subject to renewal..

 

Live streaming marketing. We have started to use the most popular online sales model in recent days, Live Streaming/Broadcasting Marketing. We train our authorized retail store owners to become live streamers participating in the live online broadcasting to market and sell their products. In addition, we constantly look for professional multi-channel network (MCN) agencies to work with their Key Opinion Leaders (KOLs) to promote our products through live streaming on popular channels such as TikTok live, Kuaishou live and Taobao live.

 

Sales of Products

 

We have adopted three complementary sales formats on our internet platform for health and nutritional supplements, household products and cosmetics, which are the main products sold in our mall: curated sales, series sales and flash sales, pursuant to which we either sell products directly to customers as a principal or act as a service provider for third-party merchants who sell products on our internet platform. We provide our customers with the same shopping experience regardless of whether the products are sold by us or by third-party merchants.

 

Curated sales. We believe the curated sales format embraces value, quality and convenience for our customers and enhances our trendsetting image. We curate and recommend a carefully selected collection of branded products for a limited period of time at attractive prices. We carefully select popular cosmetic products that primarily appeal to females. We select and update the products for curated sales every day.

 

Series sales. In addition to the curated sales, we also use our internet platform to produce series sales models that conform to the trend, festivals and hot topics. We have selected multi category products in line with the theme in the series of topics, where consumers can compare and purchase through brand, price, scope of application and other parameters. We create topics and shopping scenes, so as to guide consumers to buy the products here. We collaborate with an extensive range of international and domestic suppliers and third-party merchants, who offer diversified and branded beauty and health and nutritional supplements.

 

Flash Sales. Our flash sales format features virtual stores of selected third-party merchants. Our flash sales products are selected from products sold under our own brand or third-party merchant products. At least four products are sold with large discount and limited quantity every day. Through the flash sales, we can increase the attention and stickiness of potential and existing consumers to our platform, and can also promote the products and reduce the backlog risk for those high inventory products. The third party merchants need to register and reserve the spots for the flash sales with us in advance and we will arrange the products to be sold by flash sales according to the recent sales data for various products and their categories on the platform, so that the selected products can achieve best sales and recognition by the customers.

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Products Offerings

 

Product Categories

 

We offer high quality and affordable products. The following table illustrates the categories of products we sell on our platform:  

  

Product Category Product Description
   
Health and nutritional supplements and foods Products that regulate immune system, bone health products, beauty and beauty supplements
Cosmetics Lipstick, foundation, cream, eyebrow pencil, makeup remover, lip enamel, eye shadow, mascara, eye liner
Skin care Eye cream, eye mask, sunscreen cream, skin cream, moisturizing water, lotion, hand cream, cleansing cream, face cream, essence, facial mask
Body Care Body wash, shampoo, hair conditioner, hand sanitizer, essential oil, toothpaste, mouthwash, essential oil soap, styling gel
For baby and children Lip balm, baby massage oil, moisture cream, shower gel, shampoo, hand sanitizer, baby toothpaste, diaper, baby soap
Washing items Detergent, washing powder, washing tablet, washing liquid, kitchen cleaner, soap, pipe dredger
Fragrances Traditional herbal lotion, perfume for men and women, fragrant ball, air purifying box
Food Fruits, vegetables, snacks, roasted sunflower seeds and nuts, biscuits and pastries, health foods, beverages, wines, prepared products, kitchen seasoning, dry grain and oil
Electronics Large electronic appliances, home appliances, kitchen appliances, cosmetic electronic appliances
Apparel Men’s and women’s clothes, men’s and women’s shoes, men’s and women’s bags, suitcases and accessories
Household Products Home textile, home decoration, maternal and infant products, kitchenware, daily life necessities, cosmetic products

  

We also sell the following products under our own brands

 

Product Category Product Description
   
Skin care Facial mask
Body Care Body wash, shampoo, hair conditioner
For baby and children Lip balm, baby massage oil, moisture cream, shower gel, shampoo, hand sanitizer, baby toothpaste, diaper, baby soap
Food Roasted seeds and nuts, beverages, prepared products
Electronics Home appliances
Apparel Suitcases and accessories
Household Products Daily life necessities

  

Exclusive Products

 

To enhance consumers’ attraction to our product offerings and online shopping mall, we enter into exclusive arrangements from time to time with certain manufacturers and suppliers to offer exclusive products, including products under our owns brand names on our platform. In addition, through exclusive arrangements with suppliers, we are able to offer selected SKUs and sets of cosmetic products under popular brands exclusively on our platform, such as selected SKUs and sets of cosmetic products under the FRUITY brand of Longrich Group Co., Ltd, a related party. We do not substantially depend on any of our exclusive products suppliers.

 

Customers

 

Our large, engaged and loyal customer base is the key to our success. The loyalty of our customer base is demonstrated by the repeat purchase rates. In the past three years, the number of our repeat customers has grown greatly every year. In 2017, there were 10,728 customers placed orders on our platform, of which 6,570 or 61.24% are repeat customers. In 2018, there were 16,724 customer-placed orders on our platform, of which 10,976 or 65.63% are repeat customers. In 2019, there were 56,516 customer-placed orders on our platform, of which 29,393 or 52.01% are repeat customers. During the six month period ended June 30, 2020, there were 50,511 customer-placed orders on our platform, of which 24,115 or 47.74% are repeat customers. In 2018, the number of repeat customers increased by 67.06% compared with 2017, and in 2019, the number of repeat customers increased by 167.8% compared with 2018. If a customer returns to our platform and purchase from us within 30 days from his/her previous purchase, it is considered as a repeat customer.

 

Marketing

 

We believe that the most efficient form of marketing for our business is to continuously roll out creative and cost-efficient marketing campaigns to establish our brand image as a trendsetter for healthy products. These marketing campaigns promote word-of-mouth referrals and enhance repeat customer visits to our internet platform. We also use live streaming marketing and self-media platform marketing such as our WeChat public information release account to communicate with our customers and issue promotions and products information. We have entered into a marketing and promotion agreement with a network advertising and promotion company in the PRC to promote our products and platform. As a result, we have been able to build a large, engaged and loyal customer base with relatively low customer acquisition cost. Our cost-effective marketing campaigns have allowed us to have relatively low marketing expenses.

 

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As part of our viral marketing strategy, we offer various incentives to our existing customers in order to increase their spending and loyalty. Our customers can earn cash coupons for eligible purchases and become VIP members by registered their information with us on our platform, which status offers them additional benefits such as cash coupon rewards, exclusive products and free samples. We offer gifts and lucky draw promotions on our internet platform. Our customers can also earn cash coupons for successful referrals of new members and customers. In addition, we conduct online advertising via search engines, portals, advertising networks, video sharing websites, and social networking and microblogging sites, we encourage our customers to share their shopping experiences with us through social media and networking websites in China.

 

Our Internet Platforms