MERCARI COMMUNICATIONS GROUP, LTD. (OTCMKTS:MCAR) Files An 8-K Entry into a Material Definitive Agreement
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF
ASSETS
On December 12, 2017, we entered into and closed a share exchange
agreement, or the Share Exchange Agreement, with AiXin (BVI)
International Group Co., Ltd. a British Virgin Islands
corporation (AiXin BVI), and Quanzhong Lin, the sole
stockholder of AiXin BVI (the AiXin BVI Stockholder), to which we
acquired 100% of the outstanding capital stock of AiXin BVI in
exchange for 227,352,604 shares of our common stock (the Share
Exchange or the AiXin Acquisition). The foregoing description of
the terms of the Share Exchange Agreement is qualified in its
entirety by reference to the provisions of the Share Exchange
Agreement filed as Exhibit 2.1 to this report, which are
incorporated herein by reference. After giving effect to the
Share Exchange, we had outstanding 317,988,089 shares of common
stock.
As a result of the Share Exchange, AiXin BVI became our
wholly-owned subsidiary, and we now own all of the outstanding
shares of HK AiXin International Group Co., Limited, a Hong Kong
limited company (AiXin HK), which in turn owns all of the
outstanding shares of Chengdu AiXin Zhonghong Biological
Technology Co., Ltd., a Chinese limited company (AiXin
Zhonghong), which markets and sells innovative, premium-quality
nutritional products in Chengdu, China.
AiXin BVI was incorporated on September 21, 2017 to serve as a
holding company and AiXin HK was established in Hong Kong on
February 25, 2016 to serve as an intermediate holding company.
AiXin Zhonghong was established in the PRC on March 4, 2013, and
on June 1, 2017 the local government of the PRC issued a
certificate of approval regarding the foreign ownership of AiXin
Zhonghong by AiXin HK. Neither AiXin BVI nor AiXin HK had
operations prior to December 12, 2017.
Prior to the AiXin Acquisition, Quanzhong Lin, our President and
Chief Executive Officer, owned all of the outstanding shares of
AiXin BVI and 29,521,410 shares of our common stock,
approximately 65% % of the outstanding shares of Mercari
Communications Group, Ltd. As a result of the Share Exchange, Mr.
Lin now owns 256,874,014 shares of our common stock,
approximately 80.78% of our outstanding shares, after giving
effect to certain other issuances described under the caption
Market for Registrants Common Equity and Related Stockholder
Matters.
For accounting purposes, the acquisition has been accounted for
as a reverse acquisition and has been treated as a
recapitalization of Mercari Communications Group, Ltd. effected
by a share exchange, with AiXin BVI as the accounting acquirer.
Since neither AiXin BVI nor AiXin HK had operations prior to
December 12, 2017, the historical financial statements of AiXin
Zhonghong are now the historical financial statements of the
registrant, Mercari Communications Group, Ltd., and have been
included in Item 9.01(a) of this report. The assets and
liabilities of AiXin Zhonghong have been brought forward at their
book value and no goodwill has been recognized.
FORM 10 DISCLOSURE
As disclosed elsewhere in this report, on December 12, 2017, we
acquired AiXin BVI to the Share Exchange Agreement Item 2.01(f)
of Form 8-K states that if the registrant was a shell company
like we were immediately before the AiXin Acquisition, then the
registrant must disclose the information that would be required
if the registrant were filing a general form for registration of
securities on Form 10. Accordingly, we are providing below the
information that would be included in a Form 10 if we were to
file a Form 10. Please note that the information provided below
relates to the combined enterprises after the AiXin Acquisition,
except that information relating to periods prior to the date of
the AiXin Acquisition only relate to Mercari Communications
Group, Ltd, unless otherwise specifically indicated.
BUSINESS
Overview
We, through our indirectly wholly owned subsidiary, AiXin
Zhonghong, market and sell innovative, premium-quality
nutritional products in Chengdu, China. The products we market
and sell are manufactured by unaffiliated parties. We currently
offer 20 products, including Oleesa Milk Powder, CO Q10, D-Ribose
Powder, and other nutritional supplements. We offer these
products directly to our clients at events we organize and
sponsor, at which our nutritional consultants/counselors and, on
occasion, representatives of the manufacturer promote the
products and discuss the benefits derived from using the
products. We also rely on client recommendations to market and
sell products and offer discounts to clients who purchase
significant quantities of products for the purpose of marketing
and selling the products to their friends, family members and
others. We also offer clients who purchase significant quantities
of products paid vacations, travel and other benefits. The
products can be purchased at the events held by us, as well as
any of the fourteen sales offices we maintain in Chengdu.
Before promoting a product, we research the product to determine
whether the manufacturer is reputable and delivers unadulterated
products, and whether there is a basis for claiming the product
can deliver the benefits claimed. We do not independently test
products to determine efficacy. Rather we rely upon third party
reports and the information we can uncover in scientific and
other literature. Once we determine to offer a product and
believe that it will be purchased by our clients, we will
purchase a bulk quantity, enabling us to acquire products at
prices below those which are available to smaller distributors.
We offer our clients personalized services, including educating
them through seminars conducted by our nutritional counselors on
the benefits of the products we distribute, maintaining sales
offices at which our clients can engage in recreational and
social activities where the products we offer are prominently
displayed and can be picked up, conducting promotions with
representatives of the manufacturers of the products, and
encouraging customer loyalty with incentives such as rewards and
discounts based upon the quantities of products purchased for
individual use or sold to others. We believe that our marketing
strategy which emphasizes ongoing personal contact and support,
coaching and educating our clients as to the benefits of the
products we distribute is ideally suited for selling nutritional
products and builds confidence in and customer loyalty to our
company and the products we sell. We believe that this is
particularly the case in China where the middle class is growing
in size yet, due to lax enforcement and limited laws and
regulations, many manufacturers and distributors, particularly
those of new and innovative products, are not trusted by
consumers. Thus, although our focus is our clients, the
manufacturers we work with get the benefit of the trust our
clients have placed in us. Consequently, although certain of the
products we distribute are produced by a variety of
manufacturers, we require the manufacturer or distributor from
which we purchase a product to provide us with exclusive
distribution rights within a prescribed territory or package the
product so that it is distinct from products sold to our
competitors.
The chart below presents our corporate structure:
| Mercari Communications Group, Ltd. (a Colorado corporation) | |
| 100% | |
| AiXin (BVI) International Group Co., Ltd (BVI) | |
| 100% | |
| HK AiXin International Group Co., Limited (HK) (AiXin HK) | |
| 100% | |
|
Chengdu Aixin Zhonghong Biological Technology Co., Ltd (PRC) (AiXin Zhonghong) |
Our executive offices are located at Hongxing International
Business Building 2, 14th FL, No. 69 Qingyun South
Ave., Jinjiang District, Chengdu City, Sichuan Province, China,
and our telephone number is 86-400-6260600.
Products We Offer
We offer a variety of nutritional products, which change over
time. In 2015 we offered 8 products; in 2016 we offered 11
products, and we currently offer 20 products. Our most popular
products are Oleesa Milk Powder, CO Q10 and D-Ribose Powder. We
source and purchase all our products through third party
distributors and manufacturers which we carefully research before
determining to distribute a product.
We study the attributes of new products introduced to us from
time to time and after understanding the benefits which they
claim to offer we organize a group of professionals to experience
and evaluate the products. After a series of detailed
evaluations, we recommend the products to our clients generally
at direct marketing events organized by us. This process ensures
our clients get safe, quality products that suit their personal
needs and upon which they can rely.
Marketing and Sales Strategy
We market and sell the products we offer directly to our clients,
primarily utilizing person-to-person marketing to promote and
sell our products. These personal marketing efforts are supported
by various mediums, including our marketing content, educational
events, open facilities and social business solutions. We believe
our marketing strategy is effective because:
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our nutritional counselors can educate consumers about our products face-to-face, which we believe is more effective for differentiating our products than using traditional mass-media advertising, particularly when introducing a new product to an unsophisticated group of consumers in an environment where it is difficult to obtain accurate, reliable product information; |
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it provides for actual product demonstrations and trial by potential consumers; |
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it allows our nutritional counselors to provide personal testimonials of product efficacy; and |
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as compared to other marketing methods, our nutritional counselors have the opportunity to provide consumers higher levels of service and encourage repeat purchases. |
We market the products we offer to two types of clients:
individuals who buy our products directly from us primarily for
personal or family consumption; and individuals who personally
buy, use and distribute our products to new clients.
We offer those clients who purchase for their own personal use
high-quality, innovative products that provide demonstrable
benefits. We attempt to obtain detailed personal information
about each of our clients so that we can direct each of them to
products that best suit their needs and begin to distribute new
products that will appeal to our clients. We track the purchases
made by every individual who purchases products directly from us.
Based upon their purchasing history, we believe a significant
majority of our clients purchase the products we sell primarily
for personal or family consumption and are not actively pursuing
the opportunity we offer to generate income by marketing and
reselling products.
Our strategy for increasing the number of clients interested in
selling the products we offer to others and developing new
clients, and who demonstrate the ability to sell our products to
others, is to provide them with compensation, often in the form
of premiums such as paid travel or vacations, or quantity
purchase discounts and other incentives. We track the amount of
products purchased and frequency of purchases by those clients
who sell the products we offer to others.
We offer our clients a customer satisfaction guarantee. Under
this guarantee, any customer who is not satisfied with a product
we offer for any reason may return it or exchange it for another
product we offer based on customers claim and managements
approval.
Because of restrictions on direct selling and multi-level
commissions in Mainland China, we have structured our business
model based on several factors: the guidance we have received
from government officials, our interpretation of applicable
regulations, our understanding of the practices of other
international direct selling companies operating in Mainland
China, and our understanding as to how regulators are
interpreting and enforcing the regulations.
Competition
Products
The category of nutritional products is very competitive and
there are various channels through which such products are
marketed to consumers, including direct selling, through the
internet, in specialty retailers and the discounted channels of
food, drug and mass merchandise. Aixin Zhonghong seeks to
differentiate itself from this group by being familiar with its
clients and providing a personalized sales experience, and
focusing on after-sale services where sales employees focus on
the consultative sales process through product education and the
frequent contact and support that many sales employees have with
the clients. From a competitive standpoint, there are many
providers and sales outlets of nutritional products in China. We
believe that none have effectively combined the product, personal
coaching, education and the product access provided by our sales
employees and, further, that these efforts are compounded by the
peer pressure our clients generate through our organized sales
presentations.
Our Competitive Advantages / Strengths
Client Base
We have clients who primarily join for a discount on products
they consume and introductions to new products they might desire,
along with clients who also choose to profit by reselling our
products. As of September 30, 2017, we had 3,000 existing
clients, which include preferred clients, who purchase products
for personal and family use, and client distributors, who
purchase products for their own use and for distribution to
others, and more than 7,000 potential clients (defined as someone
who had attended an event or purchased two products within the
past two months).
People become Aixin Zhonghong clients for a number of reasons.
Many first start out as consumers looking to improve their health
through better nutrition. Some join simply to receive a better
price on products they and their families can consume and enjoy,
while others join so they can resell our products and generate
income.
Competitive Advantages
| – |
We study the attributes of new products which become available and after researching the benefits which they claim to offer we organize a group of professionals to experience and evaluate the products. Only after we have determined that a product is safe, manufactured in conformance with appropriate standards, and has a basis for the claims made, do we recommend a product to our clients. This process ensures our clients get safe, quality products that suit their personal needs and upon which they can rely. |
| – |
Our clients vary greatly in age, background, health and physical condition. We organize activities and events so that we might learn each clients family background, physical condition and personal health needs, and categorize them into different groups for different products. For example: cardiovascular and cerebrovascular group, bones and joints, heart health etc. |
| – |
We also focus on after-sale services. Due to the large number of clients that are in the middle-to-older aged groups, we have the ability to have products delivered to our clients homes by sales personal who can explain the product and demonstrate its use. Our sales personnel are available on a 24 hour basis for questions from clients. Once a client purchases a product, our in-house health advisors will contact him or her to give appropriate professional advice and consultation both over the phone, of face-to-face if needed. |
Our Strategies
| – |
On-site Publicity. We have rooms available at our 14 sales offices throughout Chengdu at which our clients can gather to play cards, enjoy afternoon teas, and engage in other activities. The products we distribute are displayed at each of these sites along with appropriate literature and can be purchased by clients and visitors. |
| – |
Marketing Events. We host large-scale marketing events for approximately 1000 participants once or twice every month and conduct events for approximately 500 participants 4-5 times every month. These events are held at our premises or at restaurants and catering halls. During each event products are demonstrated and our personnel explain the benefits of the products and, if available, representatives of the manufacturer or distributor are on hand to respond to questions or make a presentation. We use holidays, such as National Day, New Year Day, and Mid-Autumn Day as an opportunity to host large-scale themed activities or events appropriate for the season. |
| – |
One-on-one marketing. Sales people will explain and market products to clients one-on-one at our facilities, during marketing events or at a clients home or office, which gives a personal touch and more detailed explanation of products. |
Seasonality
In general, there is no seasonality in the sales of nutrition
products.
Regulation
General
The distribution of nutritional products is subject to many laws,
governmental regulations, administrative determinations and
guidance and similar constraints. Such laws, regulations and
other constraints exist at the national, provincial and or local
levels, including regulations pertaining to: (1) the formulation,
manufacturing, packaging, labeling, distribution, importation,
sale and storage of products; (2) product claims and advertising,
including direct claims and advertising by us, as well as claims
and advertising by manufacturers and distributors of the products
we offer, for which we may be held responsible; and (3) taxes.
Products
Prior to commencing manufacture or distribution of a product, the
manufacturer or distributor may be required to obtain an
approval, license or certification from the national, provincial
or local government in China. Although we attempt to determine
whether all regulatory requirements have been met, we cannot
monitor the manufacture of products and cannot be certain that
all applicable regulations are satisfied.
Regulation of Nutritional Products.
Dietary supplements are subject to regulation by the China Food
and Drug Administration. Mainland China has highly restrictive
nutritional supplement product regulations. Products marketed as
health foods are subject to extensive laboratory and clinical
analysis by government authorities, and the product registration
process in Mainland China generally takes one to two years, but
may be substantially longer. We market both health foods and
general foods in Mainland China. As a secondary distributor, we
are not in a position to obtain any required license, though we
may be held liable if we were to distribute a product which had
not been properly tested and registered with the authorities.
There is some risk associated with the common practice in
Mainland China of marketing a product as a general food while
seeking health food classification. If government officials feel
the categorization of a product distributed by us is inconsistent
with product claims, ingredients or function, this could end or
limit our ability to market such products.
As the middle class has grown, the number of manufacturers and
distributors of nutritional supplements in China has dramatically
increased. Many of these enterprises have often ignored
applicable laws and distributed adulterated or inferior products.
We believe this has created a marketing opportunity which we have
tried to exploit as a trusted source of products on which our
clients can rely. To the extent our reputation results from
reviewing and testing products prior to distributing them, and
then distributing only products determined to be safe, it is
incumbent upon us to ensure that the manufacturers and
distributors upon which we rely are trustworthy. A failure by any
of these third parties could cause substantial damage to our
reputation, business and financial results.
Direct Selling Regulations
Direct selling is regulated by various national, provincial and
local government agencies in China. These laws and regulations
are generally intended to prevent fraudulent or deceptive
schemes, including pyramid schemes, which compensate participants
primarily for recruiting additional participants without
significant emphasis on product sales to consumers.
We believe we do not engage in direct selling activities subject
to regulations prevalent in China. Nevertheless, the laws and
regulations governing direct selling may be modified or
reinterpreted from time to time, which may cause us to change our
sales compensation and business models. In almost all of our
markets, regulations are subject to discretionary interpretation
by regulators and governmental authorities. There is often
ambiguity and uncertainty with respect to the implication of
direct selling and anti-pyramiding laws and regulations.
The regulatory environment in Mainland China is particularly
complex and continues to evolve. Mainland Chinas direct selling
and anti-pyramiding regulations contain various restrictions,
including a prohibition on the payment of multi-level
compensation. The regulations are subject to discretionary
interpretation by provincial and local level regulators as well
as local customs and practices.
Employees
As of September 30, 2017 we had approximately 78 full-time
employees, of which approximately 41 were sales personnel and 37
are in public relations and sales support.
Corporate History
Mercari Communications Group, Ltd., the registrant, was
incorporated under the laws of the State of Colorado on December
30, 1987. From 1988 until early in 1990, Mercari was engaged in
the business of providing educational products, counseling,
seminar programs, and publications such as newsletters to adults
aged 30 to 50. Mercari registered its common stock with the
Securities and Exchange Commission (the SEC) under the Exchange
Act in 1988. Mercaris business failed in early 1990. Mercari
ceased all operating activities during the period from June 1,
1990 to August 31, 2001 and was considered dormant. During this
period, the registrant failed to file required reports with the
SEC under the Exchange Act.
During 2001, Mercari was reactivated. Mercari has filed all
delinquent documents with the Colorado Secretary of State and
federal and state tax authorities, and all reports required under
the Exchange Act since 2002 and is now current in its reporting
obligations under the Exchange Act.
From November 30, 2001 to March 1, 2004, Mercari was in the
development stage.
On November 9, 2009, Mercari entered into a Stock Purchase
Agreement (the Stock Purchase Agreement) with Algodon Wines
Luxury Development Group, Inc. or Algodon (formerly Diversified
Private Equity Corporation or DPEC), a then privately-held
Delaware corporation, and Kanouff, LLC (KLLC) and Underwood
Family Partners, Ltd. (the Partnership), of which KLLC and the
Partnership were the majority shareholders of the Company (the
Stock Purchase). In connection with the Stock Purchase, Algodon
purchased and the Company sold, an aggregate of 43,822,001 shares
of common stock for a purchase price of $43,822, or $0.001 per
share. In addition, Algodon purchased 200 shares of common stock
from KLLC and 200 shares of common stock from the Partnership for
a purchase price of $180,000 payable to each selling shareholder.
Immediately following the closing of the transactions
contemplated by the Stock Purchase Agreement, Algodon owned an
aggregate of 43,822,401 shares of our common stock, or
approximately 96.5% of our outstanding shares.
During each of the years since Mercari was reactivated, we had no
revenue and had losses approximately equal to the expenditures
required to reactivate and comply with filing and reporting
obligations. Expenditures have been paid by Mercari from capital
contributions and loans made by Mercaris principal stockholders
and entities controlled by Mercaris directors.
On January 20, 2017, Algodon sold all 43,822,401 shares of our
common stock, approximately 96.5% of our outstanding shares of
common stock as part of the transactions described under the
caption Security Ownership of Beneficial Owners and Management
and Related Stockholder Matters Change In Control, which resulted
in a change in control of our company.
Prior to the AiXin Acquisition on December 12, 2017, Mercari was
a development stage company with nominal assets and without
employees, and therefore was considered a shell company, as that
term is defined in Rule 12b-2 under the Exchange Act. As a result
of the AiXin Acquisition, we are no longer a shell company.
RISK FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below,
together with all of the other information included in this
report, before making an investment decision. If any of the
following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case,
the trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks Related to Our Business
We require significant investment to expand our
business.
We will require significant expenditures in the foreseeable
future to fund our ongoing operations and future growth. We
intend to fund our expenditures and growth out of internal
sources of liquidity and/or through additional financing from
external sources. Our ability to obtain external financing in the
future at a reasonable cost is subject to a variety of
uncertainties, including:
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our future financial condition, results of operations and cash flows; |
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the condition of the global and domestic financial markets; and |
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changes in the monetary policy of the PRC government with respect to bank interest rates and lending practices. |
If we require additional funds and cannot obtain them on
acceptable terms when required or at all, we may be unable to
fulfill our working capital needs, upgrade our existing
facilities or expand our business. These factors may also prevent
us from entering into transactions that would otherwise benefit
our business or implementing our future strategies. Any of these
factors may have a material adverse effect on our business,
financial condition and results of operations.
We incurred a substantial net loss in 2016 and may not be
able to continue to operate as a going concern.
We suffered net losses of $2.08 million for 2016 and $0.92
million for the nine months ended September 30, 2017 and had a
shareholders deficit of $2.02 million as of December 31, 2016 and
of $3.05 million as of September 30, 2017. The report of our
independent registered public accountants on our financial
statements as of and for the year ended December 31, 2016 states
that these factors raise uncertainty about our ability to
continue as a going concern.
We face intense competition, and if we do not compete
successfully against existing and new competitors, we may lose
market share and suffer losses.
We face intense competition. We believe that our ability to
compete depends upon many factors both within and beyond our
control. Some of our current and potential competitors may have
greater financial, marketing, user traffic and other resources
than we have. Certain of our competitors may be able to devote
greater resources to marketing and promotional campaigns and
devote substantially more resources to website and system
development than us. Increased competition may reduce our market
share and require us to increase our marketing and promotional
efforts, which could negatively affect our operating margins or
force us to incur losses. There can be no assurance that we will
be able to compete successfully against current and future
competitors, and competitive pressures may have a material
adverse effect on our business, prospects, financial condition
and results of operations.
We may have difficulty in managing our future growth and
any associated increased scale of our operations.
We expect to expand through both organic growth and acquisitions.
Our future expansion may place a significant strain on our
managerial, operational, technical and financial resources. In
order to better allocate our resources to manage our growth, we
must hire, recruit and manage our workforce effectively and
implement adequate internal controls in a timely manner. If we
are unable to effectively manage our growth and the associated
increased scale of our operations, our business, financial
condition and results of operations could be materially and
adversely affected.
Any damage to our reputation or our failure to enhance
our recognition as a distributor of quality nutritional products
may materially and adversely affect our business, financial
condition and results of operations.
We believe that the market recognition and reputation we have
achieved have significantly contributed to the success of our
business. Maintaining and enhancing our reputation is critical to
our success and ability to compete. Many factors, some of which
are beyond our control, may negatively impact our reputation,
such as:
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any failure to maintain a pleasant and reliable experience for clients; |
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any adverse reaction of one or more of our clients to any product we distribute, including reactions caused by the delivery of inferior or adulterated products by one of our suppliers; and |
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any negative publicity about us, including any actual or perceived product quality problems. |
If we are unable to maintain a good reputation, further enhance
our recognition as a distributor of quality nutritional products,
continue to develop our user loyalty and increase positive
awareness of the products we offer, our results of operations may
be materially and adversely affected.
Changes in economic conditions and consumer confidence in
China may influence the market for nutritional products, consumer
preferences and spending patterns.
Our business and revenue growth primarily depend on the size of
the market for nutritional products in China. As a result, our
revenue and profitability may be negatively affected by changes
in national, regional or local economic conditions and consumer
confidence in China. In particular, as we focus on our expansion
in metropolitan markets, where living standards and consumer
purchasing power are relatively high, we are especially
susceptible to changes in economic conditions, consumer
confidence and customer preferences of the urban Chinese
population. External factors beyond our control that affect
consumer confidence include unemployment rates, levels of
personal disposable income, national, regional or local economic
conditions, and acts of war or terrorism. Changes in economic
conditions and consumer confidence could adversely affect
consumer preferences, purchasing power and spending patterns. A
decrease in overall consumer spending as a result of changes in
economic conditions could adversely affect our sales of
nutritional supplements and negatively impact our profitability.
In addition, acts of war or terrorism may cause damage to our
facilities, disrupt the supply of the products we market and sell
or adversely impact consumer demand. Any of these factors could
have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to timely identify or otherwise
effectively respond to changing customer preferences, and we may
fail to optimize our product offering and inventory
position.
The market for nutritional products in China is rapidly evolving
and is subject to rapidly changing customer preferences that are
difficult to predict. Our success depends on our ability to
anticipate and identify customer preferences, and adapt our
product selection to meet these preferences. In particular, we
must optimize our product selection and inventory positions based
on sales trends. We cannot provide assurance that our product
selection will accurately reflect customer preferences at any
given time. If we fail to accurately anticipate either the market
for our products or customers purchasing habits or fail to
respond to customers changing preferences promptly and
effectively, we may not be able to adapt our product selection to
customer preferences or make appropriate adjustments to our
inventory positions, which could significantly reduce our revenue
and have a material adverse effect on our business, financial
condition and results of operations.
We market a relatively few nutritional products from a
limited number of manufacturers.
We currently offer only 20 nutritional products from a limited
number of manufacturers. Unless we are able to significantly
increase the number of nutritional and other products we market
and sell and the number of manufacturers who distribute their
products through our distribution channel, we will be unable to
increase our revenues and become profitable.
Our business depends substantially on the continuing
efforts of our executive officers and key employees, and our
business may be severely disrupted if we lose their
services.
We currently depend on the continued services and performance of
the key members of our management team, in particular Mr.
Quanzhong Lin, our President and Chief Executive Officer. Mr. Lin
is our founder and his leadership has played an integral role in
our growth. Our future success depends substantially on the
continued efforts of our executive officers and key employees. If
one or more of our executive officers or key employees were
unable or unwilling to continue their service, we might not be
able to replace them easily, in a timely manner, or at all, and
our business may be severely disrupted, our financial conditions
and results of operations may be materially and adversely
affected and we may incur additional expenses to recruit, train
and retain personnel.
Our key executives do not devote full time to our
operations.
Mr. Quanzhong Lin, our President and Chief Executive Officer, is
involved in a number of businesses and does not devote full time
to our operations. Our positive reputation is derived from Mr.
Lins business success and standing in the community. If Mr. Lin
does not devote sufficient attention to our business, our
operations could suffer and our financial conditions and results
of operations may be materially and adversely affected. If Mr.
Lins other businesses should fail or if his reputation in the
community should be impaired, our business could suffer and our
financial conditions and results of operations may be materially
and adversely affected.
Some of the other businesses operated by Mr. Lin or his
affiliates may be deemed competitors of ours.
Mr. Quanzhong Lin is engaged in other businesses, such as the
retail pharmacies and internet marketing, which distribute
products which may be deemed competitive with products we
distribute. Should such businesses prove more successful than
ours, Mr. Lin could choose to focus his attention on such
business which could cause him to fail to devote sufficient
attention to our business, our operations could suffer and our
financial conditions and results of operations may be materially
and adversely affected
Our principal shareholder is not familiar with American
business practices.
Mr. Quanzhong Lin, our founder and principal shareholder, is a
citizen of the PRC and a successful entrepreneur in Chengdu. Mr.
Lin is not familiar with American business practices and is
heavily influenced by the business culture in the PRC. Certain
governmental entities pay bonuses or subsidies to individuals in
China whose companies become publicly traded in America and there
is a certain level of respect and prestige associated with being
the Chinese principal of a company which is publicly traded in
the U.S. Mr. Lins motivation for causing the business of AiXin
Zhongdong to become a part of a U.S. publicly-traded company may
differ from those of American entrepreneurs and his values may
cause him to operate the business differently than would an
American entrepreneur.
If we are unable to attract, train and retain qualified
personnel, our business may be materially and adversely
affected.
Our future success depends, to a significant extent, on our
ability to attract, train and retain qualified personnel,
particularly management, technical and marketing personnel with
expertise in nutritional products. Our sales and customer service
teams are critical to maintaining the quality of our services as
they frequently interact with our clients. We must continue to
attract qualified personnel at a fast pace to increase the number
of our clients and products we distribute. As we are still a
relatively young company, our ability to train and integrate new
employees into our operations may not meet the growing demands of
our business. If we are unable to attract, train, and retain
qualified personnel, our business may be materially and adversely
affected.
Our business, financial condition and results of
operations, as well as our ability to obtain financing, may be
adversely affected by the downturn in the global or Chinese
economy.
It is unclear whether the Chinese economy will resume its high
growth rate. There is considerable uncertainty over the long-term
effects of the expansionary monetary and fiscal policies that
have been adopted by the central banks and financial authorities
of some of the worlds leading economies, including the United
States. Economic conditions in China are sensitive to global
economic conditions, as well as changes in domestic economic and
political policies and the expected or perceived overall economic
growth rate in China.
The sale of nutritional products may be affected by economic
downturns. Our products may be viewed as discretionary by our
clients, who may choose to discontinue or reduce spending on such
products during an economic downturn. In such an event, our
ability to retain existing clients and increase or maintain our
sales will be adversely affected, which would in turn negatively
impact our business and results of operations.
Moreover, a slowdown or disruption in the global or Chinas
economy may have a material and adverse impact on financing
available to us. There is a risk that our business, results of
operations and prospects would be materially and adversely
affected by any global economic downturn or disruption or
slowdown of Chinas economy.
Future strategic alliances or acquisitions may have a
material and adverse effect on our business, reputation and
results of operations.
We may in the future enter into strategic alliances with various
third parties to further our business purposes from time to time.
Strategic alliances with third parties could subject us to a
number of risks, including risks associated with sharing
proprietary information, non-performance by the counter-party,
and an increase in expenses incurred in establishing new
strategic alliances, any of which may materially and adversely
affect our business. In addition, to the extent the strategic
partner suffers negative publicity or harm to their reputation
from events relating to their business, we may also suffer
negative publicity or harm to our reputation by virtue of our
association with such third parties, and we may have little
ability to control or monitor their actions.
In addition, although we have no current acquisition plans, if we
are presented with appropriate opportunities, we may acquire
additional assets, products, technologies or businesses that are
complementary to our existing business, including businesses that
are owned or controlled by Mr. Lin or his affiliates. Future
acquisitions and the subsequent integration of new assets and
businesses into our own would require significant attention from
our management and could result in a diversion of resources from
our existing business, which in turn could have an adverse effect
on our business operations. Acquired assets or businesses may not
generate the financial results we expect. Furthermore,
acquisitions could result in the use of substantial amounts of
cash, potentially dilutive issuances of equity securities, the
occurrence of significant goodwill impairment charges,
amortization expenses for other intangible assets and exposure to
potential unknown liabilities of the acquired business. Moreover,
the costs of identifying and consummating acquisitions may be
significant. In addition to possible shareholders approval, we
may also have to obtain approvals and licenses from the relevant
government authorities in the PRC for the acquisitions and to
comply with any applicable PRC laws and regulations, which could
result in increased costs and delay.
If we or our PRC subsidiaries acquire any domestic companies in
China, such acquisition will be subject to PRC laws and
regulations on foreign investment. We and our PRC subsidiaries
are restricted or prohibited from directly acquiring interests in
companies in certain industries under PRC laws and regulations.
Our consolidated affiliated entities outside of the PRC are not
subject to PRC laws and regulations on foreign investment and may
acquire PRC companies operating in industries where foreign
investments are restricted or prohibited. However, there are
uncertainties with respect to the interpretation and application
of PRC laws and regulations regarding indirect foreign
investments in such industries.
We have limited business insurance coverage.
Insurance companies in China currently do not offer as extensive
an array of insurance products as insurance companies do in more
developed economies. We do not have any business liability or
disruption insurance to cover our operations. 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. Any uninsured occurrence of business disruption 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.
Risks Related to Doing Business in China
The PRC government exerts substantial influence over the
manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese
economy through regulation and state ownership. Our ability to
operate in China may be harmed by changes in its laws and
regulations, including those relating to taxation, import and
export tariffs, environmental regulations, land use rights,
property and other matters. We believe that our operations in
China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local
governments of the jurisdictions in which we operate may impose
new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and
efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions
in the future, including any decision not to continue to support
recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of
economic policies, could have a significant effect on economic
conditions in China or particular regions thereof.
Uncertainties in the interpretation and enforcement of
PRC laws and regulations could limit the legal protections
available to you and us.
The PRC legal system is based on written statutes. Unlike common
law systems, it is a system in which legal cases have limited
value as precedents. In the late 1970s, 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
increased the protections afforded to various forms of foreign or
private-sector investment in China. Our PRC subsidiary is subject
to laws and regulations applicable to various PRC laws and
regulations generally applicable to companies in China. However,
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 involve
uncertainties.
From time to time, we may have to resort to administrative and
court proceedings to enforce our legal rights. However, since PRC
administrative and court authorities have significant discretion
in interpreting and implementing statutory and contractual terms,
it may be more difficult to evaluate the outcome of
administrative and court proceedings and the level of legal
protection we enjoy than in more developed legal systems.
Furthermore, the PRC legal system is based in part on government
policies and internal rules (some of which are not published in a
timely manner or at all) that may have retroactive effect. As a
result, we may not be aware of our violation of these policies
and rules until sometime after the violation. Such uncertainties,
including uncertainty over the scope and effect of our
contractual, property (including intellectual property) and
procedural rights, and any failure to respond to changes in the
regulatory environment in China could materially and adversely
affect our business and impede our ability to continue our
operations.
Changes in Chinas economic, political or social
conditions or government policies could have a material adverse
effect on our business and operations.
All of our assets and all of our clients are located in China.
Accordingly, our business, financial condition, results of
operations and prospects may be influenced to a significant
degree by political, economic and social conditions in China
generally and by continued economic growth in China as a whole.
Chinas economy differs from the economies of most developed
countries in many respects, including the level of government
involvement, level of development, growth rate, control of
foreign exchange and allocation of resources. Although the PRC
government has implemented measures since the late 1970s
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 PRC government. In addition, the PRC
government continues to play a significant role in regulating
industry development by imposing industrial policies. The PRC
government also exercises significant control over the PRC
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 Chinas economy has experienced significant growth over the
past decades, growth has been uneven, both geographically and
among various sectors of the economy, and may slow down in the
future. Some of the government 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. Any stimulus measures designed to
boost the Chinese economy may contribute to higher inflation,
which could adversely affect our results of operations and
financial condition. For example, certain operating costs and
expenses, such as employee compensation and office operating
expenses, may increase as a result of higher inflation.
If relations between the United States and China worsen,
investors may be unwilling to hold or buy our stock and our stock
price may decrease.
At various times during recent years, the United States and China
have had significant disagreements over political and economic
issues. Controversies may arise in the future between these two
countries. Any political or trade controversies between the
United States and China, whether or not directly related to our
business, could reduce the price of our common stock.
The slowing economic growth in China may assert a
negative impact on our operation and financial results.
According to several articles published by the Wall Street
Journal, CNN, and BBC News in January 2016, after experiencing
rapid growth for more than a decade, Chinas economy has been hit
by shrinking foreign and domestic demand, weak investment,
factory overcapacity and oversupply in the property market, and
has experienced a painful slowdown in the last two years. In
2015, Chinas economy grew by 6.9%, compared with 7.3% a year
earlier, marking its slowest growth in a quarter of a century. As
the government tried to shift the growth engine away from
manufacturing and debt-fueled investment toward the services
sector and consumer spending, the outlook of the Chinese economy
is uncertain.
In the next two to three years, Chinas growth performance could
deteriorate because of the overhang of its real estate bubble,
massive manufacturing overcapacity, and the lack of new growth
engines. The International Monetary Fund expected Chinas economy
to grow by 6.5% in 2017. If Chinas economy fails to grow as
previously expected, it may negatively affect our business
operations and financial results.
Under the EIT Law, we may be classified as a PRC resident
enterprise for PRC enterprise income tax purposes. Such
classification would likely result in unfavorable tax
consequences to us and our non-PRC shareholders and have a
material adverse effect on our results of operations and the
value of your investment.
Under the PRC Enterprise Income Tax Law, or the EIT Law, that
became effective on January 1, 2008, an enterprise established
outside the PRC with de facto management bodies within the PRC is
considered a resident enterprise for PRC enterprise income tax
purposes and is generally subject to a uniform 25% enterprise
income tax rate on its worldwide income. Under the implementation
rules to the EIT Law, a de facto management body is defined as a
body that has material and overall management and control over
the manufacturing and business operations, personnel and human
resources, finances and properties of an enterprise. In addition,
a circular, known as SAT Circular 82, issued in April 2009 and
amended in January 2014 by the State Administration of Taxation,
or the SAT, specifies that certain offshore incorporated
enterprises controlled by PRC enterprises or PRC enterprise
groups will be classified as PRC resident enterprises if the
following are located or resident in the PRC: senior management
personnel and departments that are responsible for daily
production, operation and management; financial and personnel
decision making bodies; key properties, accounting books, company
seal, and minutes of board meetings and shareholders meetings;
and half or more of the senior management or directors having
voting rights. Further to SAT Circular 82, the SAT issued a
bulletin, known as SAT Bulletin 45, which took effect in
September 2011, to provide more guidance on the implementation of
SAT Circular 82 and clarify the reporting and filing obligations
of such Chinese-controlled offshore incorporated resident
enterprises. SAT Bulletin 45 provides procedures and
administrative details for the determination of resident status
and administration on post-determination matters. Although both
SAT Circular 82 and SAT Bulletin 45 only apply to offshore
enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreign
individuals, the determining criteria set forth in SAT Circular
82 and SAT Bulletin 45 may reflect the SATs general position on
how the de facto management body test should be applied in
determining the tax resident status of offshore enterprises,
regardless of whether they are controlled by PRC enterprises, PRC
enterprise groups or by PRC or foreign individuals.
We are subject to the 25% enterprise income tax. However, since
all of our activities are in China, we do not believe AiXin
Zhonghong or our company meet all of the conditions to be
classified as a PRC resident enterprise., However, if we engage
in activities outside of Mainland China, the PRC tax authorities
may classify AiXin Zhonghong or our company as a PRC resident
enterprise, which would result in a number of unfavorable PRC tax
consequences. First, we or our offshore subsidiaries will be
subject to the uniform 25% enterprise income tax on our
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, although dividends paid by one PRC tax resident
enterprise to an offshore incorporated PRC resident enterprise
controlled by PRC enterprises or PRC enterprise groups should
qualify as tax-exempt income under the EIT Law and Bulletin 45,
we cannot assure you that dividends paid by our PRC subsidiary to
AiXin HK will not be subject to a 10% withholding tax, as the PRC
foreign exchange control authorities, which enforce the
withholding tax on dividends, and the PRC tax authorities have
not yet issued guidance with respect to the processing of
outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes but not
controlled by PRC enterprises or PRC enterprise groups.
Finally, dividends payable by us to our investors and gains on
the sale of our shares may be become subject to PRC withholding
tax.
We may not be able to obtain certain benefits under the
relevant tax treaty on dividends paid by our PRC subsidiaries to
us through AiXin HK.
We are a holding company incorporated under the laws of Colorado
and as such rely on dividends and other distributions on equity
from our PRC subsidiaries to satisfy part of our liquidity
requirements. to the EIT Law, a withholding tax rate of 10%
currently applies to dividends paid by a PRC resident enterprise
to a foreign enterprise investor, unless any such foreign
investors jurisdiction of incorporation has a tax treaty with
China that provides for preferential tax treatment. to a Notice
112 issued by the SAT in January 2008 and the Arrangement between
the Mainland China and the Hong Kong Special Administrative
Region on the Avoidance of Double Taxation and Prevention of
Fiscal Evasion, or the Double Taxation Arrangement (Hong Kong),
such withholding tax rate may be lowered to 5% if the PRC
enterprise is at least 25% held by a Hong Kong enterprise at all
times within the 12-month period immediately prior to
distribution of the dividends and is determined by the relevant
PRC tax authority to have satisfied other conditions and
requirements under the Double Tax Avoidance Arrangement (Hong
Kong) and other applicable PRC laws. to a SAT Circular 601 issued
by the SAT in October 2009, non-resident enterprises that cannot
provide valid supporting documents as beneficial owners may not
be approved to enjoy tax treaty benefits, and beneficial owners
refers to individuals, enterprises or other organizations which
are normally engaged in substantive operations. These rules also
set forth certain adverse factors on the recognition of a
beneficial owner. Specifically, they expressly exclude a conduit
company, or any company established for the purposes of avoiding
or reducing tax obligations or transferring or accumulating
profits and not engaged in actual operations such as
manufacturing, sales or management, from being a beneficial
owner. Whether a non-resident company may obtain tax benefits
under the relevant tax treaty will be subject to approval of the
relevant PRC tax authority and will be determined by the PRC tax
authority on a case-by-case basis. In June 2012, the SAT further
provides in an announcement that a comprehensive analysis should
be made when determining the beneficial owner status based on
various factors supported by documents including the articles of
association, financial statements, records of cash movements,
board meeting minutes, board resolutions, staffing and materials,
relevant expenditures, functions and risk assumption as well as
relevant contracts and other information. Our Hong Kong
subsidiary has not applied for the approval for a withholding tax
rate of 5% from the local tax authority as our PRC subsidiaries
have not paid dividends due to their loss-making status in the
past and will not be able to pay dividends in the future until
they have achieved accumulated profits. We plan to have our Hong
Kong subsidiary assume some managerial and administrative
functions, as well as conduct other business functions in the
future. Once we implement such a plan, we do not believe that our
Hong Kong subsidiary will be considered a conduit company as
defined under SAT Circular 601. However, our Hong Kong subsidiary
as currently situated may be considered a conduit company and we
cannot assure you that the relevant PRC tax authority will agree
with our view when our Hong Kong subsidiary applies to obtain tax
benefits under the relevant tax treaty in the future. As a
result, although our PRC subsidiary is currently wholly owned by
our Hong Kong subsidiary, we may not be able to enjoy the
preferential withholding tax rate of 5% under the Double Taxation
Arrangement (Hong Kong) and therefore be subject to withholding
tax at a rate of 10% with respect to dividends to be paid by our
PRC subsidiary to AiXin HK.
Enhanced scrutiny over acquisition transactions by the
PRC tax authorities may have a negative impact on potential
acquisitions we may pursue in the future.
In connection with the EIT Law, the Ministry of Finance and the
SAT jointly issued a SAT Circular 59 in April 2009, and the SAT
issued a SAT Circular 698 in December 2009. Both SAT Circular 59
and Circular 698 became effective retroactively on January 1,
2008.
According to SAT Circular 698, where a non-resident enterprise
transfers the equity interests of a PRC resident enterprise
indirectly by disposition of the equity interests of an overseas
holding company, or an Indirect Transfer, and the overseas
holding company is located in a tax jurisdiction that: (1) has an
effective tax rate less than 12.5% or (2) does not tax foreign
income of its residents, the non-resident enterprise, being the
transferor, must report to the relevant tax authority of the PRC
resident enterprise this Indirect Transfer. Using a substance
over form principle, the PRC tax authority may disregard the
existence of the overseas holding company if it lacks a
reasonable commercial purpose and was established for the purpose
of reducing, avoiding or deferring PRC tax. As a result, gains
derived from such Indirect Transfer may be subject to PRC
withholding tax at a rate of up to 10%. SAT Circular 698 also
provides that, where a non-PRC resident enterprise transfers its
equity interests in a PRC resident enterprise to its related
parties at a price lower than the fair market value, the relevant
tax authority has the power to make a reasonable adjustment to
the taxable income of the transaction. In addition, the PRC
resident enterprise is supposed to provide necessary assistance
to support the enforcement of SAT Circular 698.
There is little guidance and practical experience as to the
application of SAT Circular 698, and it is possible that the PRC
tax authorities would pursue our offshore shareholders to conduct
a filing regarding our offshore restructuring transactions where
non-resident investors were involved and would request our PRC
subsidiary to assist in providing such disclosures. In addition,
if our offshore subsidiaries are deemed to lack substance they
could be disregarded by the PRC tax authorities. As a result, we
and our non-resident investors may become at risk of being taxed
under SAT Circular 698 and may be required to expend valuable
resources to comply with SAT Circular 698 or to establish that we
should not be taxed under SAT Circular 698, which may have a
material adverse effect on our financial condition and results of
operations or the non-resident investors investments in us.
By promulgating and implementing these circulars, the PRC tax
authorities have enhanced their scrutiny over the direct or
indirect transfer of equity interests in a PRC resident
enterprise by a non-resident enterprise. The PRC tax authorities
have the discretion under SAT Circular 59 and SAT Circular 698 to
make adjustments to the taxable capital gains based on the
difference between the fair value of the equity interests
transferred and the cost of investment. Although we currently
have no confirmed 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 EIT Law and if the
PRC tax authorities make adjustments under SAT Circular 59 or SAT
Circular 698, 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.
PRC regulations establish complex procedures for some
acquisitions of PRC companies by foreign investors, which could
make it more difficult for us to pursue growth through
acquisitions in China.
Six PRC regulatory agencies promulgated regulations effective on
September 8, 2006 that are commonly referred to as the MA Rules.
The MA Rules establish procedures and requirements that could
make some acquisitions of PRC companies by foreign investors more
time-consuming and complex, including requirements in some
instances that the Ministry of Commerce be notified in advance of
any change-of-control transaction in which a foreign investor
takes control of a PRC domestic enterprise. In addition, national
security review rules issued by the PRC governmental authorities
in 2011 require acquisitions by foreign investors of domestic
companies engaged in military-related or certain other industries
that are crucial to national security to be subject to prior
security review. Moreover, the Anti-Monopoly Law requires that
the Ministry of Commerce shall be notified in advance of any
concentration of undertaking if certain thresholds are triggered.
We may expand our business in part by acquiring complementary
businesses. Complying with the requirements of the MA Rules,
security review rules and other PRC regulations to complete such
transactions could be time-consuming, and any required approval
processes, including obtaining approval from the Ministry of
Commerce, 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 subsidiaries
ability to increase their registered capital or distribute
profits to us, limit our ability to inject capital into our PRC
subsidiaries, or otherwise expose us to liability and penalties
under PRC law.
The PRC State Administration of Foreign Exchange, or the SAFE,
promulgated in October 2005 a SAFE Circular 75 that requires PRC
citizens or residents 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 equity financing
involving a roundtrip investment whereby the offshore entity
acquires or controls onshore assets or equity interests held by
the PRC citizens or residents. In addition, such PRC citizens or
residents must update their SAFE registrations when the offshore
special purpose vehicle undergoes material events relating to
increases or decreases in investment amount, transfers or
exchanges of shares, mergers or divisions, long-term equity or
debt investments, external guarantees, or other material events
that do not involve roundtrip investments. Subsequent regulations
further clarified that PRC subsidiaries of an offshore company
governed by the SAFE regulations are required to coordinate and
supervise the filing of SAFE registrations in a timely manner by
the offshore holding companys shareholders who are PRC citizens
or residents. If these shareholders fail to comply, the PRC
subsidiaries are required to report to the local SAFE branches.
If our shareholders who are PRC citizens or residents do not
complete their registration with the local SAFE branches, 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. Moreover,
failure to comply with the various SAFE registration requirements
described above could result in liabilities for our PRC
subsidiary under PRC laws for evasion of applicable foreign
exchange restrictions, including (1) the requirement by SAFE to
return the foreign exchange remitted overseas within a period
specified by SAFE, with a fine of up to 30% of the total amount
of foreign exchange remitted overseas and deemed to have been
evasive and (2) in circumstances involving serious violations, a
fine of no less than 30% of and up to the total amount of
remitted foreign exchange deemed evasive. Furthermore, the
persons-in-charge and other persons at our PRC subsidiary who are
held directly liable for the violations may be subject to
criminal sanctions.
These foreign exchange regulations provide that PRC residents
include both PRC citizens, meaning any individual who holds a PRC
passport or resident identification card, and individuals who are
non-PRC citizens but primarily reside in the PRC due to their
economic ties to the PRC. We have requested PRC residents holding
direct or indirect interest in our company to our knowledge to
make the necessary applications, filings and amendments as
required under SAFE Circular 75 and other related rules. However,
we cannot assure you that all of our shareholders who are PRC
citizens and hold interests in us have registered with the local
SAFE branch as required under SAFE Circular 75. In addition, 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 assurances that these PRC residents will comply with
our request to make or obtain any applicable registrations or
comply with other requirements required by SAFE Circular 75 or
other related rules. A failure by our PRC resident shareholders
or future PRC resident shareholders to comply with the SAFE
regulations, if SAFE requires it, could subject us to fines or
other legal sanctions, restrict our cross-border investment
activities, limit our PRC subsidiarys ability to make
distributions or pay dividends or affect our ownership structure,
which could adversely affect our business and prospects.
Furthermore, it is unclear how these regulations, and any future
regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant
government authorities. We cannot predict how these regulations
will affect our business operations or future strategy. For
example, we may be subject to a more stringent review and
approval process with respect to our foreign exchange activities,
such as remittance of dividends and foreign-currency-denominated
borrowings, which may adversely affect our financial condition
and results of operations. In addition, if we decide to acquire a
PRC domestic company, either we or the owners of such company, as
the case may be, may not be able to obtain the necessary
approvals or complete the necessary filings and registrations
required by the foreign exchange regulations. This may restrict
our ability to implement our acquisition strategy and could
adversely affect our business and prospects.
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. As the functional currency for our PRC
subsidiary and consolidated affiliated entities is RMB,
fluctuations in the exchange rate may cause us to incur foreign
exchange losses on any foreign currency holdings they may have.
In addition, appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect our financial
results in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. 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.
The value of the Renminbi against the U.S. dollar and other
currencies is affected by, among other things, changes in Chinas
political and economic conditions and Chinas foreign exchange
policies. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the RMB to the U.S.
dollar, and the Renminbi appreciated more than 20% against the
U.S. dollar over the following three years. As a consequence, the
Renminbi has fluctuated sharply since July 2008 against other
freely traded currencies, in tandem with the U.S. dollar. It is
difficult to predict how long the current situation may last and
when and how it may change again. There remains significant
international pressure on the PRC government to adopt a
substantial liberalization of its currency policy, which could
result in a further and more significant appreciation in the
value of the Renminbi against the U.S. dollar. Significant
revaluation of the Renminbi may have a material and adverse
effect on your investment. For example, to the extent that we
need to convert U.S. dollars we receive from securities offering
into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar would have an adverse effect on the
Renminbi amount we would receive from the conversion. Conversely,
if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our common stock or
for other business purposes, appreciation of the U.S. dollar
against the Renminbi would have a negative effect on the U.S.
dollar amount available to us. In August 2015, the PRC Government
devalued its currency by approximately 3%, represented the
largest yuan depreciation for 20 years. Concerns remain that
Chinas slowing economy, and in particular its exports, will need
a stimulus that can only come from further cuts in the exchange
rate.
In addition, appreciation or depreciation in the value of the
Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to
any underlying change in our business or results of operations.
The income statements of our operations are translated into U.S.
dollars at the average exchange rates in each applicable period.
To the extent the U.S. dollar strengthens against foreign
currencies, the translation of these foreign currencies
denominated transactions results in reduced revenue, operating
expenses and net income for our international operations.
Similarly, to the extent the U.S. dollar weakens against foreign
currencies, the translation of these foreign currency denominated
transactions results in increased revenue, operating expenses and
net income for our international operations. We are also exposed
to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in
consolidation. If there is a change in foreign currency exchange
rates, the conversion of the foreign subsidiaries financial
statements into U.S. dollars will lead to a translation gain or
loss, which is recorded as a component of other comprehensive
income. Very limited hedging transactions are available in China
to reduce our exposure to exchange rate fluctuations. To date, we
have not entered into any hedging transactions. While we may
enter into hedging transactions in the future, the availability
and effectiveness of these transactions may be limited, and we
may not be able to successfully hedge our exposure at all.
Fluctuation in the value of RMB may have a material
adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in
political and economic conditions. Our revenues, costs, and
financial assets are denominated in RMB, while our reporting
currency is the U.S. dollar. Accordingly, this may result in
gains or losses from currency translation on our financial
statements. We rely entirely on dividends from our operating
subsidiary in China. Therefore, any significant fluctuation in
the value of RMB may materially and adversely affect our cash
flows, revenues, earnings, financial position, and the value of,
and any dividends payable on, our stock in U.S. dollars. For
example, an appreciation of RMB against the U.S. dollar would, to
the extent that we need to convert U.S. dollars into RMB for such
purposes, make any new RMB denominated investments or
expenditures more costly to us. An appreciation of RMB against
the U.S. dollar would result in foreign currency translation
gains for financial reporting purposes when we translate our RMB
denominated financial assets into U.S. dollars, as the U.S.
dollar is our reporting currency.
Dividends we receive from our subsidiaries located in the
PRC may be subject to PRC withholding tax.
The EIT Law provides that a maximum income tax rate of twenty
percent (20%) is applicable to dividends payable to non-PRC
investors that are non-resident enterprises, to the extent such
dividends are derived from sources within the PRC. However, the
State Council has reduced such rate to ten percent (10%) through
the implementation regulations. We are a Colorado holding company
and all of our income is derived from our AiXin Zhonghong
subsidiary located in the PRC. Therefore, dividends paid to us
from China may be subject to the ten percent (10%) income tax if
we are considered a non-resident enterprise under the EIT Law. If
we are required under the EIT Law and its implementation
regulations to pay income tax for any dividends we receive from
our PRC subsidiaries, it may have a material and adverse effect
on our net income and materially reduce the amount of dividends,
if any, we may pay to our shareholders.
We may be exposed to liabilities under the Foreign
Corrupt Practices Act and Chinese anti-corruption laws, and any
determination that we violated these laws could have a material
adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and
other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties
by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations,
agreements with third parties and we make the majority of our
sales in China. PRC also strictly prohibits bribery of government
officials. Our activities in China create the risk of
unauthorized payments or offers of payments by the employees,
consultants, sales agents or distributors of our Company, even
though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by
our employees. However, our existing safeguards and any future
improvements may prove to be less than effective, and the
employees, consultants, sales agents or distributors of our
Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption
laws may result in severe criminal or civil sanctions, and we may
be subject to other liabilities, which could negatively affect
our business, operating results and financial condition. In
addition, the U.S. government may seek to hold our Company liable
for successor liability FCPA violations committed by companies in
which we invest or that we acquire.
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and us.
We conduct all of our business through AiXin Zhonghong, our
subsidiary in the PRC. AiXin Zhonghong is subject to laws and
regulations applicable to foreign investments in China and, in
particular, laws applicable to foreign-invested enterprises. The
PRC legal system is based on written statutes, and prior court
decisions may be cited for reference but have limited
precedential value. Since 1979, a series of new PRC laws and
regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since
the PRC legal system continues to evolve rapidly, the
interpretations of many laws, regulations and rules are not
always uniform and enforcement of these laws, regulations and
rules involves uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may
be protracted and result in substantial costs and diversion of
resources and management attention. In addition, all of our
executive officers and all of our directors are residents of
China and not of the US, and substantially all the assets of
these persons are located outside the US. As a result, it could
be difficult for investors to effect service of process in the US
or to enforce a judgment obtained in the US against our Chinese
operations, subsidiary and affiliate.
You may have difficulty enforcing judgments against
us.
We are a Colorado holding company, but AiXin BVI is a British
Virgin Islands corporation, AiXin HK is a Hong Kong company, and
our operating subsidiary AiXin Zhonghong, is located in the PRC.
Virtually all of our assets are located outside the US and all of
our current operations are conducted in the PRC. In addition, all
of our directors and officers are residents of China.
Substantially all of the assets of these persons are located
outside the US. As a result, it may be difficult for you to
effect service of process within the US upon these persons. It
may also be difficult for you to enforce in US courts judgments
predicated on the civil liability provisions of the US federal
securities laws against us and our officers and directors. In
addition, there is uncertainty as to whether the courts of the
PRC would recognize or enforce judgments of US courts. The
recognition and enforcement of foreign judgments are provided for
under the PRC Civil Procedures Law. Courts in China may recognize
and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedures Law based 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
arrangements that provide for the reciprocal recognition and
enforcement of foreign judgments with the US. 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 basic
principles of PRC law or national sovereignty, security or the
public interest. So it is uncertain whether a PRC court would
enforce a judgment rendered by a court in the US.
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion and highly fluctuating rates of inflation. During
the past ten years, the rate of inflation in China has been as
high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of
credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls
on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market
for our products and our company.
Risks Relating to Our Common Stock and Our Status as a
Public Company
Our common stock is quoted on OTC Pink which may have an
unfavorable impact on our stock price and
liquidity.
Our common stock is quoted on OTC Pink under the symbol MCAR. The
trading market for securities of companies quoted on OTC Pink or
other quotation systems is substantially less liquid than the
average trading market for companies listed on a national
securities exchange. The quotation of our shares on OTC Pink or
other quotation system may result in a less liquid market
available for existing and potential stockholders to trade shares
of our common stock, could depress the market price of our common
stock and could have a long-term adverse impact on our ability to
raise capital in the future.
Our Chief Executive Officer who is our principal
stockholder has substantial influence over our company, and his
interests may not be aligned with the interests of our other
stockholders.
Quanzhong Lin, our President and Chief Executive Officer, owns
approximately 80.78% of our outstanding shares. As a result, Mr.
Lin has significant influence over our business, including
decisions regarding mergers, consolidations, the sale of all or
substantially all of our assets, election of directors and other
significant corporate actions. As a result of this concentration
of ownership, you and our other stockholders, acting alone, may
not have the ability to determine the outcome of matters
requiring stockholder approval, including the election of our
directors or significant corporate transactions. In addition,
this concentration of ownership, which is not subject to any
voting restrictions, may discourage, delay or thwart efforts by
third parties to take-over or effect a change in control of our
company which could deprive our stockholders of an opportunity to
receive a premium for their shares as part of a sale of our
company, and may limit the price that investors are willing to
pay for our common stock.
Our management is not familiar with the United States
securities laws.
Our management is generally unfamiliar with the requirements of
the U.S. securities laws and may not appreciate the need to
devote the resources necessary to comply with such laws. A
failure to adequately respond to applicable securities laws could
lead to investigations by the SEC and other regulatory
authorities that could be costly, divert managements attention
and disrupt our business.
Our accounting personnel who are primarily responsible
for the preparation and supervision of the preparation of our
financial statements under generally accepted accounting
principles in the U.S. have had no education or training in U.S.
GAAP and SEC rules and regulations pertaining to financial
reporting, which could impact our ability to prepare our
financial statements and convert our books and records to U.S.
GAAP.
We maintain our books and records in accordance with generally
accepted accounting principles in the PRC, or PRC GAAP. Our
accounting personnel in the PRC who have the primary
responsibilities of preparing and supervising the preparation of
financial statements under U.S. GAAP have had no education or
training in U.S. GAAP and related SEC rules and regulations. As
such, they may be unable to identify potential accounting and
disclosure issues that may arise upon the conversion of our books
and records from PRC GAAP to U.S. GAAP, which could affect our
ability to prepare our financial statements in accordance with
U.S. GAAP. We have taken steps to ensure that our financial
statements are in accordance with U.S. GAAP, including our hiring
of a U.S. accounting firm to work with our PRC accounting
personnel and management to convert our books and records to U.S.
GAAP and prepare our financial statements. However, the measures
we have taken may not be sufficient to mitigate the foregoing
risks. Furthermore, the need to comply with U.S. GAAP may require
us to expend substantial amounts of resources and time that could
divert our managements attention and disrupt our business.
We will incur significant costs as a result of operating
as a public company, and our management will be required to
devote substantial time to new compliance requirements, including
establishing and maintaining internal controls over financial
reporting, and we may be exposed to potential risks if we are
unable to comply with these requirements.
As a public company we will incur significant legal, accounting
and other expenses under the Sarbanes-Oxley Act of 2002 (the
Sarbanes-Oxley Act), together with rules implemented by the
Securities and Exchange Commission and applicable market
regulators. These rules impose various requirements on public
companies, including requiring certain corporate governance
practices. Our management and other personnel will need to devote
a substantial amount of time to these requirements. These rules
will increase our legal and financial costs and will make some
activities more time-consuming and costly.
PRC companies have historically not adopted a Western >
The Sarbanes-Oxley Act requires, among other things, that we
maintain effective internal controls for financial reporting and
disclosure controls and procedures. In particular, we must
perform system and process evaluations and testing of our
internal controls over financial reporting to allow management to
report on the effectiveness of our internal controls over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Compliance with Section 404 may require that
we incur substantial accounting expenses and expend significant
management efforts. When we completed the acquisition of AiXin
BVI, we adopted the financial reporting controls and disclosure
controls and procedures of AiXin Zhonghong. The financial
controls and disclosure controls and procedures of AiXin
Zhonghong are not adequate for a public company. Among others
weaknesses, the lack of familiarity of our accounting staff with
US GAAP constitutes a material weakness in our controls for
financial reporting. We have taken steps to rectify this
weakness, including hiring a US accounting firm to work with our
management and accounting personnel. There is no assurance,
however, that the steps taken to date will be sufficient to
rectify this material weakness. In the event that we fail to
remedy the weaknesses in our controls over financial reporting
and adopt appropriate disclosure controls and procedures, our
financial reporting may be deficient and we may fail to comply
with the reporting requirements of the Securities Exchange Act
and other US securities laws, in which event, the market price of
our common stock could decline if investors and others lose
confidence in the reliability of our financial statements and we
could be subject to sanctions or investigations by the SEC or
other applicable regulatory authorities.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S. publicly-traded
Chinese companies, we may have to expend significant resources to
investigate and resolve the matter which could harm our business
operations, stock price and reputation and could result in a loss
of your investment in our stock, especially if such matter cannot
be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of
their operations in China, particularly companies that have
completed reverse merger transactions, have been the subject of
intense scrutiny, criticism and negative publicity by investors,
financial commentators and regulatory agencies, such as the SEC.
Much of the scrutiny, criticism and negative publicity have
focused on financial and accounting irregularities and mistakes,
a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence
thereto and, in many cases, allegations of fraud. As a result of
the scrutiny, criticism and negative publicity, the publicly
traded stock of many Chinese companies has sharply decreased in
value and, in some cases, has become virtually worthless. Many of
these companies are now subject to stockholder lawsuits, SEC
enforcement actions and are conducting internal and external
investigations into the allegations. It is not clear what affect
this sector-wide scrutiny, criticism and negative publicity will
have on our company, our business and our stock price. 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 will be costly and time
consuming and distract our management from growing our company.
If such allegations are not proven to be groundless, our company
and business operations will be severely impacted and your
investment in our stock could be rendered worthless.
Techniques employed by manipulative short sellers in
Chinese small-cap stocks may drive down the market price of our
common stock.
Short selling is the practice of selling securities that the
seller does not own but rather has borrowed from a third party
with the intention of buying identical securities back at a later
date to return to the lender. The short seller hopes to profit
from the difference in the sale price of the borrowed securities
and the purchase price of the replacement shares. As it is
therefore in the short sellers best interests for the price of
the stock to decline, there have been incidents of short sellers
publishing, or arranging to publish negative opinions in order to
create negative market momentum. While traditionally these
disclosed shorts have been limited in their ability to access
mainstream business media or to otherwise create negative market
rumors, the rise of the Internet and technological advancements
regarding document creation, videotaping and publication by
weblog (blogging) have allowed many disclosed shorts to publicly
attack a companys credibility, strategy and veracity by means of
so-called research reports that mimic the type of investment
analysis performed by large Wall Street firms and independent
research analysts. These short attacks have, in the past,
resulted in the selling of shares in the market, on occasion on a
large scale and broad base. Issuers with business operations
based in the PRC, that have limited trading volumes and that are
susceptible to higher volatility levels than U.S. domestic
large-cap stocks can be particularly vulnerable to such short
attacks.
These short seller publications are not regulated by any
governmental, self-regulatory organization or other official
authority in the U.S., are not subject to the certification
requirements imposed by the SEC in Regulation Analyst
Certification and, accordingly, the opinions they express may be
based on distortion of the actual facts or, in some cases,
fabrication of the facts. In light of the limited risks involved
in publishing such information, and the enormous profit that can
be made from running just one successful short attack, unless the
short sellers become subject to significant penalties, it is more
likely than not that disclosed shorts will continue to issue such
reports.
While we intend to strongly defend our public filings against any
such short seller attacks, oftentimes we are constrained, either
by principles of freedom of speech, applicable state law (often
called Anti-SLAPP statutes), or issues of commercial
confidentiality, in the manner in which we can proceed against
the relevant short seller. You should be aware that in light of
the relative freedom to operate that such persons enjoy
oftentimes blogging from outside the U.S. with little or no
assets or identity requirements should we be targeted for such an
attack and the rumors not dismissed by market participants, our
stock will likely suffer from a temporary, or possibly long term,
decline in market price.
Because we do not intend to pay any cash dividends on our
common stock, our stockholders will not be able to receive a
return on their shares unless they sell them.
We have not declared or paid any cash dividends on our common
stock nor do we anticipate paying any in the foreseeable future.
Furthermore, we expect to retain any future earnings to finance
our operations and expansion. The payment of cash dividends in
the future will be at the discretion of our Board of Directors
and will depend upon our earnings levels, capital requirements,
any restrictive loan covenants and other factors the Board
considers relevant.
Unless we pay dividends, our stockholders will not be able to
receive a return on their shares unless they sell them. We cannot
assure you that you will be able to sell shares when you desire
to do so.
The market price of our common stock can become volatile,
leading to the possibility of its value being depressed at a time
when you may want to sell your holdings.
The market price of our common stock can become volatile.
Numerous factors, many of which are beyond our control, may cause
the market price of our common stock to fluctuate significantly.
These factors include:
|
our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors; |
|
changes in financial estimates by us or by any securities analysts who might cover our stock; |
|
speculation about our business in the press or the investment community; |
|
significant developments relating to our relationships with our customers or suppliers; |
|
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry; |
| customer demand for our products; |
|
investor perceptions of our industry in general and our Company in particular; |
| the operating and stock performance of comparable companies; |
| general economic conditions and trends; |
|
announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; |
|
changes in accounting standards, policies, guidance, interpretation or principles; |
| loss of external funding sources; and |
|
sales of our common stock, including sales by our directors, officers or significant stockholders; and departures of key personnel. |
Securities class action litigation is often instituted against
companies following periods of volatility in their stock price.
Should this type of litigation be instituted against us, it could
result in substantial costs to us and divert our managements
attention and resources.
Moreover, securities markets may from time to time experience
significant price and volume fluctuations for reasons unrelated
to the operating performance of particular companies. These
market fluctuations may adversely affect the price of our common
stock and other interests in our Company at a time when you want
to sell your interest in us.
If we fail to develop and maintain an effective system of
internal controls, we may not be able to accurately report our
financial results or prevent fraud, as a result, current and
potential stockholders could lose confidence in our financial
reports, which could harm our business and the trading price of
our common stock.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. Section
404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and
report on our internal controls over financial reporting.
Compliance with Section 404 requires that we strengthen, assess
and test our system of internal controls to provide the basis for
our report. The process of strengthening our internal controls
and complying with Section 404 is expensive and time consuming,
and requires significant management attention. We cannot be
certain that the measures we undertake will ensure that we will
maintain adequate controls over our financial processes and
reporting in the future. Furthermore, if we are able to rapidly
grow our business, the internal controls that we will need will
become more complex, and significantly more resources will be
required to ensure our internal controls remain effective.
Failure to implement required controls, or difficulties
encountered in their implementation, could harm our operating
results or cause us to fail to meet our reporting obligations. If
we discover a material weakness in our internal controls, the
disclosure of that fact, even if the weakness is quickly
remedied, could diminish investors confidence in our financial
statements and harm our stock price. In addition, non-compliance
with Section 404 could subject us to a variety of administrative
sanctions, including the suspension of trading, ineligibility for
listing on the OTC Markets, and the inability of registered
broker-dealers to make a market in our common stock, which would
further reduce our stock price.
There is no active trading market for our shares of
common stock.
There is no active trading market for our common stock. There can
be no assurance that a regular trading market for our securities
will develop, or that if one develops, that it will be sustained.
The trading price of our securities could be subject to wide
fluctuations, in response to announcements by us or others,
developments affecting us, and other events or factors. In
addition, the stock market has experienced extreme price and
volume fluctuations in recent years. These fluctuations have had
a substantial effect on the market prices for many companies,
often unrelated to the operating performance of such companies,
and may adversely affect the market prices of the securities.
Such risks could have an adverse effect on the stocks future
liquidity.
Our common stock is subject to the Penny Stock Rules of
the SEC and the trading market in our securities is limited,
which makes transactions in our stock cumbersome and may reduce
the value of an investment in our stock.
The SEC has adopted Rule 15g-9 which establishes the definition
of a penny stock, for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require: (a) that a broker or dealer
approve a persons account for transactions in penny stocks; and
(b) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a persons account for transactions in penny
stocks, the broker or dealer must: (a) obtain financial
information and investment experience and objectives of the
person; and (b) make a reasonable determination that the
transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in
penny stocks.
The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prescribed by the
Commission relating to the penny stock market, which, in
highlight form: (a) sets forth the basis on which the broker or
dealer made the suitability determination; and (b) that the
broker or dealer received a signed, written agreement from the
investor prior to the transaction. Generally, brokers may be less
willing to execute transactions in securities subject to the
penny stock rules. This may make it more difficult for investors
to dispose of our common shares and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading
and about the commissions payable to both the broker-dealer and
the registered representative, current quotations for the
securities and the rights and remedies available to an investor
in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information
for the penny stock held in the account and information on the
limited market in penny stocks.
Under our Articles of Incorporation, our Board of
Directors has the authority, without stockholder approval, to
issue preferred stock with terms that may not be beneficial to
common stock holders and with the ability to adversely affect
stockholder voting power and perpetuate the boards control over
our company.
Our Board of Directors by resolution may authorize the issuance
of preferred stock in one or more series with such limitations
and restrictions as it may determine, in its sole discretion,
with no further authorization by security holders required for
the issuance of such shares. The Board may determine the specific
terms of the preferred stock, including: designations;
preferences; conversions rights; cumulative, relative;
participating; and optional or other rights, including: voting
rights; qualifications; limitations; or restrictions of the
preferred stock.
The issuance of preferred stock may adversely affect the voting
power and other rights of the holders of common stock. Preferred
stock may be issued quickly with terms calculated to discourage,
make more difficult, delay or prevent a change in control of our
company or make removal of management more difficult. As a
result, the Board of Directors ability to issue preferred stock
may discourage the potential hostile acquirer, possibly resulting
in beneficial negotiations. Negotiating with an unfriendly
acquirer may result in terms more favorable to us and our
stockholders. Conversely, the issuance of preferred stock may
adversely affect the market price of, and the voting and other
rights of the holders of the common stock. We presently have no
plans to issue any preferred stock.
We may, in the future, issue additional shares of common
stock, which would reduce investors percent of ownership and may
dilute our share value.
Our Articles of Incorporation authorizes the issuance of 950
million shares of common stock. We have outstanding 317,988,089
shares of common stock. The future issuance of common stock may
result in substantial dilution in the percentage of our common
stock held by our then existing stockholders. We may value any
common stock issued in the future on an arbitrary basis. The
issuance of common stock for future services or acquisitions or
other corporate actions may have the effect of diluting the value
of the shares held by our investors, and might have an adverse
effect on any trading market for our common stock.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On December 12, 2017, we entered into and closed a share exchange
agreement, or the Share Exchange Agreement, with AiXin (BVI)
International Group Co., Ltd. a British Virgin Islands
corporation (AiXin BVI), and Quanzhong Lin, the owner of
all of the outstanding shares of AiXin BVI, to which we acquired
100% of the outstanding capital stock of AiXin BVI in exchange
for 227,352,604 shares of our common stock (the Share Exchange or
the AiXin Acquisition). The foregoing description of the terms of
the Share Exchange Agreement is qualified in its entirety by
reference to the provisions of the Share Exchange Agreement filed
as Exhibit 2.1 to this report, which are incorporated herein by
reference. After giving effect to the Share Exchange, we had
outstanding 317,988,089 shares of common stock.
As a result of the Share Exchange, AiXin BVI became our
wholly-owned subsidiary, and we now own all of the outstanding
shares of HK AiXin International Group Co., Limited, a Hong Kong
limited company (AiXin HK), which in turn owns all of the
outstanding shares of Chengdu AiXin Zhonghong Biological
Technology Co., Ltd., a Chinese limited company (AiXin
Zhonghong), which markets and sells premium-quality nutritional
products.in China.
AiXin BVI was incorporated on September 21, 2017 to serve as a
holding company and AiXin HK was established in Hong Kong on
February 25, 2016 to serve as an intermediate holding company.
AiXin Zhonghong was established in the PRC on March 4, 2013, and
on May 27, 2017, the local government of the PRC issued a
certificate of approval regarding the foreign ownership of AiXin
Zhonghong by AiXin HK. Neither AiXin BVI nor AiXin HK had
operations prior to December 12, 2017.
Prior to the AiXin Acquisition, Quanzhong Lin, our President and
Chief Executive Officer, owned all of the outstanding shares of
AiXin BVI and 29,521,410 shares of our common stock, representing
approximately 65% of the outstanding shares of Mercari
Communications Group, Ltd. As a result of the Share Exchange, Mr.
Lin now owns 256,874,014 shares of our common stock,
approximately 80.78% of our outstanding shares, after giving
effect to certain issuances described under the caption Market
for Registrants Common Equity and Related Stockholder Matters.
For accounting purposes, the acquisition has been accounted for
as a reverse acquisition and has been treated as a
recapitalization of Mercari Communications Group, Ltd. effected
by a share exchange, with AiXin BVI as the accounting acquirer.
Since neither AiXin BVI nor AiXin HK had operations prior to
December 12, 2017, the historical financial statements of AiXin
Zhonghong are now the historical financial statements of the
registrant, Mercari Communications Group, Ltd, and have been
included in Item 9.01(a) of this report. The assets and
liabilities of AiXin Zhonghong have been brought forward at their
book value and no goodwill has been recognized.
We, through our indirectly owned AiXin Zhonghong subsidiary,
mainly market and sell innovative consumer products in China by
offering a comprehensive line of premium-quality nutritional
products. We sell the products through our sales offices,
exhibition events we organize and sponsor, as well as
person-to-person marketing. our revenue was primarily generated
from sales of 20 products, which include Oleesa Milk Powder, CO
Q10, D-Ribose Powder, and other nutritional supplements. Our
business mainly focuses on proactive approach to our customers
such as hosting events for clients, which we believe its ideally
suited to marketing our products because sales of nutrition
products are strengthened by ongoing personal contact and
support, coaching and education among the Company, our clients,
and their clients towards a healthy and active life>
The chart below presents our corporate structure:
| Mercari Communications Group, Ltd. (a Colorado corporation) | |||||
| 100% | |||||
| AiXin (BVI) International Group Co., Ltd (BVI) | |||||
| 100% | |||||
|
HK AiXin International Group Co., Limited (HK) (AiXin HK) |
|||||
| 100% | |||||
|
Chengdu Aixin Zhonghong Biological Technology Co., Ltd (AiXin Zhonghong) |
Results of Operations
Comparison of the Nine Months Ended September 30, 2017
and 2016
The following table sets forth the results of our operations for
the periods indicated as a percentage of net sales, certain
columns may not add due to rounding:
| $ | % of Net Sales | $ | % of Net Sales | |||||||
| Net sales | $ | 650,348 | $ | 2,279,383 | ||||||
| Cost of sales | 246,765 | % | 1,001,488 | % | ||||||
| Gross profit | 403,583 | % | 1,277,895 | % | ||||||
| Operating expenses | 1,322,161 | % | 1,511,480 | % | ||||||
| Loss from operations | (918,578 | ) | (141 | )% | (233,585 | ) | (10 | )% | ||
| Non-operating expenses, net | (6,337 | ) | (1 | )% | (8,998 | ) | (0.4 | )% | ||
| Income tax expense | – | – | % | – | – | % | ||||
| Net loss | $ | (924,915 | ) | (142 | )% | $ | (242,583 | ) | (11 | )% |
Net Sales
Net sales for the nine months ended September 30, 2017, was $0.65
million, while net sales for the nine months ended September 30,
2016, was $ 2.28 million, a decrease of $1.63 million or 72%. The
72% decrease in net sales was primarily due to reduction in
promotional and marketing activities in response to the
governments policy of strengthening the supervision of health
products industry for avoiding false advertisement and unlawful
marketing approach.
Cost of Sales
Cost of sales (COS) was $0.25 million in the nine months ended
September 30, 2017, compared to $1.0 million in the nine months
ended September 30, 2016, a decrease of $0.75 million or 75%. The
decrease in our COS is attributable to the decrease in net sales.
The COS as a percentage to net sales was 38% in 2017 compared to
44% in 2016, resulting from decrease in purchasing price of our
products from vendors due to their reduction in price after the
effect of the governments policy on strengthening the supervision
of health products industry.
Gross Profit
Gross profit was $0.40 million in the nine months ended September
30, 2017, compared to $1.28 million in the nine months ended
September 30, 2016, a decrease of $0.87 million or 68%. The
decrease in our gross profit was mainly due to the decrease in
net sales. Gross margin was 62% for 2017and 56% for 2016.
Operating Expenses
Operating expenses were $1.32 million for the nine months ended
September 30, 2017, compared to $1.51 million for the nine months
ended September 30, 2016, a decrease of $0.19 million or 13%. The
decrease in operating expenses was mainly due to the $0.20
million decrease in selling expenses resulting from decreased
sales.
Non-Operating Expense, net
Net non-operating expense was $6,337 for the nine months ended
September 30, 2017, compared to $8,998 for the nine months ended
September 30, 2016, a decrease of $2,661 of 30%. The decrease was
due to decreased loss from fixed assets physical counting in the
nine months ended September 30, 2017.
Net Loss
Our net loss for the nine months ended September 30,2017, was
$0.92 million compared to net loss of $0.24 million for the nine
months ended September 30, 2016, an increase of $0.68 million or
281%. Net loss as a percentage of sales was 142% in the nine
months ended September 30, 2017, compared to 11% in the nine
months ended September 30, 2016. The increase in net loss as a
percentage of net sales was mainly due to significantly decreased
sales.
Comparison of the Years Ended December 31, 2016 and
2015
The following table sets forth the results of our operations for
the periods indicated as a percentage of net sales, certain
columns may not add due to rounding:
| $ | % of Net Sales | $ | % of Net Sales | |||||||
| Net Sales | $ | 3,082,725 | $ | 1,611,409 | ||||||
| Cost of sales | 1,352,742 | % | 718,848 | % | ||||||
| Gross profit | 1,729,983 | % | 892,561 | % | ||||||
| Operating expenses | 3,799,897 | % | 1,067,326 | % | ||||||
| Loss from operations | (2,069,914 | ) | (67 | )% | (174,765 | ) | (11 | )% | ||
| Non-operating expenses, net | (10,298 | ) | (0.3 | )% | (17,755 | ) | (1 | )% | ||
| Income tax expense | – | – | % | – | – | % | ||||
| Net loss | $ | (2,080,212 | ) | (68 | )% | $ | (192,520 | ) | (12 | )% |
Net Sales
Net sales for the year ended December 31, 2016, was $3.08
million, while net sales for the year ended December 31, 2015,
was $1.61 million, an increase of $1.47 million or 91%. The 91%
increase in total sales was primarily due to our aggressive sales
inventive and promotional policy such as offering free travel,
and attractive commission policy, as well as our competitive
product price. We added three new products in the year ended
December 31, 2016, which brought us additional sales of $0.46
million.
Cost of Sales
Cost of sales (COS) was $1.35 million in the year ended December
31, 2016, compared to $0.72 million in the year ended December
31, 2015, an increase of $0.63 million or 88%. The increase in
our COS is attributable to increase of net sales. The COS as a
percentage to the sales was 44% in 2016 compared to 45% in 2015,
resulting from our stable purchase price for the inventory.
Gross Profit
Gross profit was $1.73 million in the year ended December 31,
2016, compared to $0.89 million in the year ended December 31,
2015. An increase of $0.84 million or 94%. The increase in our
gross profit was mainly due to the increase of net sales. Gross
margin was 56% for 2016 and 55% for 2015.
Operating Expenses
Operating expenses was $3.80 million for the year ended December
31, 2016, compared to $1.07 million for the year ended December
31, 2015, an increase of $2.73 million or 256%. The increase of
operating expenses was mainly due to the $2.03 million capital
market related expenses (including auditing and legal fees of
$200,000, due diligence and accounting fees of $135,000, shell
company expense of $300,000, travel expense of $90,000 and
commission expense, and $0.24 million increase of sales
commissions.
Non-Operating Expense, net
Net non-operating expense was $10,298 for the year ended December
31, 2016, compared to $17,755 for the year ended December 31,
2015, a decrease of $7,457 of 42%. The decrease in net
non-operating expense was mainly due to an increase in other
income of $33,157, which was mainly the rental income from
leasing certain units of the Companys office space.
Net Loss
Our net loss for the year ended December 31, 2016, was $2.08
million compared to net loss of $0.19 million for the year ended
December 31, 2015, an increase of $1.89 million or 980%. Net loss
as a percentage of sales was 68% in the year ended December 31,
2016 compared to 12% in the year ended December 31, 2015. This
increase in net loss was attributable to increased GA expenses
for capital market related professional and consulting fee, and
commission expense in the year ended December 31, 2016, despite
we had increased sales by $1.47 million in 2016.
Liquidity and Capital Resources
As of September 30, 2017, cash and equivalents were $20,881,
compared to $29,668 as of December 31, 2016 and $44,419 as of
December 31, 2015. At September 30, 2017, we had a working
capital deficit of $(5.84) million, as compared to $(4.83)
million at December 31, 2016 and $(2.97) million at December 31,
2016. The increase in the working capital deficit of $1.01
million at September 30, 2017 as compared to December 31, 2016
was due to increased unearned revenue, accrued liability, other
payables and an advance from shareholder, The increase in the
working capital deficit of 1.86 million at December 31, 2016 as
compared to December 31, 2015, was mainly due to increased tax
payable and an advance from a shareholder.
The following is a summary of cash provided by or used in each of
the indicated types of activities during the nine months ended
September 30, 2017, December 31, 2016 and December 31, 2015,
respectively.
| September 30, 2017 | December 31, 2016 | December 31, 2015 | |||||||
| Net cash provided by (used in) operating activities | $ | (15,792 | ) | $ | (971,898 | ) | $ | 711,040 | |
| Net cash used in investing activities | $ | (7,727 | ) | $ | (272,468 | ) | $ | (3,074,208 | ) |
| Net cash provided by financing activities | $ | 13,631 | $ | 1,231,926 | $ | 2,409,086 | |||
Net cash provided by (used in) operating activities
Cash has historically been used in operations. Net cash used in
operating activities was $15,792 for the nine months ended
September 30, 2017, as compared to $0.97 million for the year
ended December 31, 2016. This improvement was mainly due to a
decrease in the net loss for the period, a decrease in accounts
receivable, an increase in accounts payable and a decrease in
taxes payable.
Net cash used in investing activities
Net cash used in investing activities was $7,727 for nine months
ended September 30, 2017, as compared to net cash used in
investing activities of $0.27 million for 2016. We paid $7,727
for purchase of property and equipment in the nine months ended
September 30, 2017, as compared to $272,468 in the year ended
December 31, 2016.
Net cash used in investing activities was $0.27 million for 2016,
compared to cash used in investing activities of $3.07 million
for 2015. We paid $272,468 for purchase of property and equipment
in the year ended December 31, 2016, compared to $3.07 million
for purchase of property and equipment in the year ended December
31, 2015.
Net cash provided by financing activities
Net cash provided by financing activities was $13,631 for the
nine months ended September 30, 2017, compared to $1.23 million
for the year ended December 31, 2016. The net cash provided by
financing activities in the nine months ended September 30, 2017
was due to an advance from a major shareholder for our working
capital needs.
Net cash provided by financing activities was $1.23 million for
the year ended December 31, 2016, compared to $2.41 millionin the
year ended December 31, 2015. The net cash provided by financing
activities in 2016 and 2015 was due to an advance from a major
shareholder for our working capital needs.
Impact of Inflation
The general annual inflation rate in China was 1.4% in 2015 and
3.0% in 2016 according to the National Bureau of Statistics. Our
results of operations may be affected by inflation, particularly
rising prices for products and other operating costs.
Contractual Obligations
We have no long-term fixed contractual obligations or
commitments.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other
commitments to guarantee the obligations of any third parties. We
have not entered into any derivative contracts that are indexed
to our shares and classified as shareholders equity or that are
not reflected in our combined financial statements. Furthermore,
we do not have any retained or contingent interest in assets
transferred to an uncombined entity that serves as credit,
liquidity or market risk support to such entity. We do not have
any variable interest in any uncombined entity that provides
financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services
with us.
Contingencies
The Companys former operations were conducted in the PRC and were
subject to specific considerations and significant risks not
typically associated with company in North America and Western
Europe. These include risks associated with, among others, the
political, economic and legal environments in China and foreign
currency exchange. The Companys results may be adversely affected
by changes in PRC government 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 Companys sales, purchases and expense transactions in China
are denominated in RMB and all of the Companys assets and
liabilities in China are also denominated in RMB. The RMB is not
freely convertible into foreign currencies under the current PRC
law. In China, foreign exchange transactions are required by law
to be transacted only by authorized financial institutions.
Remittances in currencies other than RMB may require certain
supporting documentation in order to affect the remittance.
Significant Accounting Policies
While our significant accounting policies are more fully
described in Note 2 to our financial statements, we believe the
following accounting policies are the most critical to aid you in
fully understanding and evaluating this management discussion and
analysis.
Basis of Presentation
The accompanying financial statements are prepared in conformity
with U.S. Generally Accepted Accounting Principles (US GAAP). The
functional currency of Aixin is Chinese Renminbi (RMB). The
accompanying financial statements are translated from RMB and
presented in U.S. dollars (USD).
Going Concern
The Company suffered net losses of $2.08 million for 2016 and
$0.92 million for the nine months ended September 30, 2017 and
had a shareholders deficit of $2.02 million as of December 31,
2016 and of $3.05 million as of September 30, 2017. These
conditions raise a substantial doubt about the Companys ability
to continue as a going concern. The Company plans to increase its
income by strengthening its sales force, providing attractive
sales inventive program, and increasing marketing and promotion
activities. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Use of Estimates
In preparing financial statements in conformity with US 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 financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period.
Significant estimates, required by management, include the
recoverability of long-lived assets, allowance for doubtful
accounts, and the reserve for obsolete and slow-moving
inventories. Actual results could differ from those estimates.
Accounts Receivable
The Companys policy is to maintain an allowance for potential
credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns
to evaluate the adequacy of these reserves. During the years
ended December 31, 2016 and 2015, bad debt expense was $7,018 and
$2,800, respectively. As of December 31, 2016 and 2015, the bad
debt allowance for accounts receivable was $9,475 and $2,944,
respectively. During the nine months ended September 30, 2017 and
2016, bad debt expense was $16,963 and $12,191, respectively. As
of September 30, 2017 and December 31, 2016, the bad debt
allowance was $27,279 and $9,475, respectively.
Revenue Recognition
The Companys revenue recognition policies comply with FASB ASC
Topic 605, Revenue Recognition. Sales are recognized when a
formal arrangement exists; the price is fixed or determinable;
title has passed to the buyer, which generally is at the time of
delivery of the products or services; no other significant
obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria
for revenue recognition are recorded as unearned revenue.
Sales revenue represents the invoiced value of goods, net of
value-added taxes (VAT). All of the Companys products sold in
China are subject to the PRC VAT of 17% of the gross sales price.
This VAT may be offset by VAT paid by the Company on raw
materials and other materials purchased in China. The Company
records VAT payable and VAT receivable net of payments in the
financial statements. The VAT tax return is filed offsetting the
payables against the receivables. Sales and purchases are
recorded net of VAT collected and paid as the Company acts as an
agent for the government.
Foreign Currency Translation and Comprehensive Income
(Loss)
The functional currency of the Company is RMB. For financial
reporting purposes, RMB is translated into USD as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet dates. Revenues and expenses
are translated at the average rate of exchange prevailing during
the reporting period.
Translation adjustments arising from the use of different
exchange rates from period to period are included as a component
of stockholders equity as Accumulated other comprehensive income.
Gains and losses resulting from foreign currency transactions are
included in income. There was no significant fluctuation in the
exchange rate for the conversion of RMB to USD after the balance
sheet date.
The Company uses FASB ASC Topic 220, Comprehensive Income.
Comprehensive income (loss) is comprised of net income (loss) and
all changes to the statements of stockholders equity, except
those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders. Comprehensive loss for
the nine months ended September 30, 2017 and 2016 consisted of
net loss and foreign currency translation adjustments.
New Accounting Pronouncements
In May 2014, the FASB issued No. 2014-09, Revenue from Contracts
with Customers, which supersedes the revenue recognition
requirements in Accounting Standards Codification 605 – Revenue
Recognition and most industry-specific guidance throughout the
Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or
services. In August 2015, the FASB approved a one-year deferral
of the effective date of the new revenue recognition standard.
Public business entities, certain not-for-profit entities, and
certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual
reporting periods beginning after December 31, 2016, including
interim reporting periods within that reporting period. In March
2016, the FASB issued ASU 2016-08, Revenue from Contracts with
Customers (Topic 606), Principal versus Agent Considerations
(Reporting Revenue versus Net). In April 2016, the FASB issued
ASU 2016-10, Revenue from Contracts with Customers (Topic 606),
Identifying Performance Obligations and Licensing. In May 2016,
the FASB issued ASU 2016-11, Revenue from Contracts with
Customers (Topic 606) and Derivatives and Hedging (Topic 815) –
Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16,
and ASU 2016-12, Revenue from Contracts with Customers (Topic
606) – Narrow Scope Improvements and Practical Expedients. These
ASUs clarify the implementation guidance on a few narrow areas
and adds some practical expedients to the guidance Topic 606. The
Company is evaluating the effect that these ASUs will have on its
financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments-Credit Losses (Topic 326), which requires entities to
measure all expected credit losses for financial assets held at
the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. This
replaces the existing incurred loss model and is applicable to
the measurement of credit losses on financial assets measured at
amortized cost. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2019. Early application will be permitted for all
entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. The Company is
currently evaluating the impact that the standard will have on
its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification
of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies
the presentation and classification of certain cash receipts and
cash payments in the statement of cash flows. This ASU is
effective for public business entities for fiscal years, and
interim periods within those years, beginning after December 15,
2017. Early adoption is permitted. The Company is currently
assessing the potential impact of ASU 2016-15 on its financial
statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of
Cash Flows (Topic 230): Restricted Cash. The guidance requires
that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows.
The standard is effective for fiscal years beginning after
December 15, 2017, and interim period within those fiscal years.
Early adoption is permitted, including adoption in an interim
period. The standard should be applied using a retrospective
transition method to each period presented. The Company does not
anticipate the adoption of this ASU will have a significant
impact on its financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a
Business, which clarifies the definition of a business with the
objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions or
disposals of assets or businesses. The standard is effective for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted.
The standard should be applied prospectively on or after the
effective date. The Company will evaluate the impact of adopting
this standard prospectively upon any transactions of acquisitions
or disposals of assets or businesses.
In January 2017, the FASB issued ASU 2017-04, Simplifying the
Test for Goodwill Impairment. The guidance removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase
price allocation. A goodwill impairment will now be the amount by
which a reporting units carrying value exceeds its fair value,
not to exceed the carrying amount of goodwill. The guidance
should be adopted on a prospective basis for the annual or any
interim goodwill impairment tests beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1,
2017. The Company is currently evaluating the impact of adopting
this standard on its CFS.
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets forth the names and ages of all
directors and executive officers of the registrant as of the end
of the last fiscal year and on the date of this report:
| Quanzhong Lin | Director, President and Chief Executive Officer |
| Yao-Te Wang | Director |
| Guolu Li | Chief Financial Officer |
Quanzhong Lin has served as a director,
President and Chief Executive Officer of our company since
February 2, 2017. Mr. Lin is a highly successful entrepreneur in
China, and currently serves as Chairman of Ai Xin Company Group,
a diversified company which he founded in 2008. In addition to Ai
Xin Company, Mr. Lin has founded a number of companies located in
Chengdu City, Sichuan Province, China, engaged in various types
of business, including pharmacies, retail outlets, hotel
management services and global tourism.
Yao-Te Wang has served as a director of our
company since December 12, 2017. Mr. Wang has been the Chief
Executive Officer of Ivy Service Group (China), which is a
transnational consultant company in China, since 2015. From
January 2016 to June 2016, Mr. Wang participated the overall
operation planning for Chongqing Cultural Assets and Equity
Exchange. From June 2015 to January 2016, Mr. Wang helped with
the overall brand strategy development for Swire Group, who
merged the biggest baking brand in Southwest China within more
than 150 million RMB. From September 2014 to February 2015, Mr.
Wang was the chairman special assistant for JECUI Health Science
Company. From July 2012 to August 2014, Mr. Wang was the Chief
Executive Officer of Ivy Service Group (Taipei). From August 2007
to June 2012, Mr. Wang was an instructor of National Defense
University (Taipei), taught International Politics and Economic
Analysis. From September 2006 to August 2007, Mr. Wang was the
Public Affair Officer of Marine Corps Headquarter (Kaohsiung).
From January 2005 to June 2006, Mr. Wang was a graduate
internship and assistant of New York City Council/Denver City
Mayor Office. From September 2005 to January 2006, Mr. Wang
worked as graduate internship at the McCann Group in New York
City. From December 1999 to May 2003, Mr. Wang was the First
Lieutenant at Platoon Leader and Psychological Counselor (Marine
Corps). Mr. Wang received a Masters degree in International
Affairs at Columbia University in New York in 2006.
Guolu Li became our Chief Financial Officer on
December 12, 2017. Mr. Li is a CPA who has served as managing
director and Senior Accountant at Chengdu Bixin, an accounting
firm, since August 2016. From October 2013 to July 2016, Mr. Li
was Deputy Financial Director of Chengdu Geeya Science and
Technology Co. (Shenzhen Stock Exchange). From August 2010 to May
2013, he was Senior Auditor at Sichuan HengKun CPA Co., Ltd. From
December 2007 to July 2010, he was Manager of the Audit
Department at Sichuan Zhonglian, an accounting firm. From July
2005 to December 2007, he was Chief Accountant at Shenzhen Heneng
Group. From April 2000 to July 2005, he was Manager of the
Finance Department at Chengdu Unionfriend Network Co. (Shenzhen
Stock Exchange). From January 1999 to March 2000, he was
Assistant Auditor at Sichuan Junhe, an accounting firm. From July
1989 to December 1998, he was General Assistant at Sichuan
Petroleum Administration Bureau (SPA). Mr. Li received a Bachelor
degree in Engineer Management from China University of Petroleum
(Beijing), in July 1989.
There are no family relationships among any of our officers and
directors.
Directors hold office until the next annual meeting of
shareholders and until their successors have been duly elected
and qualified. Officers are elected by the Board of Directors
(BOD) and hold office until the earliest of their death,
resignation or removal from office.
Compensation of Directors
No member of our BOD received any compensation for his services
as a director during the year ended May 31, 2017.
Corporate Governance
Audit, Nominating and Compensation Committees
Our BOD does not have standing audit, nominating or compensation
committees. Instead, the functions that might be delegated to
such committees are carried out by our BOD, to the extent
required. Our BOD believes that the cost of establishing such
committees, including the costs necessary to recruit and retain
qualified independent directors to serve on our BOD and such
committees and the legal costs to properly form and document the
authority, policies and procedures of such committees, are not
justified under our current circumstances.
Our BOD believes that its members have sufficient knowledge and
experience to fulfill the duties and obligations of the audit
committee for the Company. None of the current Board members is
an audit committee financial expert within the meaning of the
rules and regulations of the SEC. The Board has determined that
each of its members is able to read and understand fundamental
financial statements and has substantial business experience that
results in that members financial sophistication.
Our BOD does not currently have a policy for the qualification,
identification, evaluation, or consideration of board candidates
and does not think that such a policy is necessary at this time,
because it believes that, given the limited scope of the Companys
operations, a specific nominating policy would be premature and
of little assistance until the Companys business operations are
at a more advanced level. Currently the entire Board decides on
nominees.
The BOD does not have any defined policy or procedural
requirements for shareholders to submit recommendations or
nominations for directors. The Company does not have any
restrictions on shareholder nominations under its articles of
incorporation or bylaws. The only restrictions are those
applicable generally under Colorado law and the federal proxy
rules. The BOD will consider suggestions from individual
shareholders, subject to an evaluation of the persons merits.
Shareholders may communicate nominee suggestions directly to the
Board, accompanied by biographical details and a statement of
support for the nominees. The suggested nominee must also provide
a statement of consent to being considered for nomination. There
are no formal criteria for nominees.
Independent Directors
Yao-Te Wang is independent director as the term independent is
defined by Nasdaq Marketplace Rule 5605(a)(2).
Shareholders Communications
Shareholders may communicate with the BOD and individual
directors by submitting their communications in writing to the
Companys Corporate Secretary at Hongxing International Business
Building 2, 14th FL, No. 69 Qingyun South Ave.,
Jinjiang District, Chengdu City, Sichuan Province, China. Any
communications received that are directed to the BOD will be
processed by the Corporate Secretary and distributed promptly to
the BOD or individual directors, as appropriate. If it is unclear
from the communication received whether it was intended or
appropriate for the Board, the Corporate Secretary will (subject
to any applicable regulatory requirements) use his or her
business judgment to determine whether such communications should
be conveyed to the BOD.
Code of Ethics
Due to the limited scope of our current operations, the Company
has not yet adopted a code of ethics that applies to our
principal executive officer, principal financial officer, and
principal accounting officer or controller, or persons performing
similar functions.
EXECUTIVE COMPENSATION
Mercari Communications Group, Ltd.
Summary Compensation Table
No compensation was paid to or earned by our executive officers
for any purpose during the years ended May 31, 2017 and 2016
Outstanding Equity Awards at Fiscal Year-End
None of our executive officers was granted any options or equity
awards during the year ended May 31, 2017 or held any options or
other equity awards at May 31, 2017.
AiXin Zhonghong
The following table sets forth information concerning
compensation awarded to, earned by or paid to the chief executive
officer of AiXin Zonghong for services rendered in all capacities
during the periods indicated. No other executive officer of AiXin
Zhonghong received total annual salary and bonus compensation in
excess of $100,000 for the years ended December 31, 2016 and
2015.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | ||||
| Quanzhong Lin, President | $ | 13,098 | $ | – | $ | 13,098 | ||
| $ | 13,723 | $ | 6,422 | $ | 20,145 | |||
Mr. Lin does not have an employment agreement with AiXin
Zhonghong.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
The following includes a summary of transactions since June 1,
2015, or any currently proposed transaction, in which we were or
are to be a participant and the amount involved exceeded or
exceeds the lesser of $120,000 or one percent of the average of
our total assets at year-end for the last two completed fiscal
years, and in which any related person had or will have a direct
or indirect material interest (other than compensation described
under Executive Compensation). We believe the terms obtained or
consideration that we paid or received, as applicable, in
connection with the transactions described below were comparable
to terms available or the amounts that would be paid or received,
as applicable, in arms-length transactions.
Mercari Communications Group, Ltd.
From December 14, 2011 to January 20, 2017, we received advances
from Algodon, our then principal shareholder, for a total of
$125,987 and $74,000 at May 31, 2017 and 2015 respectively, and
aggregating $150,087 at January 20, 2017. These advances carried
no interest and were intended to be converted to equity in the
future. These advances included $12,000 for the value of the
services, shared office and space and management oversight
incurred by Algodon. At May 31, 2017 and 2016, the amounts due to
our shareholders was $166,677 and $125,987, respectively.
On December 12, 2017, we issued 15,074,695 shares of our common
stock to each of Ethan Chuang, a director of our company until
the AiXin Acquisition, and Yao-Te Wang, who became a director
upon consummation of the AiXin Acquisition, for executive
services.
As of the date of this report, we do not have in place any
policies with respect to whether we will enter into agreements
with related persons in the future.
Other than the foregoing, none of the directors or executive
officers of the Company, nor any person who owned of record or
was known to own beneficially more than 5% of the Companys
outstanding shares of its Common Stock, nor any associate or
affiliate of such persons or companies, had any material
interest, direct or indirect, in any transaction that occurred
since June 1, 2015, or in any proposed transaction, which has
materially affected or will affect the Company.
AiXin Zhonghong
Advance from a Shareholder
At December 31, 2016 and 2015, the Company had received an
advance from a major shareholder of $2,095,064 and $819,702,
respectively. The advance was payable on demand, and bore no
interest.
Office Lease from a Major Shareholder
In May 2014, the Company entered a lease with its major
shareholder for office use; the lease term is three years until
May 2017 with option to renew. The monthly rent was RMB 5,000
($721), the Company was required to prepay each years annual rent
at 15th of May of each year. The Company renewed the lease in May
2017 for another three years until May 28, 2020 with month rent
of RMB 5,000 ($721), payable quarterly.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Change in Control
On February 2, 2017, Quanzhong Lin purchased 29,521,410 shares of
our common stock, approximately 65% of our outstanding shares of
common stock, for $300,000, from China Concentric to a Stock
Purchase Agreement dated December 21, 2016. China Concentric had
purchased 43,822,001 shares of our common stock, approximately
96.5%, of our outstanding shares of common stock, from Algodon
Wines Luxury Development Group, Inc. (Algodon) on January 20,
2017, for $260,000 to a Stock Purchase Agreement dated December
20, 2016, as amended. Algodon also assigned to China Concentric
all its right, title and interest to amounts payable to Algodon
for non-interest bearing advances to our company, which advances,
as of January 20, 2017 were $150,087, and any additional advances
made to our company up until the closing date as set forth in the
Stock Purchase Agreement.
On February 2, 2017, in conjunction with the closing of the sale
to Mr. Lin, our then BOD elected Mr. Lin as a director, Chairman
of the BOD, President and Chief Executive Officer of our company,
effective upon the closing, and Ethan Chuang, who had served as
President of our company since January 20, 2017, as Vice
President of our company. Mr. Chuang, who was elected to BOD on
January 20, 2017, served as a director of our company until
December 12, 2017, the date of the AiXin Acquisition.
Mr. Lin, as the sole stockholder of AiXin Zhonghong, received
227,352,604 shares of our common stock in the Share Exchange, and
now owns 256,874,014 shares of our common stock, representing
approximately 80.78% of our outstanding shares.
Security Ownership
The following table sets forth information concerning beneficial
ownership of our common stock as of December 12, 2017, by (i) any
person or group with more than 5% of our common stock, (ii) each
director, (iii) our chief executive officer and each other
executive officer whose cash compensation for the most recent
fiscal year exceeded $100,000 and (iv) all such executive
officers and directors as a group.
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting and investment power with respect
to the securities. Subject to applicable community property laws,
the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as
beneficially owned by them. In addition, shares of common stock
issuable upon exercise of options, warrants and other convertible
securities anticipated to be exercisable or convertible at or
within sixty days of December 12, 2017, are deemed outstanding
for the purpose of computing the percentage ownership of the
person holding those securities, and the group as a whole, but
are not deemed outstanding for computing the percentage ownership
of any other person. As of December 12, 2017, we had outstanding
317,988,089 shares of common stock.
To our knowledge, the persons named in the table have sole voting
and investment power with respect to all shares of securities
shown as beneficially owned by them.
| Name of Shareholder | Amount and Nature of Beneficial Ownership | Percent of Common Stock | ||
| Directors and Executive Officers: | ||||
|
Quanzhong Lin, Chairman and CEO 9 An Rong Lu Jingniu, Bldg 4 Unit 163 Chengdu, Sichuan Province, China |
256,874,014 | 80.78 | % | |
|
Yao-Te Wang, Director 704 No.9, Lane 14, Shijian St. Tainan City, Taiwan, R.O.C. |
15,074,695 | 4.74 | % | |
| All directors and executive officers as a group | 271,948,709 | 85.52 | % | |
MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on OTC Pink under the symbol MCAR.
There exists only a very limited trading market for our common
stock on the Pink tier of the OTC Markets (www.otcmarkets.com)
with limited or no volume. The quotations are inter-dealer prices
without retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
| Year ended May 31, 2016 | Low | High | ||
| First Quarter | $ | 0.10 | $ | 0.10 |
| Second Quarter | 0.06 | 0.15 | ||
| Third Quarter | 0.07 | 0.15 | ||
| Fourth Quarter | 0.07 | 0.25 | ||
| First Quarter | $ | 0.36 | $ | 0.40 |
| Second Quarter | 0.20 | 1.00 | ||
| Third Quarter | 0.15 | 0.40 | ||
| Fourth Quarter | 0.21 | 0.30 |
| First Quarter | $ | 0.17 | $ | 0.30 |
| Second Quarter | 0.17 | 0.23 | ||
|
Third Quarter (through December 12, 2017) |
0.08 | 0.21 |
Holders
As of December 13, 2017, we had approximately 26 record holders
of our common stock.
Dividends
Since inception we have not paid any dividends on our common
stock. We currently do not anticipate paying any cash dividends
in the foreseeable future on our common stock. Although we intend
to retain our earnings, if any, to finance the exploration and
growth of our business, our BOD will have the discretion to
declare and pay dividends in the future.
Payment of dividends in the future will depend upon our earnings,
growth, capital requirements, and other factors, which our BOD
may deem relevant.
Issuer Purchases of Equity Securities
None.
Securities Authorized for Issuance under Equity
Compensation Plans
The following table sets forth information about the common stock
available for issuance under compensatory plans and arrangements
as of May 31, 2017.
| (c) | ||||
| Number of securities | ||||
| (a) | remaining available | |||
| Number of | (b) | for future issuance | ||
| securities to be | Weighted-average | under equity | ||
| issued upon | exercise price of | Compensation | ||
| exercise of | outstanding options | plans (excluding | ||
| outstanding | under equity | securities reflected in | ||
| Plan Category | options | compensation plans | column (a)) | |
| Equity compensation plan approved by security holders | None | None | ||
| Equity compensation plans not approved by security holders | None | None | ||
| Total | None | None | ||
Penny Stock Regulations
The SEC has regulations which generally define so-called penny
stocks to be an equity security that has a market price less than
$5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exemptions. Our common stock is a penny
stock and is subject to Rule 15g-9 under the Exchange Act, or the
Penny Stock Rule. This rule imposes additional sales practice
requirements on broker-dealers that sell such securities to
persons other than established customers and accredited investors
(generally, individuals with a net worth in excess of $1,000,000
or annual incomes exceeding $200,000, or $300,000 together with
their spouses). For transactions covered by Rule 15g-9, a
broker-dealer must make a special suitability determination for
the purchaser and have received the purchasers written consent to
the transaction prior to sale. As a result, this rule may affect
the ability of broker-dealers to sell our securities and may
affect the ability of purchasers to sell any of our securities in
the secondary market, thus possibly making it more difficult for
us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in penny stock,
of a disclosure schedule required by the SEC relating to the
penny stock market. Disclosure is also required to be made about
sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in
the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for
exemption from the Penny Stock Rule. In any event, even if our
common stock were exempt from the Penny Stock Rule, we would
remain subject to Section 15(b)(6) of the Exchange Act, which
gives the SEC the authority to restrict any person from
participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.
Recent Sales of Unregistered Equity Securities
On December 12, 2017, we issued 15,074,695 shares of our common
stock to Ethan Chuang, a director of our company until the AiXin
Acquisition, for executive services, and we issued 15,074,695
shares of our common stock to each of Yao-Te Wang, who became a
director upon consummation of the AiXin Acquisition, and Wanli
Liu for consulting services.
On December 12, 2017, we issued 227,352,604 shares of common
stock to Quanzhong Lin, the sole stockholder of AiXin BVI, in
exchange for his shares of AiXin BVI, to the Share Exchange
Agreement.
The issuance of the shares to Mr. Wang, Ms. Liu and Mr. Lin, each
of whom is not a U.S. person, as defined in Rule 902 of
Regulation S under the Securities Act, was exempt from the
registration requirements of the Securities Act under Regulation
S. The issuance of the shares to Mr. Chuang, an accredited
investor, was exempt from the registration requirements of the
Securities Act under Rule 506 of Regulation D. The certificates
evidencing the shares are endorsed with a restrictive Securities
Act legend.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 20,000,000 shares of blank check
preferred stock and 950,000,000 shares of common stock, $.0001
par value per share. As of December 12, 2017, after giving effect
to the AiXin Acquisition and the issuances of 15,074,695 shares
of common stock to each of Messrs. Chuang and Wang and Ms. Liu
described above under the caption Recent Sales of Unregistered
Equity Securities, we had outstanding 317,988,089 shares of
common stock.
Holders of our common stock are entitled to receive dividends
when and as declared by our Board out of funds legally available
therefore. Upon dissolution of our company, the holders of common
stock are entitled to share, pro rata, in our net assets after
payment of or provision for all of our debts and liabilities.
Each share of common stock is entitled to participate on a pro
rata basis with each other share of such stock in dividends and
other distributions declared on shares of common stock.
The holders of common stock are entitled to one vote per share on
all matters submitted to a vote of the stockholders and may not
cumulate their votes for the election of directors. The holders
of common stock do not have preemptive rights to subscribe for
additional shares of any class that we may issue, and no share of
common stock is entitled in any manner to any preference over any
other share of such stock.
SHARES ELIGIBLE FOR SALE
As of December 12, 2017, after giving effect to the AiXin
Acquisition and the issuances of 15,074,695 shares of common
stock to each of Messrs. Chuang and Wang and Ms. Liu described
above under the caption Recent Sales of Unregistered Equity
Securities,, we had outstanding 317,988,089 shares of common
stock, of which all but 1,588,999 shares are restricted
securities under Rule 144 or owned by affiliates of our company.
Rule 144
Rule 144 permits a person who has beneficially owned restricted
shares for at least six months to sell their shares provided
that: (i) such person is not deemed to have been one of our
affiliates at the time of, or at any time during the three months
preceding, a sale and (ii) we are subject to the Exchange Act
periodic reporting requirements for at least three months before
the sale.
Persons who have beneficially owned restricted shares for at
least six months but who are our affiliates at the time of, or at
any time during the three months preceding, a sale, are subject
to additional restrictions, by which such person would be
entitled to sell within any three-month period only a number of
shares that does not exceed the greater of either of the
following:
|
1.0% of the number of shares of common stock then outstanding, which is now 3,179,881 shares; and |
|
if the common stock is listed on a national securities exchange, the average weekly trading volume of the shares of common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Sales by affiliates under Rule 144 are also limited by manner of
sale provisions and notice requirements and to the availability
of current public information about us.
Sales Under Rule 144 By Non-Affiliates
Under Rule 144, a person who is not deemed to have been one of
our affiliates at the time of or at any time during the three
months preceding a sale, and who has beneficially owned the
restricted shares of common stock proposed to be sold for at
least six months, including the holding period of any prior owner
other than an affiliate, is entitled to sell their shares without
complying with the manner of sale and volume limitation or notice
provisions of Rule 144. We must be current in our public
reporting if the non-affiliate is seeking to sell under Rule 144
after holding his shares of common stock between six months and
one year. After one year, non-affiliates do not have to comply
with any other Rule 144 requirements.
Restrictions on the Use of Rule 144 by Shell Companies or Former
Shell Companies
Rule 144 is not available for the resale of securities initially
issued by companies that are, or previously were, blank check
companies like us, to their promoters or affiliates despite
technical compliance with the requirements of Rule 144. Rule 144
also is not for resale of securities issued by any shell
companies (other than business combination related shell
companies) or any issuer that has been at any time previously a
shell company. The SEC has provided an exception to this
prohibition, however, if the following conditions are met:
|
the issuer of the securities that was formerly a shell company has ceased to be a shell company; |
|
the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; |
|
the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and |
|
at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. |
As a result, Quanzhong Lin, the former owner of AiXin BVI, will
not be able to sell any of the 256,874,014 shares of common stock
which he owns, including the 227,352,604 shares he acquired in
the Share Exchange, to Rule 144 until December 14, 2018.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of the Articles of Incorporation provides:
A director of this corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director except that this provision
shall not limit the liability of a director to the corporation or
to its shareholders for monetary damages for: (i) any breach of
the directors duty of loyalty to the corporation or to its
shareholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law;
(iii) acts specified in Section 7-108-403 of the Colorado
Business Corporation Act, as it may be amended from time to time;
or (iv) any transaction from which the director derived an
improper personal benefit. If the Colorado Business Corporation
Act is amended to authorize corporate actions further limiting to
eliminating the personal liability of directors, then the
liability of a director of the corporation shall be limited or
eliminated to the fullest extent permitted by the Colorado
Business Corporation Act, as so amended.
Any repeal or modification of this Article IX by the shareholders
of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time
of such repeal or modification.
Section 40 of our By-laws provides as follows:
Indemnification. The corporation may provide
indemnification of officers, directors and employees as permitted
under Section Colorado Revised Statutes, 1973, as such statute
may be in effect from time to time.
Insofar as indemnification by us for liabilities arising under
the Securities Act may be permitted to our directors, officers or
persons controlling the company to provisions of our certificate
of incorporation and bylaws, or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification by
such director, officer or controlling person of us in the
successful defense of any action, suit or proceeding is asserted
by such director, officer or controlling person in connection
with the securities being offered, we will, unless in the opinion
of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of ours in
which indemnification would be required or permitted. We are not
aware of any threatened litigation or proceeding, which may
result in a claim for such indemnification.
PROPERTIES
AiXin Zhonghong owns the following properties:
#69 Qingyun South Street, Building 7, 24th Floor, Unit
# 2401 2413
Jinjiang District, Chengdu City
#69 Qingyun South Street, Building 2, 14th Floor, Unit
# 1401 1415
Jinjiang District, Chengdu City
AiXin Zhonghong leases the following properties:
Sales Offices:
| Location | Size (sq meters) | Annual Rental(RMB) | Expiration Date | ||||
| #68 Linyuan Road East, Building 7 | |||||||
| Peicheng District, Mianyang, Chengdu | 83.36 | m2 | 20,000 | 12/19/2017 | |||
| #99 Liucheng Avenue East, | |||||||
| Wenjiang District, Chengdu | 126.6 | m2 | 66,000 | 06/09/2021 | |||
| #236-238 Xintai Road West | |||||||
| Xindu District, Chengdu | m2 | 36,000 | 12/28/2017 | ||||
| #287 Yihu Road West | |||||||
| Qingbaijiang District, Chengdu | 70.19 | m2 | 33,600 | 10/12/2018 | |||
| #17 Park Street | |||||||
| Jiangcheng Township, Jianyang, Chengdu | m2 | 30,000 | 08/01/2021 | ||||
| #69 East Road, unit 1-4 | |||||||
| Wujin Township, Xinjin County, Chengdu | 227.06 | m2 | 33,000 | 05/30/2021 | |||
| #69 Qingyun South Street, Building 2 | |||||||
| Jinjiang District, Chengdu | 248.77 | m2 | 60,000 | 05/28/2020 | |||
| #1 Jianshe Road North, Jinyang Park | |||||||
| Yanjiang District, Ziyang, Chengdu | 61.09 | m2 | 26,000 | 12/31/2022 | |||
| #89 Anyang Road | |||||||
| Guanghan, Chengdu | m2 | 15,600 | 07/03/2018 | ||||
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties and an
adverse result in these or other matters may arise from time to
time that may harm our business. We are currently not aware of
any such legal proceedings or claims that we believe will have a
material adverse effect on our business, financial condition or
operating results.
CHANGES IN REGISTERED INDEPENDENT PUBLIC
ACCOUNTANT
a) Dismissal of BloomSchon CPAs LLC As Principal Accountant
1. On July 18, 2017, we dismissed BloomSchon CPAs LLC
(BloomSchon) as our independent registered principal accounting
firm. BloomSchon had been our independent registered principal
accounting firm since September 29, 2015 and issued a report on
our financial statements for the year ended May 31, 2016.
BloomSchons report on our financial statements for the fiscal
year ended May 31, 2016 did not contain an adverse opinion or a
disclaimer of opinion, nor was it qualified or modified as to
audit scope or accounting principles. Such report of BloomSchon
was prepared assuming that we had the ability to continue as a
going concern. The decision to change auditors was approved by
our BOD.
2. During the year ended May 31, 2016 and the subsequent interim
periods through the date of the filing of our Current Report on
Form 8-K reporting the dismissal of BloomSchon, (i) we did not
have any disagreements with BloomSchon on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements,
if not resolved to BloomSchons satisfaction, would have caused
them to make reference thereto in their reports on our financial
statements for such periods, and (ii) there were no reportable
events, as defined in Item 304(a)(1)(v) of Regulation S-K.
3. We provided BloomSchon with a copy of disclosures in the Form
8-K reporting the dismissal of BloomSchon and requested that
BloomSchon furnish a letter addressed to the SEC stating whether
or not it agreed with the statements made therein. A copy of
BloomSchons letter dated July 18, 2017, is filed as Exhibit 16.1
hereto.
(b) Engagement of MJF Associates, APC As Principal Accountant
1. On July 18, 2017, we engaged MJF Associates, APC (MJF) as our
registered independent public accountants for the fiscal year
ended May 31, 2017. The decision to engage MJF was approved by
our BOD.
2. During our two most recent fiscal years ended May 31, 2016 and
2017, and through the date of filing of our Current Report on
Form 8-K reporting the engagement of MJF, we did not consult with
MJF on (i) the application of accounting principles to a
specified transaction, either completed or proposed, or the type
of audit opinion that may be rendered on our financial
statements, and MJF did not provide either a written report or
oral advice to us that MJF concluded was an important factor
considered by us in reaching a decision as to any accounting,
auditing, or financial reporting issue; (ii) any matter the
subject of any disagreement, as defined in Item 304 (a)(1)(iv) of
Regulation S-K and the related instructions, or (iii) a
reportable event within the meaning set forth in Item
304(a)(1)(v) of Regulation S-K.
ITEM 3.02 UNREGISTERED SALES OF EQUITY
SECURITIES
Reference is made to the disclosure set forth Item 2.01 of this
Current Report under the caption Recent Sales of Unregistered
Securities, which disclosure is incorporated by reference into
this section.
ITEM 4.01 CHANGES IN REGISTRANTS CERTIFYING
ACCOUNTANT
Reference is made to the disclosure set forth Item 2.01 of this
Current Report under the caption Change in Registered Independent
Certified Public Accountant, which disclosure is incorporated by
reference into this section.
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
Reference is made to the disclosure set forth under Item 2.01 of
this report under the caption Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
Change in Control, which disclosure is incorporated herein by
reference.
ITEM 5.02 DEPARTURE OF DIRECTORS OR CERTAIN OFFICERS;
ELECTION OF DIRECTORS; APPOINTMENT OF CERTAIN OFFICERS;
COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
On December 12, 2017, immediately prior to the closing of the
AiXin Acquisition, Ethan Chuang resigned as a director of our
company and our BOD appointed Yao-Te Wang as a director to fill
the vacancy created by Mr. Chuangs resignation and elected Guolu
Li as Chief Financial Officer, effective upon the closing.
Yao-Te Wang, age 40, has been the Chief
Executive Officer of Ivy Service Group (China), which is a
transnational consultant company in China, since 2015. From
January 2016 to June 2016, Mr. Wang participated the overall
operation planning for Chongqing Cultural Assets and Equity
Exchange. From June 2015 to January 2016, Mr. Wang helped with
the overall brand strategy development for Swire Group, who
merged the biggest baking brand in Southwest China within more
than 150 million RMB. From September 2014 to February 2015, Mr.
Wang was the chairman special assistant for JECUI Health Science
Company. From July 2012 to August 2014, Mr. Wang was the Chief
Executive Officer of Ivy Service Group (Taipei). From August 2007
to June 2012, Mr. Wang was an instructor of National Defense
University (Taipei), taught International Politics and Economic
Analysis. From September 2006 to August 2007, Mr. Wang was the
Public Affair Officer of Marine Corps Headquarter (Kaohsiung).
From January 2005 to June 2006, Mr. Wang was a graduate
internship and assistant of New York City Council/Denver City
Mayor Office. From September 2005 to January 2006, Mr. Wang
worked as graduate internship at the McCann Group in New York
City. From December 1999 to May 2003, Mr. Wang was the First
Lieutenant at Platoon Leader and Psychological Counselor (Marine
Corps). Mr. Wang received a Master degree in International
Affairs at Columbia University in New York in 2006.
Guolu Li, age 51, is a CPA who
has served as managing director and Senior Accountant at Chengdu
Bixin, an accounting firm, since August 2016. From October 2013
to July 2016, Mr. Li was Deputy Financial Director of Chengdu
Geeya Science and Technology Co. (Shenzhen Stock Exchange, Ticker
Symbol: 300028). From August 2010 to May 2013, he was Senior
Auditor at Sichuan HengKun CPA Co., Ltd. From December 2007 to
July 2010, he was Manager of the Audit Department at Sichuan
Zhonglian, an accounting firm. From July 2005 to December 2007,
he was Chief Accountant at Shenzhen Heneng Group. From April 2000
to July 2005, he was Manager of the Finance Department at Chengdu
Unionfriend Network Co. (Shenzhen Stock Exchange). From January
1999 to March 2000, he was Assistant Auditor at Sichuan Junhe, an
accounting firm. From July 1989 to December 1998, he was General
Assistant at Sichuan Petroleum Administration Bureau (SPA). Mr.
Li received a Bachelor degree in Engineer Management from China
University of Petroleum (Beijing), in July 1989.
ITEM 5.03 AMENDMENTS TO ARTICLES OF INCORPORATION OR
BYLAWS; CHANGE IN FISCAL YEAR.
As a result of the AiXin Acquisition, our fiscal year end has
changed from May 31 to December 31, the fiscal year end of AiXin
Zhonghong.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS
Prior to the closing of the AiXin Acquisition, Mercari was a
shell company as defined in Rule 12b-2 of the Exchange Act. As
described in Item 2.01 above, which is incorporated by reference
into this Item 5.06, Mercari Communications Group, Ltd. ceased
being a shell company upon completion of the AiXin Acquisition on
December 12, 2017.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Financial Statements for the years ended and as at
December 31, 2016 and 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Chengdu Aixin Zhonghong Biological Technology Co., Ltd.
We have audited the accompanying balance sheets of Chengdu Aixin
Zhonghong Biological Technology Co., Ltd. (the Company) as of
December 31, 2016 and 2015, and the related statements of
operations, stockholders equity and other comprehensive loss, and
cash flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, audits of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 2016 and 2015, and the results
of its operations and its cash flows for each of the years then
ended, in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements were prepared assuming the
Company will continue as a going concern. The Company incurred
net losses of $2.08 million and $0.19 million for 2016 and 2015
respectively. The Company also had a stockholders deficit of
$2.02 million as of December 31, 2016. These factors, among
others, as discussed in Note 2 to the financial statements, raise
substantial doubt about the Companys ability to continue as a
going concern. Managements plans in regard to these matters are
also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
|
/s/ MJF Associates, APC |
| MJF Associates |
| Los Angeles, California |
| December 14, 2017 |
515 S. Flower Street, Suite 3600, Los Angeles, CA 90071
Telephone: (213) 626-2701 Fax: (866) 510-6726
Los Angeles San Diego San Francisco Dallas New
York
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
BALANCE SHEETS
| As of December 31, | |||||
| ASSETS | |||||
| CURRENT ASSETS | |||||
| Cash equivalents | $ | 29,668 | $ | 44,419 | |
| Accounts receivable, net | 175,259 | 55,934 | |||
| Other receivables and prepaid expenses | 3,782 | ||||
| Advances to suppliers | 105,455 | 273,173 | |||
| Deferred commission | 335,110 | 223,861 | |||
| Deferred travel cost | 176,187 | 159,532 | |||
| Inventory | 46,570 | 201,159 | |||
| Total current assets | 872,031 | 959,039 | |||
| NONCURRENT ASSETS | |||||
| Property and equipment, net | 2,816,934 | 2,946,523 | |||
| Total non-current assets | 2,816,934 | 2,946,523 | |||
| TOTAL ASSETS | $ | 3,688,965 | $ | 3,905,562 | |
| LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) | |||||
| CURRENT LIABILITIES | |||||
| Accounts payable | $ | 35,191 | $ | 12,239 | |
| Unearned revenue | 2,066,550 | 2,256,539 | |||
| Taxes payable | 1,193,050 | 603,531 | |||
| Accrued liability and other payables | 314,475 | 238,683 | |||
| Advance from shareholder | 2,095,064 | 819,702 | |||
| TOTAL LIABILITIES | 5,704,330 | 3,930,694 | |||
| STOCKHOLDERS EQUITY (DEFICIT) | |||||
| Paid in capital | 16,402 | 16,402 | |||
| Statutory reserve | 11,721 | 11,721 | |||
| Retained earnings (accumulated deficit) | (2,131,504 | ) | (51,292 | ) | |
| Accumulated other comprehensive income (loss) | 88,016 | (1,963 | ) | ||
| TOTAL STOCKHOLDERS EQUITY (DEFICIT) | (2,015,365 | ) | (25,132 | ) | |
| TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) | $ | 3,688,965 | $ | 3,905,562 | |
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Years Ended December 31, | ||||||
| Net sales | $ | 3,082,725 | $ | 1,611,409 | ||
| Cost of sales | 1,352,742 | 718,848 | ||||
| Gross profit | 1,729,983 | 892,561 | ||||
| Operating expenses | ||||||
| Selling expenses | 1,152,555 | 850,264 | ||||
| General and administrative expenses | 2,640,324 | 214,262 | ||||
| Provision for bad debt expense | 7,018 | 2,800 | ||||
| Total operating expenses | 3,799,897 | 1,067,326 | ||||
| Loss from operations | (2,069,914 | ) | (174,765 | ) | ||
| Non-operating income (expenses) | ||||||
| Financial expense | (669 | ) | (803 | ) | ||
| Other income | 51,445 | 18,288 | ||||
| Other expense | (61,074 | ) | (35,240 | ) | ||
| Total non-operating expenses, net | (10,298 | ) | (17,755 | ) | ||
| Loss before income tax | (2,080,212 | ) | (192,520 | ) | ||
| Income tax expense | – | – | ||||
| Net loss | (2,080,212 | ) | (192,520 | ) | ||
| Other comprehensive items | ||||||
| Foreign currency translation gain (loss) | 89,979 | (1,904 | ) | |||
| Comprehensive loss | $ | (1,990,233 | ) | $ | (194,424 | ) |
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2016 AND 2015
| Paid in capital | Statutory reserves | Accumulated other comprehensive income (loss) | Retained earnings (accumulated deficit) | Total | ||||||||
| Balance at January 1, 2015 | $ | 16,402 | $ | 11,721 | $ | (59 | ) | $ | 141,228 | $ | 169,292 | |
| Net loss for year | – | – | – | (192,520 | ) | (192,520 | ) | |||||
| Foreign currency translation loss | – | – | (1,904 | ) | – | (1,904 | ) | |||||
| Balance at December 31, 2015 | 16,402 | 11,721 | (1,963 | ) | (51,292 | ) | (25,132 | ) | ||||
| Net loss for year | – | – | – | (2,080,212 | ) | (2,080,212 | ) | |||||
| Foreign currency translation gain | – | – | 89,979 | – | 89,979 | |||||||
| Balance at December 31, 2016 | $ | 16,402 | $ | 11,721 | $ | 88,016 | $ | (2,131,504 | ) | $ | (2,015,365 | ) |
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
| Net loss | $ | (2,080,212 | ) | $ | (192,520 | ) |
| Depreciation | 211,114 | 70,371 | ||||
| Provision for bad debts | 7,018 | 2,800 | ||||
| Increase (decrease) in assets | ||||||
| Accounts receivable | (135,369 | ) | (55,993 | ) | ||
| Other receivables and prepaid expenses | (3,010 | ) | (235 | ) | ||
| Advances to suppliers | 156,923 | (46,059 | ) | |||
| Deferred commission | (131,129 | ) | (233,393 | ) | ||
| Deferred travel cost | (28,044 | ) | (166,324 | ) | ||
| Inventory | 148,020 | (141,351 | ) | |||
| Increase (decrease) in liabilities: | ||||||
| Accounts payable | 24,789 | – | ||||
| Unearned revenue | (47,785 | ) | 867,825 | |||
| Taxes payable | 655,962 | 394,973 | ||||
| Accrued liability and other payables | 249,826 | 210,946 | ||||
| Net cash provided by (used in) operating activities | (971,897 | ) | 711,040 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
| Purchase of property and equipment | (272,468 | ) | (3,074,208 | ) | ||
| Net cash used in investing activities | (272,468 | ) | (3,074,208 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
| Advance from shareholder | 1,231,926 | 2,409,086 | ||||
| Net cash provided by financing activities | 1,231,926 | 2,409,086 | ||||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH EQUIVALENTS | (2,312 | ) | (1,897 | ) | ||
| NET INCREASE (DECREASE) IN CASH EQUIVALENTS | (14,751 | ) | 44,021 | |||
| CASH EQUIVALENTS, BEGINNING OF YEAR | 44,419 | |||||
| CASH EQUIVALENTS, END OF YEAR | $ | 29,668 | $ | 44,419 | ||
| Supplemental Cash flow data: | ||||||
| Income tax paid | $ | – | $ | 3,322 | ||
| Interest paid | $ | – | $ | – | ||
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Chengdu Aixin Zhonghong Biological Technology Co., Ltd. (the
Company or Aixin) was incorporated in 2013 in Chengdu, China. The
Company mainly develops and distributes consumer products by
offering a comprehensive line of premium-quality nutritional
products. The Company sells the products through exhibition
events, conferences, as well as person-to-person marketing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are prepared in conformity
with U.S. Generally Accepted Accounting Principles (US GAAP). The
functional currency of Aixin is Chinese Renminbi (RMB). The
accompanying financial statements are translated from RMB and
presented in U.S. dollars (USD).
Going Concern
The Company incurred net losses of $2.08 million and $0.19
million for 2016 and 2015 respectively. The Company also had a
stockholders deficit of $2.02 million as of December 31, 2016.
These conditions raise a substantial doubt about the Companys
ability to continue as a going concern. The Company plans to
increase its income by strengthening its sales force, providing
attractive sales incentive program, and increasing marketing and
promotion activities. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Use of Estimates
In preparing financial statements in conformity with US 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 financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period.
Significant estimates, required by management, include the
recoverability of long-lived assets, allowance for doubtful
accounts, and the reserve for obsolete and slow-moving
inventories. Actual results could differ from those estimates.
Cash and Equivalents
For financial statement purposes, the Company considers all
highly liquid investments with an original maturity of three
months or less to be cash equivalents.
Accounts Receivable
The Companys policy is to maintain an allowance for potential
credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns
to evaluate the adequacy of these reserves. During the years
ended December 31, 2016 and 2015, bad debt expense was $7,018 and
$2,800, respectively. As of December 31, 2016 and 2015, the bad
debt allowance for accounts receivable was $9,475 and $2,944,
respectively.
Inventory
Inventory mainly consists of health supplement products.
Inventory is valued at the lower of average cost or market, cost
being determined on a moving weighted average method. Management
compares the cost of inventories with the net realizable value
and an allowance is made for writing down their inventories to
market value, if lower. The Company did not record any
write-downs of inventory at December 31, 2016 and 2015.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation, and impairment losses, if any. Major repairs and
betterments that significantly extend original useful lives or
improve productivity are capitalized and depreciated over the
period benefited. Maintenance and repairs are expensed as
incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is
included in operations. Depreciation of property and equipment is
provided using the straight-line method for substantially all
assets with 5% salvage value and estimated lives as follows:
| Building | 20 years |
| Office furniture | 5 years |
| Electronic Equipment | 3 years |
| Vehicles | 5 years |
Impairment of Long-Lived Assets
Long-lived assets, which include property and equipment and
intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, but at least annually.
Recoverability of long-lived assets to be held and used is
measured by comparing of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated
by it. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds its fair value (FV). FV is generally determined
using the assets expected future discounted cash flows or market
value, if readily determinable. Based on its review, the Company
believes that, as of December 31, 2016 and 2015, there was no
significant impairments of its long-lived assets.
Income Taxes
Income taxes are accounted for using an asset and liability
method. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws
and statutory tax rates, applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
The Company follows ASC Topic 740, which 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. ASC Topic 740 also provides guidance
on recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim
periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are
filed, it is likely that some positions taken would be sustained
upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or
the amount of the position that would be ultimately sustained.
The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available
evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax
positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax
benefit that is more than 50% likely of being realized upon
settlement with the applicable taxing authority. The portion of
the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability
for unrecognized tax benefits in the accompanying balance sheets
along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits is classified as
interest expense and penalties are classified in selling, general
and administrative expenses in the statement of income.
At December 31, 2016 and 2015, the Company did not take any
uncertain positions that would necessitate recording a tax
related liability.
Revenue Recognition
The Companys revenue recognition policies comply with FASB ASC
Topic 605, Revenue Recognition. Sales are recognized when a
formal arrangement exists; the price is fixed or determinable;
title has passed to the buyer, which generally is at the time of
delivery of the products or services; no other significant
obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria
for revenue recognition are recorded as unearned revenue.
Sales revenue represents the invoiced value of goods, net of
value-added taxes (VAT). All of the Companys products sold in
China are subject to the PRC VAT of 17% of the gross sales price.
This VAT may be offset by VAT paid by the Company on raw
materials and other materials purchased in China. The Company
records VAT payable and VAT receivable net of payments in the
financial statements. The VAT tax return is filed offsetting the
payables against the receivables. Sales and purchases are
recorded net of VAT collected and paid as the Company acts as an
agent for the government.
The Companys sales policy allows for the return of unopened
products for cash after deducting certain service and transaction
fees. As alternatives for the product return option, the
customers have options of asking an exchange of the products with
same value. The amount for return of products was immaterial for
the years ended December 31, 2016 and 2015.
Cost of Sales
Cost of sales (COS) consists primarily of cost of purchasing
inventory. Write-down of inventory to lower of cost or market is
also recorded in COS.
Concentration of Credit Risk
The operations of the Company are in the PRC. Accordingly, the
Companys business, financial condition, and results of operations
may be influenced by the political, economic, and legal
environments in the PRC, and by the general state of the PRC
economy.
The Company has cash on hand and demand deposits in accounts
maintained with state-owned banks within the PRC. Cash in
state-owned banks is covered by insurance up to RMB 500,000
($72,500) per bank. The Company have not experienced any losses
in such accounts and believe they are not exposed to any risks on
their cash in these bank accounts.
Statement of Cash Flows
In accordance with ASC Topic 230, Statement of Cash
Flows, cash flows from the Companys operations are
calculated based on the local currencies using the average
translation rates. 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.
Fair Value (FV) of Financial Instruments
Certain of the Companys financial instruments, including cash and
equivalents, accrued liabilities and accounts payable, carrying
amounts approximate their FV due to their short maturities. FASB
ASC Topic 825, Financial Instruments, requires disclosure of the
FV of financial instruments held by the Company. The carrying
amounts reported in the balance sheets for current liabilities
each qualify as financial instruments and are a reasonable
estimate of their FV because of the short period of time between
the origination of such instruments and their expected
realization and the current market rate of interest.
Fair Value Measurements and Disclosures
ASC Topic 820, Fair Value Measurements and Disclosures, defines
FV, and establishes a three-level valuation hierarchy for
disclosures of FV measurement that enhances disclosure
requirements for FV measures. The three levels are defined as
follow:
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
|
Level 3 inputs to the valuation methodology are unobservable and significant to the FV measurement. |
As of December 31, 2016 and 2015, the Company did not identify
any assets and liabilities that are required to be presented on
the balance sheet at FV.
Foreign Currency Translation and Comprehensive Income
(Loss)
The functional currency of the Company is RMB. For financial
reporting purposes, RMB is translated into USD as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet dates. Revenues and expenses
are translated at the average rate of exchange prevailing during
the reporting period.
Translation adjustments arising from the use of different
exchange rates from period to period are included as a component
of stockholders equity as Accumulated other comprehensive income.
Gains and losses resulting from foreign currency transactions are
included in income. There was no significant fluctuation in the
exchange rate for the conversion of RMB to USD after the balance
sheet date.
The Company uses FASB ASC Topic 220, Comprehensive Income.
Comprehensive income (loss) is comprised of net income (loss) and
all changes to the statements of stockholders equity, except
those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders. Comprehensive loss for
2016 and 2015 consisted of net loss and foreign currency
translation adjustments.
Basic and Diluted Earnings per Share
The Company is a limited Company (LC) formed under the laws of
the PRC. Like limited liability company in the US, limited
company in the PRC do not issue shares to the owners. The owners
however, are called shareholders. Ownership interest is
determined in proportion to capital contributed. Accordingly,
earnings per share data is not presented.
Segment Reporting
ASC Topic 280, Segment Reporting, requires use of the management
approach model for segment reporting. The management approach
model is based on the way a companys chief operating decision
maker organizes segments within the Company for making operating
decisions assessing performance and allocating resources.
Reportable segments are based on products and services,
geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
Management determined that the Companys operations constitute a
single reportable segment in accordance with ASC 280. The Company
operates exclusively in one business and industry segment: sale
of health supplement products.
New Accounting Pronouncements
In May 2014, the FASB issued No. 2014-09, Revenue from Contracts
with Customers, which supersedes the revenue recognition
requirements in Accounting Standards Codification 605 – Revenue
Recognition and most industry-specific guidance throughout the
Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or
services. In August 2015, the FASB approved a one-year deferral
of the effective date of the new revenue recognition standard.
Public business entities, certain not-for-profit entities, and
certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual
reporting periods beginning after December 31, 2016, including
interim reporting periods within that reporting period. In March
2016, the FASB issued ASU 2016-08, Revenue from Contracts with
Customers (Topic 606), Principal versus Agent Considerations
(Reporting Revenue versus Net). In April 2016, the FASB issued
ASU 2016-10, Revenue from Contracts with Customers (Topic 606),
Identifying Performance Obligations and Licensing. In May 2016,
the FASB issued ASU 2016-11, Revenue from Contracts with
Customers (Topic 606) and Derivatives and Hedging (Topic 815) –
Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16,
and ASU 2016-12, Revenue from Contracts with Customers (Topic
606) – Narrow Scope Improvements and Practical Expedients. These
ASUs clarify the implementation guidance on a few narrow areas
and adds some practical expedients to the guidance Topic 606. The
Company is evaluating the effect that these ASUs will have on its
financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments-Credit Losses (Topic 326), which requires entities to
measure all expected credit losses for financial assets held at
the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. This
replaces the existing incurred loss model and is applicable to
the measurement of credit losses on financial assets measured at
amortized cost. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2019. Early application will be permitted for all
entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. The Company is
currently evaluating the impact that the standard will have on
its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification
of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies
the presentation and classification of certain cash receipts and
cash payments in the statement of cash flows. This ASU is
effective for public business entities for fiscal years, and
interim periods within those years, beginning after December 15,
2017. Early adoption is permitted. The Company is currently
assessing the potential impact of ASU 2016-15 on its financial
statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of
Cash Flows (Topic 230): Restricted Cash. The guidance requires
that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows.
The standard is effective for fiscal years beginning after
December 15, 2017, and interim period within those fiscal years.
Early adoption is permitted, including adoption in an interim
period. The standard should be applied using a retrospective
transition method to each period presented. The Company does not
anticipate the adoption of this ASU will have a significant
impact on its financial statements.
3. DEFERRED COMMISSION
The Company paid commissions to its salesmen based on cash
collected from the sales. The Company calculated and paid
commission based on certain proportion of monthly cash receipts
from sales; however, the customers sometimes delays taking
delivery of the products after payment is made to the Company,
which is recorded as unearned revenue. Accordingly, the Company
only recognizes current commission cost as the related revenue is
recognized. Commission expenses are recorded as selling expenses.
As of December 31, 2016 and 2015, the Company had deferred
commission of $335,110 and $223,861 respectively.
4. DEFERRED TRAVEL COST
As part of the Companys sales incentive program, the Company
occasionally provided free travel to its customers whose
prepayment to purchase the Companys products reached to certain
amount. There are different travel incentive offering to its
customers based on amount received from each customer. The
Company recorded the to-be-provided free travel cost when cash is
collected from customers as deferred travel cost with
corresponding account of accrued travel cost, and recorded as net
of sales once the prepayment from customers was recognized as
revenue. As of December 31, 2016 and 2015, the Company had
deferred travel cost of $176,187 and $159,532 respectively.
5. INVENTORY
Inventory consisted of the following at December 31, 2016 and
2015:
| Finished goods health supplements | $ | 46,570 | $ | 201,159 |
| Less: Inventory impairment allowance | – | – | ||
| Total | $ | 46,570 | $ | 201,159 |
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at December 31,
2016 and 2015:
| Office furniture | $ | 226,385 | $ | 37,238 |
| Building | 2,641,211 | 2,821,560 | ||
| Vehicle | 211,639 | 150,940 | ||
| Electronic equipment | 6,776 | 8,287 | ||
| Total | 3,086,012 | 3,018,026 | ||
| Less: Accumulated depreciation | (269,078 | ) | (71,503 | ) |
| Net | $ | 2,816,934 | $ | 2,946,523 |
Depreciation for the years ended December 31, 2016 and 2015 was
$211,114 and $70,371, respectively.
7. TAXES PAYABLES
Taxes payable consisted of the following at December 31, 2016 and
2015:
| Income | $ | 35,295 | $ | 90,021 |
| Value-added | 1,075,161 | 465,193 | ||
| City construction | 47,137 | 27,271 | ||
| Education | 33,680 | 19,479 | ||
| Other | 1,777 | 1,567 | ||
| Taxes payable | $ | 1,193,050 | $ | 603,531 |
8. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following
at December 31, 2016 and 2015:
| Accrued liability travel cost (see Note 4) | $ | 114,726 | $ | 108,795 |
| Salary payable | 53,714 | 34,300 | ||
| Other payables | 146,035 | 95,588 | ||
| Total | $ | 314,475 | $ | 238,683 |
Other payable mainly consisted of payables for employees social
insurance and disabled employment security fund of $128,927 and
$67,253 at December 31, 2016 and 2015, respectively.
9. RELATED PARTY TRANSACTIONS
Advance from a Shareholder
At December 31, 2016 and 2015, the Company had advance from a
major shareholder of $2,095,064 and $819,702, respectively. The
advance was payable on demand, and bore no interest.
Office lease from a Major Shareholder
In May 2014, the Company entered a lease with its major
shareholder for office use; the lease term is three years until
May 2017 with option to renew. The monthly rent was RMB 5,000
($721), the Company was required to prepay each years annual rent
at 15th of May of each year. The rental expense for the year
ended December 31, 2016 and 2015 was $9,033 each. The Company
renewed lease in May 2017 for another three years until May 28,
2020 with month rents of RMB 5,000 ($721), payable quarterly.
10. INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC and
various local tax laws. Effective January 1, 2008, China adopted
a uniform tax rate of 25% for all enterprises (including
foreign-invested enterprises). The following table reconciles the
PRC statutory rates to the Companys effective tax rate for 2016
and 2015:
| PRC statutory rates (benefit) | (25.0 | )% | (25.0 | )% |
| Valuation allowance on NOL | 25.0 | % | 25.0 | % |
| Tax (benefit) per financial statements | – | % | – | % |
11. STATUTORY RESERVES
to the PRC corporate law effective January 1, 2006, the Company
is now only required to maintain one statutory reserve by
appropriating from its after-tax profit before declaration or
payment of dividends. The statutory reserve represents restricted
retained earnings.
Surplus reserve fund
The Company is now required to transfer 10% of its net income, as
determined under PRC accounting rules and regulations, to a
statutory surplus reserve fund until such reserve balance reaches
50% of the Companys registered capital.
The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years losses, if
any, and may be utilized for business expansion or converted into
share capital by issuing new shares to existing shareholders in
proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the
registered capital.
Common welfare fund
Common welfare fund is a voluntary fund that the Company can
elect to transfer 5% to 10% of its net income, as determined
under PRC accounting rules and regulations, to this fund. The
Company did not make any contribution to this fund during 2016 or
2015.
This fund can only be utilized on capital items for the
collective benefit of the Companys employees, such as
construction of dormitories, cafeteria facilities, and other
staff welfare facilities. This fund is non-distributable other
than upon liquidation.
12. OPERATING RISKS
The Companys operations in the PRC are subject to specific
considerations and significant risks not typically associated
with company in North America and Western Europe. These include
risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Companys
results may be adversely affected 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 Companys sales, purchases and expenses are denominated in RMB
and all of the Companys 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. Remittances in currencies
other than RMB may require certain supporting documentation to
effect the remittance.
13. SUBSEQUENT EVENTS
On May 26, 2017, HK AiXin International Group Co., Limited, a
Hong Kong limited company (AiXin HK) established on February 25,
2016 to serve as an intermediate holding company, entered an
acquisition agreement with the Company and its shareholders to
acquire 100% ownership of the Company for RMB 100,000,000 ($14.56
million). On May 27, 2017, the local government of the PRC issued
a certificate of approval regarding the foreign ownership of
AiXin Zhonghong by AiXin HK.
AiXin (BVI) International Group Co., Ltd. (Aixin BVI) was
incorporated in British Virgin Islands on September 21, 2017 to
serve as a holding company. On November 17, 2017, AiXin BVI and
AiXin HK entered a share exchange agreement, wherein AiXin BVI
acquired 100% ownership of AiXin HK in exchange for the issuance
of 10 shares of the commons stock of Aixin BVI.
On December 12, 2017, AiXin BVI and its shareholders entered into
and closed a share exchange agreement, with Mercari
Communications Group, Ltd (Mercari), to which Mercari acquired
100% of the issued and outstanding capital stock of Aixin BVI in
exchange for a total of 227,352,604 shares of Mercaris common
stock. In addition, the Company desired to issue 45,224,085
shares of Mercaris common stock to three individuals for services
rendered to the Company. After giving effect to the Share
Exchange and new shares issued to three individuals, Mercari had
outstanding 317,988,089 shares of common stock, representing all
of Mercaris authorized shares of common stock.
As a result of the Share Exchange described above, AiXin BVI
became the wholly-owned subsidiary of Mercari, and AiXin BVI owns
all of the outstanding shares of AiXin HK, which in turn owns all
of the outstanding shares of AiXin Zhonghong. Neither AiXin BVI
nor AiXin HK had operations prior to December 12, 2017.
For accounting purposes, the acquisition of AiXin BVI by Mercari
was accounted for as a reverse acquisition and has been treated
as a recapitalization of Mercari, effected by a share exchange,
with AiXin BVI as the accounting acquirer. Since neither AiXin
BVI nor AiXin HK had operations prior to December 12, 2017, the
historical financial statements of AiXin Zhonghong are now the
historical financial statements of the registrant, Mercari. The
assets and liabilities of AiXin Zhonghong have been brought
forward at their book value and no goodwill has been recognized.
Financial Statements for the nine months ended September
30, 2017 and 2016, and as at September 30, 2017 and December 31,
2016
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
BALANCE SHEETS
unaudited
| September 30, 2017 | December 31, 2016 | |||
| ASSETS | ||||
| CURRENT ASSETS | ||||
| Cash equivalents | $ | 20,881 | $ | 29,668 |
| Accounts receivable, net | 83,802 | 175,259 | ||
| Other receivables and prepaid expenses | 6,378 | 3,782 | ||
| Advances to suppliers | 26,850 | 105,455 | ||
| Deferred commissions | 399,533 | 335,110 | ||
| Deferred travel cost | 274,100 | 176,187 | ||
| Inventory | 76,636 | 46,570 | ||
| Total current assets | 888,180 | 872,031 | ||
| NONCURRENT ASSETS | ||||
| Property and equipment, net | 2,786,335 | 2,816,934 | ||
| Total non-current assets | 2,786,335 | 2,816,934 | ||
| TOTAL ASSETS | $ | 3,674,515 | $ | 3,688,965 |
| LIABILITIES AND STOCKHOLDERS (DEFICIT) | ||||
| CURRENT LIABILITIES | ||||
| Accounts payable | $ | 138,655 | $ | 35,191 |
| Unearned revenue | 2,560,895 | 2,066,550 | ||
| Taxes payable | 1,252,744 | 1,193,050 | ||
| Accrued liabilities and other payables | 572,364 | 314,475 | ||
| Advance from shareholder | 2,203,759 | 2,095,064 | ||
| TOTAL LIABILITIES | 6,728,417 | 5,704,330 | ||
| STOCKHOLDERS (DEFICIT) | ||||
| Paid in capital | 16,402 | 16,402 | ||
| Statutory reserve | 11,721 | 11,721 | ||
| Accumulated deficit | (3,056,419 | ) | (2,131,504 | ) |
| Accumulated other comprehensive income (loss) | (25,606 | ) | 88,016 | |
| TOTAL STOCKHOLDERS (DEFICIT) | (3,053,902 | ) | (2,015,365 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS (DEFICIT) | $ | 3,674,515 | $ | 3,688,965 |
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
unaudited
| For the Nine Months Ended September 30, | ||||||
| Net sales | $ | 650,348 | $ | 2,279,383 | ||
| Cost of sales | 246,765 | 1,001,488 | ||||
| Gross profit | 403,583 | 1,277,895 | ||||
| Operating expenses | ||||||
| Selling expenses | 576,984 | 778,480 | ||||
| General and administrative expenses | 728,214 | 720,809 | ||||
| Provision for bad debts | 16,963 | 12,191 | ||||
| Total operating expenses | 1,322,161 | 1,511,480 | ||||
| Loss from operations | (918,578 | ) | (233,585 | ) | ||
| Non-operating income (expenses) | ||||||
| Financial expense | (527 | ) | (462 | ) | ||
| Other income | 35,661 | 38,966 | ||||
| Other expense | (41,471 | ) | (47,502 | ) | ||
| Total non-operating expenses, net | (6,337 | ) | (8,998 | ) | ||
| Loss before income tax | (924,915 | ) | (242,583 | ) | ||
| Income tax expense | – | – | ||||
| Net loss | (924,915 | ) | (242,583 | ) | ||
| Other comprehensive items | ||||||
| Foreign currency translation gain (loss) | (113,622 | ) | 4,352 | |||
| Comprehensive loss | $ | (1,038,537 | ) | $ | (238,231 | ) |
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
STATEMENTS OF CASH FLOWS
unaudited
| For the Nine Months Ended September 30, | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
| Net loss | $ | (924,915 | ) | $ | (242,583 | ) |
| Depreciation | 161,949 | 157,624 | ||||
| Provision for bad debts | 16,963 | 12,191 | ||||
| Increase (decrease) in assets | ||||||
| Accounts receivable | 80,058 | (210,880 | ) | |||
| Other receivables and prepaid expenses | (2,367 | ) | (1,152 | ) | ||
| Advances to suppliers | 81,394 | 161,775 | ||||
| Deferred commissions | (48,100 | ) | (177,417 | ) | ||
| Deferred travel cost | (87,810 | ) | (101,676 | ) | ||
| Inventory | (27,297 | ) | 71,453 | |||
| Increase (decrease) in liabilities: | ||||||
| Accounts payable | 99,453 | 78,429 | ||||
| Unearned revenue | 391,384 | 210,397 | ||||
| Taxes payable | 5,612 | 496,048 | ||||
| Accrued liabilities and other payables | 237,884 | 55,413 | ||||
| Net cash provided by (used in) operating activities | (15,792 | ) | 509,622 | |||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
| Purchase of property and equipment | (7,727 | ) | (273,640 | ) | ||
| Net cash used in investing activities | (7,727 | ) | (273,640 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
| Advance from (repayment to) shareholder | 13,631 | (261,683 | ) | |||
| Net cash provided by (used in) financing activities | 13,631 | (261,683 | ) | |||
| EFFECT OF EXCHANGE RATE CHANGE ON CASH EQUIVALENTS | 1,101 | (838 | ) | |||
| NET DECREASE IN CASH EQUIVALENTS | (8,787 | ) | (26,539 | ) | ||
| CASH EQUIVALENTS, BEGINNING OF PERIOD | 29,668 | 44,419 | ||||
| CASH EQUIVALENTS, END OF PERIOD | $ | 20,881 | $ | 17,881 | ||
| Supplemental Cash flow data: | ||||||
| Income tax paid | $ | – | ||||
| Interest paid | $ | – | $ | – | ||
The accompanying notes are an integral part of these financial
statements
CHENGDU AIXIN ZHONGHONG BIOLOGICAL TECHNOLOGY CO.,
LTD
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2017 (UNAUDITED) and DECEMBER 31,
2016
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Chengdu Aixin Zhonghong Biological Technology Co., Ltd. (the
Company or Aixin) was incorporated in 2013 in Chengdu, China. The
Company mainly develops and distributes consumer products by
offering a comprehensive line of premium-quality nutritional
products. The Company sells the products through exhibition
events, conferences, as well as person-to-person marketing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are prepared in conformity
with U.S. Generally Accepted Accounting Principles (US GAAP). The
functional currency of Aixin is Chinese Renminbi (RMB). The
accompanying financial statements are translated from RMB and
presented in U.S. dollars (USD).
Going Concern
The Company incurred net losses of $0.92 million and $0.24
million for the nine months ended September 30, 2017 and 2016
respectively. The Company also had a stockholders deficit of
$3.05 million as of September 30, 2017. These conditions raise a
substantial doubt about the Companys ability to continue as a
going concern. The Company plans to increase its income by
strengthening its sales force, providing attractive sales
incentive program, and increasing marketing and promotion
activities. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Use of Estimates
In preparing financial statements in conformity with US 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 financial
statements, as well as the reported amounts of revenues and
expenses during the reporting period.
Significant estimates, required by management, include the
recoverability of long-lived assets, allowance for doubtful
accounts, and the reserve for obsolete and slow-moving
inventories. Actual results could differ from those estimates.
Cash and Equivalents
For financial statement purposes, the Company considers all
highly liquid investments with an original maturity of three
months or less to be cash equivalents.
Accounts Receivable
The Companys policy is to maintain an allowance for potential
credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns
to evaluate the adequacy of these reserves. During the nine
months ended September 30, 2017 and 2016, bad debt expense was
$16,963 and $12,191, respectively. As of September 30, 2017 and
December 31, 2016, the bad debt allowance was $27,279 and $9,475,
respectively.
Inventory
Inventory mainly consists of health supplement products.
Inventory is valued at the lower of average cost or market, cost
being determined on a moving weighted average method. Management
compares the cost of inventories with the net realizable value
and an allowance is made to write down their inventories to
market value, if lower. The Company did not record any
write-downs of inventory at September 30, 2017 and December
31,2016.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation, and impairment losses, if any. Major repairs and
betterments that significantly extend original useful lives or
improve productivity are capitalized and depreciated over the
period benefited. Maintenance and repairs are expensed as
incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is
included in operations. Depreciation of property and equipment is
provided using the straight-line method for substantially all
assets with 5% salvage value and estimated lives as follows:
| Building | 20 years |
| Office furniture | 5 years |
| Electronic Equipment | 3 years |
| Vehicles | 5 years |
Impairment of Long-Lived Assets
Long-lived assets, which include property and equipment and
intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, but at least annually.
Recoverability of long-lived assets to be held and used is
measured by comparing of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated
by it. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds its fair value (FV). FV is generally determined
using the assets expected future discounted cash flows or market
value, if readily determinable. Based on its review, the Company
believes that, as of September 30, 2017 and December 31, 2016,
there was no significant impairments of its long-lived assets.
Income Taxes
Income taxes are accounted for using an asset and liability
method. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws
and statutory tax rates, applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
The Company follows ASC Topic 740, which 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. ASC Topic 740 also provides guidance
on recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim
periods, and income tax disclosures.
Under the provisions of ASC Topic 740, when tax returns are
filed, it is likely that some positions taken would be sustained
upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or
the amount of the position that would be ultimately sustained.
The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available
evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax
positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax
benefit that is more than 50% likely of being realized upon
settlement with the applicable taxing authority. The portion of
the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability
for unrecognized tax benefits in the accompanying balance sheets
along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interest
associated with unrecognized tax benefits is classified as
interest expense and penalties are classified in selling, general
and administrative expenses in the statement of income.
At September 30, 2017 and December 31, 2016, the Company did not
take any uncertain positions that would necessitate recording a
tax related liability.
Revenue Recognition
The Companys revenue recognition policies comply with FASB ASC
Topic 605, Revenue Recognition. Sales are recognized when a
formal arrangement exists; the price is fixed or determinable;
title has passed to the buyer, which generally is at the time of
delivery of the products or services; no other significant
obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria
for revenue recognition are recorded as unearned revenue.
Sales revenue represents the invoiced value of goods, net of
value-added taxes (VAT). All of the Companys products sold in
China are subject to the PRC VAT of 17% of the gross sales price.
This VAT may be offset by VAT paid by the Company on raw
materials and other materials purchased in China. The Company
records VAT payable and VAT receivable net of payments in the
financial statements. The VAT tax return is filed offsetting the
payables against the receivables. Sales and purchases are
recorded net of VAT collected and paid as the Company acts as an
agent for the government.
The Companys sales policy allows for the return of unopened
products for cash after deducting certain service and transaction
fees. As alternatives for product returns, the customers can ask
for an exchange of the products with same value. The amount for
return of products was immaterial for the nine months ended
September 30, 2017 and 2016.
Cost of Sales
Cost of sales (COS) consists primarily of cost of purchasing
inventory. Write-down of inventory to lower of cost or market is
also recorded in COS.
Concentration of Credit Risk
The operations of the Company are in the PRC. Accordingly, the
Companys business, financial condition, and results of operations
may be influenced by the political, economic, and legal
environments in the PRC, and by the general state of the PRC
economy.
The Company has cash on hand and demand deposits in accounts
maintained with state-owned banks within the PRC. Cash in
state-owned banks is covered by insurance up to RMB 500,000
($72,500) per bank. The Company have not experienced any losses
in such accounts and believe they are not exposed to any risks on
their cash in these bank accounts.
Statement of Cash Flows
In accordance with ASC Topic 230, Statement of Cash
Flows, cash flows from the Companys operations are
calculated based on the local currencies using the average
translation rates. 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.
Fair Value (FV) of Financial Instruments
Certain of the Companys financial instruments, including cash and
equivalents, accrued liabilities and accounts payable, carrying
amounts approximate their FV due to their short maturities. FASB
ASC Topic 825, Financial Instruments, requires disclosure of the
FV of financial instruments held by the Company. The carrying
amounts reported in the balance sheets for current liabilities
each qualify as financial instruments and are a reasonable
estimate of their FV because of the short period of time between
the origination of such instruments and their expected
realization and the current market rate of interest.
Fair Value Measurements and Disclosures
ASC Topic 820, Fair Value Measurements and Disclosures, defines
FV, and establishes a three-level valuation hierarchy for
disclosures of FV measurement that enhances disclosure
requirements for FV measures. The three levels are defined as
follow:
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
|
Level 3 inputs to the valuation methodology are unobservable and significant to the FV measurement. |
As of September 30, 2017 and December 31, 2016, the Company did
not identify any assets and liabilities that are required to be
presented on the balance sheet at FV.
Foreign Currency Translation and Comprehensive Income
(Loss)
The functional currency of the Company is RMB. For financial
reporting purposes, RMB is translated into USD as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet dates. Revenues and expenses
are translated at the average rate of exchange prevailing during
the reporting period.
Translation adjustments arising from the use of different
exchange rates from period to period are included as a component
of stockholders equity as Accumulated other comprehensive income.
Gains and losses resulting from foreign currency transactions are
included in income. There was no significant fluctuation in the
exchange rate for the conversion of RMB to USD after the balance
sheet date.
The Company uses FASB ASC Topic 220, Comprehensive Income.
Comprehensive income (loss) is comprised of net income (loss) and
all changes to the statements of stockholders equity, except
those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders. Comprehensive loss for
the nine months ended September 30, 2017 and 2016 consisted of
net loss and foreign currency translation adjustments.
Basic and Diluted Earnings per Share
The Company is a limited Company (LC) formed under the laws of
the PRC. Like limited liability company in the US, limited
company in the PRC do not issue shares to the owners. The owners
however, are called shareholders. Ownership interest is
determined in proportion to capital contributed. Accordingly,
earnings per share data is not presented.
Segment Reporting
ASC Topic 280, Segment Reporting, requires use of the management
approach model for segment reporting. The management approach
model is based on the way a companys chief operating decision
maker organizes segments within the Company for making operating
decisions assessing performance and allocating resources.
Reportable segments are based on products and services,
geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
Management determined that the Companys operations constitute a
single reportable segment in accordance with ASC 280. The Company
operates exclusively in one business and industry segment: sale
of health supplement products.
New Accounting Pronouncements
In May 2014, the FASB issued No. 2014-09, Revenue from Contracts
with Customers, which supersedes the revenue recognition
requirements in Accounting Standards Codification 605 – Revenue
Recognition and most industry-specific guidance throughout the
Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or
services. In August 2015, the FASB approved a one-year deferral
of the effective date of the new revenue recognition standard.
Public business entities, certain not-for-profit entities, and
certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual
reporting periods beginning after December 31, 2016, including
interim reporting periods within that reporting period. In March
2016, the FASB issued ASU 2016-08, Revenue from Contracts with
Customers (Topic 606), Principal versus Agent Considerations
(Reporting Revenue versus Net). In April 2016, the FASB issued
ASU 2016-10, Revenue from Contracts with Customers (Topic 606),
Identifying Performance Obligations and Licensing. In May 2016,
the FASB issued ASU 2016-11, Revenue from Contracts with
Customers (Topic 606) and Derivatives and Hedging (Topic 815) –
Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16,
and ASU 2016-12, Revenue from Contracts with Customers (Topic
606) – Narrow Scope Improvements and Practical Expedients. These
ASUs clarify the implementation guidance on a few narrow areas
and adds some practical expedients to the guidance Topic 606. The
Company is evaluating the effect that these ASUs will have on its
financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments-Credit Losses (Topic 326), which requires entities to
measure all expected credit losses for financial assets held at
the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. This
replaces the existing incurred loss model and is applicable to
the measurement of credit losses on financial assets measured at
amortized cost. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2019. Early application will be permitted for all
entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. The Company is
currently evaluating the impact that the standard will have on
its financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification
of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies
the presentation and classification of certain cash receipts and
cash payments in the statement of cash flows. This ASU is
effective for public business entities for fiscal years, and
interim periods within those years, beginning after December 15,
2017. Early adoption is permitted. The Company is currently
assessing the potential impact of ASU 2016-15 on its financial
statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of
Cash Flows (Topic 230): Restricted Cash. The guidance requires
that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash
and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows.
The standard is effective for fiscal years beginning after
December 15, 2017, and interim period within those fiscal years.
Early adoption is permitted, including adoption in an interim
period. The standard should be applied using a retrospective
transition method to each period presented. The Company does not
anticipate the adoption of this ASU will have a significant
impact on its financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a
Business, which clarifies the definition of a business with the
objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions or
disposals of assets or businesses. The standard is effective for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted.
The standard should be applied prospectively on or after the
effective date. The Company will evaluate the impact of adopting
this standard prospectively upon any transactions of acquisitions
or disposals of assets or businesses.
In January 2017, the FASB issued ASU 2017-04, Simplifying the
Test for Goodwill Impairment. The guidance removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase
price allocation. A goodwill impairment will now be the amount by
which a reporting units carrying value exceeds its fair value,
not to exceed the carrying amount of goodwill. The guidance
should be adopted on a prospective basis for the annual or any
interim goodwill impairment tests beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1,
2017. The Company is currently evaluating the impact of adopting
this standard on its CFS.
Other recent accounting pronouncements issued by the FASB,
including its Emerging Issues Task Force, the American Institute
of Certified Public Accountants, and the SEC did not or are not
believed by management to have a material impact on the Companys
present or future CFS.
3. DEFERRED COMMISSION
The Company pays commissions to its salesmen based on cash
collected from the sales. The Company calculated and paid
commission based on certain proportion of monthly cash receipts
from sales; however, the customers sometimes delays taking
delivery of the products after payment is made to the Company,
which is recorded as unearned revenue. Accordingly, the Company
only recognizes current commission cost as the related revenue is
recognized. Commission expenses are recorded as selling expenses.
As of September 30, 2017 and December 31, 2016, the Company had
deferred commissions of $399,533 and $335,110 respectively.
4. DEFERRED TRAVEL COST
As part of the Companys sales incentive program, the Company
occasionally provided free travel to its customers whose
prepayment to purchase the Companys products reached to certain
amount. There are different travel incentive offering to its
customers based on amount received from each customer. The
Company recorded the to-be-provided free travel cost when cash is
collected from customers as deferred travel cost with
corresponding account of accrued travel cost, and recorded as net
of sales once the prepayment from customers was recognized as
revenue. As of September 30, 2017 and December 31, 2016, the
Company had deferred travel cost of $274,100 and $176,187,
respectively.
5. INVENTORY
Inventory consisted of the following at September 30, 2017 and
December 31, 2016:
| Finished goods health supplements | $ | 76,636 | $ | 46,570 |
| Less: Inventory impairment allowance | – | – | ||
| Total | $ | 76,636 | $ | 46,570 |
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at September
30, 2017 and December 31, 2016:
| Office furniture | $ | 237,853 | $ | 226,385 |
| Building | 2,760,639 | 2,641,211 | ||
| Vehicle | 221,209 | 211,639 | ||
| Electronic equipment | 13,766 | 6,776 | ||
| Total | 3,233,467 | 3,086,012 | ||
| Less: Accumulated depreciation | (447,132 | ) | (269,078 | ) |
| Net | $ | 2,786,335 | $ | 2,816,934 |
Depreciation for the nine months ended September 30, 2017 and
2016 was $161,949 and $157,624, respectively.
7. TAXES PAYABLE
Taxes payable consisted of the following at September 30, 2017
and December 31, 2016:
| Income | $ | 36,890 | $ | 35,295 |
| Value-added | 1,129,223 | 1,075,161 | ||
| City construction | 49,445 | 47,137 | ||
| Education | 35,329 | 33,680 | ||
| Other | 1,857 | 1,777 | ||
| Taxes payable | $ | 1,252,744 | $ | 1,193,050 |
8. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following
at September 30, 2017 and December 31, 2016:
| Accrued liability travel cost (see Note 4) | $ | 86,049 | $ | 114,726 |
| Salary payable | 58,031 | 53,714 | ||
| Other payables | 428,284 | 146,035 | ||
| Total | $ | 572,364 | $ | 314,475 |
Other payable mainly consisted of payables for employees social
insurance and disabled employment security fund of $242,385 and
commission payable of $174,121 at September 30, 2017; and
payables of employees social insurance and disables employment
security fund of $128,927 at December 31, 2016, respectively.
9. RELATED PARTY TRANSACTIONS
Advance from a Shareholder
At September 30, 2017 and December 31, 2016, the Company had
advance from a major shareholder of $2,203,759 and $2,095,064,
respectively. The advance was payable on demand, and bore no
interest.
Office lease from a Major Shareholder
In May 2014, the Company entered a lease with its major
shareholder for office use; the lease term is three years until
May 2017 with option to renew. The monthly rent was RMB 5,000
($721), the Company was required to prepay each years annual rent
at 15th of May of each year. The Company renewed lease in May
2017 for another three years until May 28, 2020 with month rents
of RMB 5,000 ($721), payable quarterly. The future annual minimum
lease payment at September 30, 2017 is: $8,652 for each of the
year ending September 30, 2018, and 2019, and $3,605 for the year
ending September 30, 2020. The renal expense for this lease was
$6,490 for the nine months ending September 30, 2017 and 2016,
respectively.
10. INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC and
various local tax laws. Effective January 1, 2008, China adopted
a uniform tax rate of 25% for all enterprises (including
foreign-invested enterprises). The following table reconciles the
PRC statutory rates to the Companys effective tax rate for nine
months ended September 30, 2017 and 2016:
| PRC statutory rates (benefit) | (25.0 | )% | (25.0 | )% |
| Valuation allowance on NOL | 25.0 | % | 25.0 | % |
| Tax (benefit) per financial statements | – | % | – | % |
11. STATUTORY RESERVES
to the PRC corporate law effective January 1, 2006, the Company
is now only required to maintain one statutory reserve by
appropriating from its after-tax profit before declaration or
payment of dividends. The statutory reserve represents restricted
retained earnings.
Surplus reserve fund
The Company is now required to transfer 10% of its net income, as
determined under PRC accounting rules and regulations, to a
statutory surplus reserve fund until such reserve balance reaches
50% of the Companys registered capital.
The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years losses, if
any, and may be utilized for business expansion or converted into
share capital by issuing new shares to existing shareholders in
proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the
registered capital.
Common welfare fund
Common welfare fund is a voluntary fund that the Company can
elect to transfer 5% to 10% of its net income, as determined
under PRC accounting rules and regulations, to this fund. The
Company did not make any contribution to this fund during the
nine month ended September 30, 2017 or 2016.
This fund can only be utilized on capital items for the
collective benefit of the Companys employees, such as
construction of dormitories, cafeteria facilities, and other
staff welfare facilities. This fund is non-distributable other
than upon liquidation.
12. OPERATING RISKS
The Companys operations in the PRC are subject to specific
considerations and significant risks not typically associated
with company in North America and Western Europe. These include
risks associated with, among others, the political, economic and
legal environments and foreign currency exchange. The Companys
results may be adversely affected 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 Companys sales, purchases and expenses are denominated in RMB
and all of the Companys 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. Remittances in currencies
other than RMB may require certain supporting documentation to
effect the remittance.
13. SUBSEQUENT EVENTS
On May 26, 2017, HK AiXin International Group Co., Limited, a
Hong Kong limited company (AiXin HK) established on February 25,
2016 to serve as an intermediate holding company, entered an
acquisition agreement with the Company and its shareholders to
acquire 100% ownership of the Company for RMB 100,000,000 ($14.56
million). On May 27, 2017, the local government of the PRC issued
a certificate of approval regarding the foreign ownership of
AiXin Zhonghong by AiXin HK.
AiXin (BVI) International Group Co., Ltd. (Aixin BVI) was
incorporated in British Virgin Islands on September 21, 2017 to
serve as a holding company. On November 17, 2017, AiXin BVI and
AiXin HK entered a share exchange agreement, wherein AiXin BVI
acquired 100% ownership of AiXin HK in exchange for the issuance
of 10 shares of the commons stock of Aixin BVI.
On December 12, 2017, AiXin BVI and its shareholders entered into
and closed a share exchange agreement, with Mercari
Communications Group, Ltd (Mercari), to which Mercari acquired
100% of the issued and outstanding capital stock of Aixin BVI in
exchange for a total of 227,352,604 shares of Mercaris common
stock. In addition, the Company desired to issue 45,224,085
shares of Mercaris common stock to three individuals for services
rendered to the Company. After giving effect to the Share
Exchange and new shares issued to three individuals, Mercari had
outstanding 317,988,089 shares of common stock, representing all
of Mercaris authorized shares of common stock.
As a result of the Share Exchange described above, AiXin BVI
became the wholly-owned subsidiary of Mercari, and AiXin BVI owns
all of the outstanding shares of AiXin HK, which in turn owns all
of the outstanding shares of AiXin Zhonghong. Neither AiXin BVI
nor AiXin HK had operations prior to December 12, 2017.
For accounting purposes, the acquisition of AiXin BVI by Mercari
was accounted for as a reverse acquisition and has been treated
as a recapitalization of Mercari, effected by a share exchange,
with AiXin BVI as the accounting acquirer. Since neither AiXin
BVI nor AiXin HK had operations prior to December 12, 2017, the
historical financial statements of AiXin Zhonghong are now the
historical financial statements of the registrant, Mercari. The
assets and liabilities of AiXin Zhonghong have been brought
forward at their book value and no goodwill has been recognized.
(b) Pro Forma Financial Information
MERCARI COMMUNICATIONS GROUP, LTD
AND AIXIN (BVI) INTERNATIONAL GROUP CO., LTD
Pro Forma Consolidated Balance Sheet
As of September 30, 2017
(unaudited)
| (historical) | (historical) | |||||||
| CURRENT ASSETS | ||||||||
| Cash equivalents | $ | — | $ | 20,881 | $ | 20,881 | ||
| Accounts receivable, net | — | 83,802 | 83,802 | |||||
| Other receivables and prepaid expenses | — | 6,378 | 6,378 | |||||
| Advances to suppliers | — | 26,850 | 26,850 | |||||
| Deferred commissions | — | 399,533 | 399,533 | |||||
| Deferred travel cost | — | 274,100 | 274,100 | |||||
| Inventory | — | 76,636 | 76,636 | |||||
| Total current assets | — | 888,180 | 888,180 | |||||
| NONCURRENT ASSETS | ||||||||
| Property and equipment, net | — | 2,786,335 | 2,786,335 | |||||
| Total noncurrent assets | — | 2,786,335 | 2,786,335 | |||||
| TOTAL ASSETS | $ | — | $ | 3,674,515 | $ | 3,674,515 | ||
| LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | — | $ | 138,655 | $ | 138,655 | ||
| Unearned revenue | — | 2,560,895 | 2,560,895 | |||||
| Accrued liabilities and other payables | 57,246 | 572,364 | 629,610 | |||||
| Tax payable | — | 1,252,744 | 1,252,744 | |||||
| Due to related parties | 181,546 | 2,203,759 | 2,385,305 | |||||
| Total current liabilities | 238,792 | 6,728,417 | 6,967,209 | |||||
| Total liabilities | 238,792 | 6,728,417 | 6,967,209 | |||||
| CONTINGENCIES AND COMMITMENTS | ||||||||
| STOCKHOLDERS DEFICIT | ||||||||
| Common stock | — | 31,345 | (A)(B) | 31,799 | ||||
| Paid in capital | 158,722 | 16,402 | 3,188,614 | (A)(B)(C) | 3,363,738 | |||
| Statutory reserve | — | 11,721 | 11,721 | |||||
| Accumulated other comprehensive income | — | (25,606 | ) | (25,606 | ) | |||
| Accumulated deficit | (397,968 | ) | (3,056,419 | ) | (3,219,959 | )(B)(C) | (6,674,346 | ) |
| Total stockholders deficit | (238,792 | ) | (3,053,902 | ) | (3,292,694 | ) | ||
| TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT | $ | — | $ | 3,674,515 | $ | 3,674,515 |
| (1) |
Source: unaudited financial statements of Mercari as of September 30, 2017. |
| (2) |
Source: unaudited financial statements of Aixin Zhonghong as of September 30, 2017, as filed in this Form 8-K filed with the SEC. |
| (A) |
Reflection of the issuance of 227,352,604 shares to the shareholders of Aixin BVI; |
| (B) |
Reflection of the issuance of 45,224,085 shares to three individuals for services rendered, resulting in 317,988,089 total shares outstanding of Mercari after the reverse merger and new issuance of the shares; |
| (C) |
Elimination of Mercaris capital accounts and accumulated deficit as result of recapitalization. |
See accompanying notes to pro forma consolidated financial
statements
MERCARI COMMUNICATIONS GROUP, LTD
AND AIXIN (BVI) INTERNATIONAL GROUP CO., LTD
Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2017
(unaudited)
| (1) | (2) | ||||||||||
| (historical) | (historical) | ||||||||||
| Net sales | $ | — | $ | 650,348 | $ | — | $ | 650,348 | |||
| Cost of sales | — | 246,765 | — | 246,765 | |||||||
| Gross profit | — | 403,583 | — | 403,583 | |||||||
| Operating expenses | |||||||||||
| Selling | — | 576,984 | — | 576,984 | |||||||
| Provision for bad debts | — | 16,963 | 16,963 | ||||||||
| General and administrative | 91,328 | 728,214 | — | 819,542 | |||||||
| Total operating expenses | 91,328 | 1,322,161 | — | 1,413,489 | |||||||
| Income (loss) from operations | (91,328 | ) | (918,578 | ) | — | (1,009,906 | ) | ||||
| Non-operating income (expenses) | |||||||||||
| Other income | — | 35,661 | — | 35,661 | |||||||
| Other expenses | — | (41,471 | ) | — | (41,471 | ) | |||||
| Financial expense | — | (527 | ) | — | (527 | ) | |||||
| Total non-operating expenses, net | — | (6,337 | ) | — | (6,337 | ) | |||||
| Loss before income tax | (91,328 | ) | (924,915 | ) | — | (1,016,243 | ) | ||||
| Income tax expense | — | — | — | — | |||||||
| Net loss | $ | (91,328 | ) | $ | (924,915 | ) | $ | — | $ | (1,016,243 | ) |
| Other comprehensive items | |||||||||||
| Foreign currency translation loss | — | (113,622 | ) | — | (113,622 | ) | |||||
| Comprehensive loss | $ | (91,328 | ) | $ | (1,038,537 | ) | $ | — | $ | (1,129,865 | ) |
| Loss per share | $ | (0.002 | ) | $ | (0.004 | ) | $ | — | $ | (0.003 | ) |
| Weighted average shares outstanding | 45,411,400 | 227,352,604 | 45,224,085 | 317,988,089 |
| (1) |
Source: unaudited financial statements of Mercari for the nine month ended and as of September 30, 2017. |
| (2) |
Source: unaudited financial statements of Aixin Zhonghong for the nine months ended and as of September 30, 2017, as filed in this Form 8-K filed with the SEC. |
See accompanying notes to pro forma consolidated financial
statements
MERCARI COMMUNICATIONS GROUP, LTD
AND AIXIN (BVI) INTERNATIONAL GROUP CO., LTD
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2016
(unaudited)
| (1) | (2) | |||||||||||
| (historical) | (historical) | |||||||||||
| Net sales | $ | — | $ | 3,082,725 | $ | — | $ | 3,082,725 | ||||
| Cost of sales | — | 1,352,742 | — | 1,352,742 | ||||||||
| Gross profit | — | 1,729,983 | — | 1,729,983 | ||||||||
| Operating expenses | ||||||||||||
| Selling | — | 1,152,555 | — | 1,152,555 | ||||||||
| Provision for bad debt expense | 7,018 | — | 7,018 | |||||||||
| General and administrative | 41,579 | 2,640,324 | 3,617,927 | (A) | 6,299,830 | |||||||
| Total operating expenses | 41,579 | 3,799,897 | 3,617,927 | 7,459,403 | ||||||||
| Income from operations | (41,579 | ) | (2,069,914 | ) | (3,617,927 | ) | (5,729,420 | ) | ||||
| Non-operating income (expenses) | ||||||||||||
| Other income | — | 51,445 | — | 51,445 | ||||||||
| Other expenses | — | (61,074 | ) | — | (61,074 | ) | ||||||
| Financial expense | — | (669 | ) | — | (669 | ) | ||||||
| Total non-operating expenses, net | — | (10,298 | ) | — | (10,298 | ) | ||||||
| Loss before income tax | (41,579 | ) | (2,080,212 | ) | (3,617,927 | ) | (5,739,718 | ) | ||||
| Income tax benefit | — | — | — | — | ||||||||
| Net loss | $ | (41,579 | ) | $ | (2,080,212 | ) | $ | (3,617,927 | ) | $ | (5,739,718 | ) |
| Other comprehensive items | ||||||||||||
| Foreign currency translation gain (loss) | — | 89,979 | — | 89,979 | ||||||||
| Comprehensive loss | $ | (41,579 | ) | $ | (1,990,233 | ) | $ | (3,617,927 | ) | $ | (5,649,739 | ) |
| Loss per share | $ | (0.001 | ) | $ | (0.009 | ) | $ | (0.080 | ) | $ | (0.018 | ) |
| Weighted average shares outstanding | 45,411,400 | 227,352,604 | 45,224,085 | (A) | 317,988,089 |
| (1) |
Source: unaudited financial statements of Mercari for the year ended and as of December 31, 2016. |
| (2) |
Source: audited financial statements of Aixin Zhonghong for the year ended and as of December 31, 2016, as filed in this Form 8-K filed with the SEC. |
| (A) |
Reflection of the issuance of 45,224,085 shares to three individuals for services rendered, resulting in 317,988,089 total shares outstanding of Mercari after the reverse merger and new issuance of the shares. |
See accompanying notes to pro forma consolidated financial
statements
Mercari Communications Group, Ltd
And AiXin (BVI) International Group Co., Ltd
Notes to Pro Forma Consolidated Financial
Statements
NOTE 1 – BASIS OF PRESENTATION
On December 12, 2017, AiXin (BVI) International Group Co., Ltd.
(Aixin BVI) and its shareholders entered into and closed a share
exchange agreement, with Mercari Communications Group, Ltd
(Mercari), to which Mercari acquired 100% of the issued and
outstanding capital stock of Aixin BVI in exchange for a total of
227,352,604 shares of Mercaris common stock. In addition, the
Company desired to issue 45,224,085 shares of Mercaris common
stock to three individuals for services rendered to the Company.
After giving effect to the Share Exchange and new shares issued
to three individuals, Mercari had outstanding 317,988,089 shares
of common stock, representing all of Mercaris authorized shares
of common stock.
As a result of the Share Exchange, Aixin BVI and its subsidiaries
became Mercaris wholly-owned subsidiaries.
The acquisition of Aixin BVI was accounted for as a
recapitalization effected by a share exchange, wherein Aixin BVI
is considered the acquirer for accounting and financial reporting
purposes with no adjustment to the historical basis of its assets
and liabilities. Aixin BVIs shareholders become the majority
shareholders and have control of the Company and, Mercari was a
non-operating public shell prior to the acquisition. As a result
of the acquisition of Aixin BVI, Mercari is no longer a shell
company. to Securities and Exchange Commission (SEC) rules, the
merger or acquisition of a private operating company into a
non-operating public shell with nominal net assets is considered
a capital transaction in substance, rather than a business
combination.
The accompanying pro forma consolidated statements of operations
present the accounts of Mercari and Aixin BVI, and its
wholly-owned subsidiaries HK Aixin International Group Co.,
Litmited (Aixin HK), a company incorporated and registered in
Hong Kong on February 25, 2016 to serve as an intermediate
holding company. On May 26, 2017, Aixin HK acquired Aixin
Zhonghong Biological Technology Co., Ltd (Aixin Zhonghong) for
RMB 100,000,000 (US$14.56 million), Aixin Zhonghong is an
operating entity incorporated in China in 2013.
The accompanying pro forma consolidated statements of operations
are for the nine months ended September 30, 2017 and for the year
ended December 31, 2016, as if the acquisition occurred on
January 1, 2017 and January 1, 2016, for the purpose of the
statements of operations, respectively. The accompanying pro
forma consolidated balance sheet presents the accounts of Mercari
and Aixin BVI and its wholly-owned subsidiaries as if the
acquisition of Aixin BVI by Mercari occurred on September 30,
2017.
The following adjustments would be required if the acquisition
occurred as indicated above:
| A. |
Reflection of the issuance of 227,352,604 shares to the shareholders of Aixin BVI. |
| B. |
Reflection of the issuance of 45,224,085 shares to three |
| C. |
Elimination of Mercaris capital accounts and accumulated deficit as result of recapitalization. |
(c) Exhibits. The following exhibits have been
filed as part of, or incorporated by reference into, this Report:
|
Exhibit No. |
|
| 2.1 |
Share Exchange Agreement, dated as of December 12, 2017, among the Company, AiXin BVI, AiXinHK, AiXin Zhonghong and the stockholders of Aixin Zhonghong. |
| 3.1 |
Articles of Incorporation (incorporated by reference to the Companys Annual Report on Form 10-KSB for the fiscal year ended May 31, 2006 as filed with the SEC on March 7, 2007). |
| 3.2 |
Articles of Amendment to Articles of Incorporation (incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on June 3, 2008). |
| 3.3 |
Bylaws of the Registrant (incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on June 3, 2008). |
| 10.1 |
Stock Purchase Agreement dated December 20, 2016, between Algodon and China Concentric, as amended (incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 2017 as filed with the SEC on September 6, 2017). |
| 10.2 |
Stock Purchase Agreement dated December 21, 2016, between China Concentric and Quanzhong Lin. (incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 2017 as filed with the SEC on September 6, 2017). |
| 10.3 |
Executive Services And Separation Agreement with Ethan Chuang. |
| 10.4 | Consulting Agreement with Yao-Te Wang. |
| 10.5 | Consulting Agreement with Wanli Liu. |
| 16.1 |
Letter from BloomSchoen, the Companys former registered independent public accountants, dated July 18, 2017 (incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on July 18, 2017.) |
| 21.1 | Subsidiaries |
MERCARI COMMUNICATIONS GROUP LTD ExhibitEX-2.1 2 ex2-1.htm SHARE EXCHANGE AGREEMENT THIS SHARE EXCHANGE AGREEMENT (hereinafter referred to as this “Agreement”) is entered into as of this 12th day of December,…To view the full exhibit click here
About MERCARI COMMUNICATIONS GROUP, LTD. (OTCMKTS:MCAR)
Mercari Communications Group, Ltd. is a shell company. The Company seeks to acquire a privately owned business with the intent that the Company becomes a publicly owned business. The Company intends to acquire interests in various business opportunities. The Company had no products or services as of May 31, 2016. The Company has not generated any revenues. The Company was engaged in the business of providing educational products, counseling, seminar programs and publications, such as newsletters to adults aged 30 to 50.
