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EX-32.1 - CERTIFICATION - Natural Destiny Inc. | f10q1216ex32i_naturaldestiny.htm |
EX-31.1 - CERTIFICATION - Natural Destiny Inc. | f10q1216ex31i_naturaldestiny.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2016
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-211380
Natural Destiny Inc. |
(Exact name of registrant as specified in its charter) |
Nevada | 81-1352933 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
Room 902, Unit 1, Pearl Business Building |
||
Jiande City, Zhejiang Province, P.R. China | 311600 | |
(Address of principal executive offices) | (Zip Code) |
+86 571-64197788 |
(Registrant's telephone number, including area code) |
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer (Do not check if a smaller reporting company) |
☐ | Smaller reporting company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 17, 2017, there were 250,229,775 shares of the Company’s common stock issued and outstanding.
NATURAL DESTINY INC.
TABLE OF CONTENTS
Page No. | ||
Part I – Financial Information | ||
Item 1 | Financial Statements | 1 |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 21 |
Item 4 | Controls and Procedures | 21 |
Part II – Other Information | ||
Item 1 | Legal Proceedings | 22 |
Item 1A | Risk Factors | 22 |
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
Item 3 | Defaults Upon Senior Securities | 22 |
Item 4 | Mine Safety Disclosures | 22 |
Item 5 | Other Information | 22 |
Item 6 | Exhibits | 22 |
PART I – FINANCIAL INFORMATION
NATURAL DESTINY INC.
CONSOLIDATED BALANCE SHEETS
As at December 31, 2016 and September 30, 2016
December 31, | September 30, | |||||||
2016 | 2016 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 407,247 | $ | 1,203,928 | ||||
Other receivables | 15,418 | 9,118 | ||||||
Due from related parties | 986,330 | 124,042 | ||||||
Prepaid expenses and other current assets | 66,958 | 19,712 | ||||||
Total current assets | 1,475,953 | 1,356,800 | ||||||
Property and equipment, net | 2,037 | 2,313 | ||||||
Other assets, net | 441 | 473 | ||||||
Total long-term assets | 2,478 | 2,786 | ||||||
Total assets | $ | 1,478,431 | $ | 1,359,586 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | 38,198 | 36,644 | ||||||
Short-term debt | 126,030 | 131,218 | ||||||
Advances from investors | 35,770 | 37,243 | ||||||
Due to related parties | 225,056 | 43,324 | ||||||
Total Liabilities | $ | 425,054 | $ | 248,429 | ||||
Shareholders’ equity | ||||||||
Common stock, par value $0.0001 per share, 1,000,000,000 shares authorized; 250,229,775 and 250,229,775 shares issued and outstanding at December 31, 2016 and September 30, 2016, respectively) | $ | 25,023 | $ | 25,023 | ||||
Additional paid-in capital | 1,470,341 | 1,470,341 | ||||||
Accumulated deficit | (399,926 | ) | (385,852 | ) | ||||
Accumulated other comprehensive (loss)/income | (42,061 | ) | 1,645 | |||||
Total shareholders’ equity | 1,053,377 | 1,111,157 | ||||||
Total liabilities and shareholders’ equity | $ | 1,478,431 | $ | 1,359,586 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1 |
NATURAL DESTINY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the three months ended December 31, 2016 and 2015
For the Three Months Ended December 31, | ||||||||
2016 | 2015 | |||||||
(unaudited) | (unaudited) | |||||||
Operating expenses | ||||||||
Selling, general and administrative expenses | (14,876 | ) | (64,528 | ) | ||||
Total operating expenses | (14,876 | ) | (64,528 | ) | ||||
Loss from operations | (14,876 | ) | (64,528 | ) | ||||
Other income (expenses) | ||||||||
Interest income | 802 | - | ||||||
Other expenses, net | - | (16 | ) | |||||
Total other income (expenses) | 802 | (16 | ) | |||||
Loss before income taxes | (14,074 | ) | (64,544 | ) | ||||
Provision for income taxes | - | - | ||||||
Net Loss | (14,074 | ) | (64,544 | ) | ||||
Other comprehensive loss | ||||||||
Foreign currency translation adjustment | (43,706 | ) | (1,602 | ) | ||||
Total comprehensive loss | $ | (57,780 | ) | $ | (66,146 | ) | ||
Net loss per common share – basic and diluted | $ | (0.00 | ) | N/A | ||||
Weighted average number of common shares outstanding during the year – basic and diluted | 250,229,775 | N/A |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2 |
NATURAL DESTINY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2016 and 2015
For the Three Months Ended December 31, | ||||||||
2016 | 2015 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (14,074 | ) | $ | (64,544 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Bad debt expense | - | - | ||||||
Depreciation and amortization expense | 201 | 152 | ||||||
Changes in operating assets and liabilities: | ||||||||
Other receivables | (6,768 | ) | (10,762 | ) | ||||
Due from related parties | 106,456 | - | ||||||
Prepaid expenses and other current assets | (48,802 | ) | 15,002 | |||||
Accounts payable and accrued expenses | 3,052 | 4,416 | ||||||
Advance from customers | - | 81,558 | ||||||
Due to related parties | 186,409 | - | ||||||
Net Cash Provided by Operating Activities | 226,474 | 25,822 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchase of property and equipment | - | (3,233 | ) | |||||
Purchase of intangible asset | - | (562 | ) | |||||
Loans to a related party | (987,665 | ) | - | |||||
Net Cash Used in Investing Activities | (987,665 | ) | (3,795 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Advances to shareholder | - | (17,727 | ) | |||||
Net Cash Used in Financing Activities | - | (17,727 | ) | |||||
Effect of Exchange Rate Changes on Cash | (35,490 | ) | (652 | ) | ||||
Net (Decrease) Increase In Cash | (796,681 | ) | 3,648 | |||||
Cash at Beginning of Period | 1,203,928 | - | ||||||
Cash at End of Period | $ | 407,247 | $ | 3,648 | ||||
Supplemental Cash Flow Information | ||||||||
Cash paid for interest expense | $ | - | $ | - | ||||
Cash paid for income tax | $ | - | $ | - |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3 |
1. | ORGANIZATION AND PRINCIPAL ACTITIVIES |
Natural Destiny Inc. (“ND” or the “Company”) is a holding company incorporated in the State of Nevada on October 21, 2015. The Company is engaged in the sale of food and beverages in the People’s Republic of China (the “PRC” or “China”) through its subsidiaries and affiliated entity. The Company’s executive offices are located in Jiande city, Zhejiang province, China.
On April 13, 2016, the Company executed a share exchange agreement to acquire all of the issued and outstanding ordinary shares of Natural Destiny (BVI) Company Limited, a corporation incorporated under the laws of the British Virgin Islands (“ND BVI”), from the shareholder of ND BVI (the “ND BVI Shareholder”) in exchange for the issuance to the ND BVI Shareholder of 250,000,000 shares of its common stock, par value $0.0001 per share, representing 100% of its then issued and outstanding shares of Common Stock (the transaction, hereinafter referred to as the “Share Exchange”). Upon completion of the Share Exchange, ND BVI became the Company’s wholly owned subsidiary.
Effective April 1, 2016, pursuant to an exclusive option agreement, ND BVI Shareholder granted Mr. Jianrong Xia, the Company’s Chief Executive Officer, an irrevocable and exclusive option to purchase 250,000,000 shares of common stock of the Company owned by the ND BVI Shareholder at any time at an exercise price of $1.00. The option agreement has a term of 10 years and can be renewed at Mr. Xia’s election.
ND BVI is a holding company, which in turn, holds 100% of the capital stock of Natural Destiny (HK) Co., Limited (“ND HK”), a Hong Kong corporation which was incorporated on November 16, 2015. ND HK is the parent company of Shanghai You Yue Trading Co., Ltd. (the “WFOE”), a wholly foreign owned entity established under the laws of the PRC, which is engaged in the sale and distribution of food and beverage in the PRC through a series of contractual arrangements (the “VIE Agreements”) with Hangzhou Yezhiyuan Agriculture Development Co., Ltd. (“Hangzhou Yezhiyuan”), a PRC limited liability company which was established on November 27, 2012 with a registered capital of RMB 10,000,000 (equivalent of $1,593,755), of which RMB 9,000,000 (equivalent of $1,426,997) has been paid to date.
Neither the Company nor its subsidiaries own any equity interest in Hangzhou Yezhiyuan. Instead, the Company controls and receives the economic benefits of Hangzhou Yezhiyuan’s business operation through a series of contractual arrangements. WFOE, Hangzhou Yezhiyuan and its shareholder entered into a series of contractual arrangements, also known as the VIE Agreements, on April 13, 2016. The VIE Agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Hangzhou Yezhiyuan (“Hangzhou Yezhiyuan Shareholder”), including absolute control rights and the rights to the assets, property and revenue of Hangzhou Yezhiyuan. Based on a legal opinion issued by Yuan Tai Law Offices to WFOE, the VIE Agreements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC.
The transaction between ND and Hangzhou Yezhiyuan constituted a reorganization. As all of the above mentioned companies are under common control, this series of transactions has been accounted for as a reorganization of entities and the financial statements have been prepared as if the reorganization had occurred retroactively. The financial statements have been prepared as if the existing corporate structure had been in existence throughout all periods and the reorganization had occurred as of October 1, 2014, the beginning of the earliest period presented in the accompanying financial statements. The Company included the historical values of Hangzhou Yezhiyuan’s assets and liabilities in its consolidated financial statements.
VIE Agreements with Hangzhou Yezhiyuan
According to the Exclusive Business Cooperation Agreement, Hangzhou Yezhiyuan is obligated to pay service fees to WFOE approximately equal to the net income of Hangzhou Yezhiyuan. Hangzhou Yezhiyuan, a variable interest entity (“VIE”), is wholly owned by Mr. Jianrong Xia. Mr. Jianrong Xia is also the Company’s Chief Executive Officer and effectively holds 99.9% of the Company. Hangzhou Yezhiyuan’s operations are, in fact, directly controlled by the Company entirely. There are no unrecognized revenue-producing assets that are held by Hanzhou Yezhiyuan.
4 |
1. | ORGANIZATION AND PRINCIPAL ACTITIVIES (CONTINUED) |
Each of the VIE Agreements is described in detail below:
Exclusive Business Cooperation Agreement
Pursuant to the Exclusive Business Cooperation Agreement between Hangzhou Yezhiyuan and WFOE, WFOE provides Hangzhou Yezhiyuan with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Hangzhou Yezhiyuan granted an irrevocable and exclusive option to WFOE to purchase from Hangzhou Yezhiyuan, any or all of its assets, to the extent permitted under the PRC laws. WFOE may exercise, at its sole discretion, the option to purchase from Hangzhou Yezhiyuan any or all of Hangzhou Yezhiyuan’s assets at the lowest purchase price permitted by PRC laws. Should WFOE exercise such option, the parties shall enter into a separate asset transfer or similar agreement. WFOE shall own all intellectual property rights that are developed during the course of the Exclusive Business Cooperation Agreement. For services rendered to Hangzhou Yezhiyuan by WFOE under this agreement, WFOE is entitled to collect a service fee calculated based on the time of services rendered multiplied by the corresponding rate, which is approximately equal to the net income of Hangzhou Yezhiyuan.
The Exclusive Business Cooperation Agreement shall remain in effect for ten years until it is terminated by WFOE with 30-day prior notice. Hangzhou Yezhiyuan does not have the right to terminate the agreement unilaterally. WFOE may unilaterally extend the term of this agreement with prior written notice.
The legal representative of WFOE, Mr. Xia, is currently managing Hangzhou Yezhiyuan pursuant to the terms of the Exclusive Business Cooperation Agreement. WFOE has absolute authority relating to the management of Hangzhou Yezhiyuan, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions.
Share Pledge Agreement
Under the Share Pledge Agreement between the Hangzhou Yezhiyuan Shareholder and WFOE, the Hangzhou Yezhiyuan Shareholder pledged all of his equity interests in Hangzhou Yezhiyuan to WFOE to guarantee the performance of Hangzhou Yezhiyuan’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in the event that Hangzhou Yezhiyuan or its shareholder breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. The Hangzhou Yezhiyuan Shareholder also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interests in accordance with applicable PRC laws. The Hangzhou Yezhiyuan Shareholder further agrees not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.
The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Hangzhou Yezhiyuan. WFOE shall cancel or terminate the Share Pledge Agreement upon Hangzhou Yezhiyuan’s full payment of fees payable under the Exclusive Business Cooperation Agreement.
Exclusive Option Agreement
Under the Exclusive Option Agreement, the Hangzhou Yezhiyuan Shareholder irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of his equity interests in Hangzhou Yezhiyuan. The option price is equal to the capital paid in by the Hangzhou Yezhiyuan Shareholder subject to any appraisal or restrictions required by applicable PRC laws and regulations. As of the date of this prospectus, if WFOE exercised such option, the total option price that would be paid to the Hangzhou Yezhiyuan Shareholder would be approximately $1.35 million (RMB 9,000,000), which is the aggregate paid in capital of Hangzhou Yezhiyuan.
The agreement remains effective for a term of ten years and may be renewed at WFOE’s election.
5 |
1. | ORGANIZATION AND PRINCIPAL ACTITIVIES (CONTINUED) |
Power of Attorney
Under the Power of Attorney, the Hangzhou Yezhiyuan Shareholder authorizes WFOE to act on his behalf as their exclusive agent and attorney with respect to all rights as a shareholder, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Hangzhou Yezhiyuan.
Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.
Timely Reporting Agreement
To ensure Hangzhou Yezhiyuan promptly provides all of the information that WFOE and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered between Hangzhou Yezhiyuan and the Company.
Under the Timely Reporting Agreement, Hangzhou Yezhiyuan agrees that it is obligated to make its officers and directors available to the Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other regulatory reports as required.
Although it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the Exclusive Business Cooperation Agreement.
6 |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) | Basis of presentation and principle of consolidation |
The unaudited condensed interim consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements included the Company’s accounts and those of the Company’s subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The interim financial information as of December 31, 2016 and for the three months ended December 31, 2016 and 2015 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on February 2, 2017.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed consolidated financial position as of December 31, 2016, its unaudited condensed consolidated results of operations for the three months ended December 31, 2016 and 2015, and its unaudited condensed consolidated cash flows for the s three months ended December 31, 2016 and 2015, as applicable, have been made. The unaudited interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
(b) | Reclassifications |
Certain items in the financial statements of comparative period have been reclassified to conform to the financial statements for the current period.
(c) | Foreign currency translation |
The reporting currency of the Company is United States Dollars (“US$”) and the functional currency is Renminbi (“RMB”) as China is the primary economic environment in which the entity operates.
For financial reporting purposes, the financial statements of the Company prepared using RMB are translated into the Company’s reporting currency, U.S. Dollars. Monetary assets and liabilities denominated in currencies other than the reporting currency are translated into the reporting currency at the rates of exchange ruling at the balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and stockholders’ equity (deficit) is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity (deficit).
The schedule below illustrates the exchange rate used to translate the financial statements:
December 31, | September 30, | |||||||
2016 | 2015 | |||||||
Balance sheet items, except for equity accounts | 6.9448 | 6.6702 |
For the three months ended December 31, | ||||||||
2016 | 2015 | |||||||
Items in the statements of operations and comprehensive loss | 6.8343 | 6.2288 |
(d) | Use of estimates |
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates.
7 |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(e) | Fair values of financial instruments |
ASC Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
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 assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
Level 3 | inputs to the valuation methodology are unobservable and significant to the fair value. |
As of December 31, 2016 and September 30, 2016, financial instruments of the Company primarily comprise of cash, due from related parties, prepaid expenses and other current assets, accounts payable and accrued expenses, due to related parties and short-term debt, which were carried at cost on the balance sheets. These financial instruments’ carrying amounts approximated their fair values because of their generally short maturities.
(f) | Cash |
Cash consists of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use. The Company maintains accounts at banks and has not experienced any losses from such concentrations.
(g) | Accounts receivables and allowance for doubtful accounts |
Accounts receivable are stated at the amount the Company expects to collect. Accounts receivable represents receivables, net of allowances for doubtful accounts. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.
(h) | Inventories and cost of revenues |
Inventories are merchant products for trading business. Inventories are stated at the lower of cost or market value. Cost is determined using first in first out method.
Cost of revenues includes all expenditures incurred in bringing the goods to the point of sale. Costs of revenues include direct costs of the merchant products and business taxes.
(i) | Property and equipment |
Property and equipment are recorded at cost and depreciated using the straight-line method based on the estimated useful lives of the assets. The estimated useful lives for the Company’s property and equipment are 5 years.
The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major additions and betterment to equipment are capitalized.
(j) | Other assets |
Other assets mainly included software and are amortized using the straight-line method over their estimated period of benefit.
(k) | Revenue recognition |
Revenue from the sale of products is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. In most cases, these conditions are met when the product is delivered to the customer.
8 |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(l) | Income taxes |
Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the asset and liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
(m) | Comprehensive loss |
Comprehensive loss includes net loss and foreign currency adjustments. Comprehensive loss is reported in the statements of operations and comprehensive loss.
Accumulated other comprehensive income, as presented on the balance sheets are the cumulative foreign currency translation adjustments.
(n) | Loss Per Common Share |
The Company provides basic and diluted earnings per common share information for each period presented. Basic loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding plus dilutive securities. Since the Company has only incurred losses, basic and diluted net loss per common share are the same. The potentially dilutive securities were excluded from the diluted loss per common share calculation because their effect would have been antidilutive. As of December 31 and September 30, 2016, the Company had no potentially issuable common shares.
(o) | Subsequent Events |
The Company’s management reviewed all material events from December 31, 2016 through the issuance of these financial statements for disclosure consideration.
9 |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
(p) | Recently issued accounting standards |
In October 2016, the FASB issued a new accounting standard that revises the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2018, with early adoption permitted. The Company is currently in the process of assessing what impact this new standard may have on its consolidated financial statements.
(q) | Significant risks and uncertainties |
1) | Credit risk |
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash. The maximum exposure of such assets to credit risk is their carrying amount as at the balance sheet dates. As of December 31, 2016 and September 30, 2016, the Company held cash aggregating $407,247 and $1,203,928, respectively, which were deposited in two financial institutions located in China, and were uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Company primarily place cash deposits with large financial institutions in China which management believes are of high credit quality.
The Company’s operations are carried out in China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. In addition, the Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, rates and methods of taxation, and the extraction of mining resources, among other factors.
2) | Liquidity risk |
The Company is also exposed to liquidity risk which is a risk that the Company is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the owners to obtain short-term funding to meet the liquidity shortage.
3) | Foreign currency risk |
A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers' invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
4) | Concentration risk |
The Company commenced its operation during the year ended September 30, 2015. During the three months ended December 31, 2016 and 2015, the Company did not generate revenue with any customers.
10 |
3. | VARIABLE INTEREST ENTITIES AND OTHER CONSOLIDATION MATTERS |
On April 13, 2016, the Company, through WFOE, entered into a series of contractual arrangements, also known as “VIE Agreements” with Hangzhou Yezhiyuan and the Hangzhou Yezhiyuan Shareholder. The significant terms of the VIE Agreements are summarized in Note 1.
VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. WFOE is deemed to have a controlling financial interest and be the primary beneficiary of the entities mentioned in Note 1 above, because it has both of the following characteristics:
1. | power to direct activities of a VIE that most significantly impact the entity’s economic performance, and |
2. | obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE. |
In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over Hangzhou Yezhiyuan and its ability to conduct its business may be materially and adversely affected.
All of the Company’s main current operations are conducted through Hangzhou Yezhiyuan. Current regulations in China permit Hangzhou Yezhiyuan to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of Hangzhou Yezhiyuan to make dividends and other payments to the Company may be restricted by factors including changes in applicable foreign exchange and other laws and regulations.
All of the Company’s current revenue is generated in RMB. Any future restrictions on currency exchanges may limit our ability to use net revenues generated in RMB to make dividends or other payments in US$ or fund possible business activities outside China.
Foreign currency exchange regulation in China is primarily governed by the following rules:
● | Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules; |
● | Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
Under the Administration Rules, RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (“SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like WFOE that need foreign currency for the distribution of profits to their shareholders may validate payment from their foreign currency accounts or purchase and pay foreign currencies at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign invested enterprises are permitted to open foreign currency settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign currency at certain designated foreign exchange banks.
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4. | GOING CONCERN |
These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. As of December 31, 2016, the Company has incurred losses and accumulated deficits totaling $399,926 since its inception and has not yet generated steady revenues from its operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. When necessary, the Company plans to obtain short-term funding from other financial institutions and the stockholders to meet its obligations when they become due.
5. | RELATED PARTY TRANSACTIONS AND BALANCES |
1) | Nature of relationships with related parties |
Name | Relationship with the Company | |
Xia, Jianrong | Chief Executive Officer | |
Xia, Jianhua | Immediate family member of Xia, Jianrong | |
Hangzhou Dechuan Bio-Technology Co., Ltd. | An entity controlled by Xia, Jianrong | |
Hangzhou Xinlin Fruits Co., Ltd. | An entity controlled by Xia, Jianrong | |
Hangzhou Dechuan Network Co., Ltd. | An entity owned by Xia, Jianrong’s son |
2) | Related party balances |
Due from related parties were as follows:
December 31, 2016 (unaudited) | September 30, 2016 | |||||||
Xia, Jianhua | $ | 10,784 | $ | 11,238 | ||||
Hangzhou Dechuan Bio-Technology Co., Ltd. (“Dechuan Bio-Tech”) | - | 29,731 | ||||||
Hangzhou Xinlin Fruits Co., Ltd. (“Hangzhou Xinlin”) | 974,106 | 83,073 | ||||||
Hangzhou Dechuan Network Co., Ltd. (“Dechuan Network”) | 1,440 | - | ||||||
$ | 986,330 | $ | 124,042 |
The balance due from Xia, Jianhua represented advances for purposes of business travel expenses, entertainment expenses and promotion expenses. On January 25, 2017, the amount of $10,784 was repaid to the Company because the planned trip was cancelled.
The Company provided financial support to Hangzhou Xinlin which is in trial production of organic food that the Company may sell or distribute in the future. The Company entered into a loan agreement with Hangzhou Xinlin providing a loan of up to RMB 1 million with a loan term from January 1, 2016 to January 1, 2017. The loan bears an interest rate of 4.35% per annum. The outstanding balance was repaid on October 13, 2016. During the three months ended December 31, 2016, the Company entered into another loan agreement with Hangzhou Xinlin providing a loan of RMB 6,750,000 to Hangzhou Xinlin with a loan term from October 1, 2016 to March 31, 2017. The loan is interest free. As of December 31 and September 30, 2016, the total outstanding principal of the loans to Hangzhou Xinlin was $971,954 and $80,957, respectively and accrued interest was $2,152 and $2,116, respectively.
The balance due from Hangzhou Dechuan Network was for the future purchase of office supplies.
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5. | RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED) |
2) | Related party balances (Continued) |
Due to related parties were as follows:
December 31, 2016 (unaudited) | September 30, 2016 | |||||||
Xia, Jianrong | $ | 40,820 | $ | 43,324 | ||||
Hangzhou Dechuan Bio-Technology Co., Ltd. | 184,236 | - | ||||||
$ | 225,056 | $ | 43,324 |
During the year ended September 30, 2016, Mr. Jianrong Xia paid office rental expenses on behalf of the Company, leading to an outstanding balance of $40,820 and $43,324 as of December 31, 2016 and September 30, 2016, respectively.
During the year ended September 30, 2016, the Company provided outsourcing services to Dechuan Bio-tech which resulted in a balance of due from related party of $29,731 as of September 30, 2016. During the three months ended December 31, 2016, Dechuan Bio-Tech repaid more than outsourcing service fee to the Company, leading to a balance of due to related party as of December 31, 2016.
3) | Related party transactions |
During the three months ended December 31, 2016 and 2015, the Company did not conduct sales and purchases with related parties.
6. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets as of December 31, 2016 and September 30, 2016 consisted of the following:
December 31, 2016 (unaudited) | September 30, 2016 | |||||||
Advance to vendors | $ | 102,956 | $ | 53,972 | ||||
Prepaid rent | - | 3,220 | ||||||
Total prepaid expenses and other current assets, gross | 102,956 | 57,192 | ||||||
Allowance for advance to vendor | (35,998 | ) | (37,480 | ) | ||||
Total prepaid expenses and other current assets, net | $ | 66,958 | $ | 19,712 |
An allowance of $35,998 (RMB 250,000 at the exchange rate on December 31, 2016) was made for advance to a vendor due to the concern of collectability.
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7. | SHORT-TERM DEBT |
As of December 31, 2016 and September 30, 2016, the Company had short-term debt of $126,030 and $131,218, respectively. These borrowings are from various third parties to be used by the Company as working capital. The borrowings are interest-free and due on demand. For the three months ended December 31, 2016, the amount of imputed interest is considered immaterial.
8. | EMPLOYEE BENEFIT PLAN |
The Company has made employee benefit contributions in accordance with relevant Chinese regulations, including retirement insurance, unemployment insurance, medical insurance, housing fund, work injury insurance and maternity insurance. The Company records the contributions in the salary and employee charges when incurred. The contributions made by the Company were $1,894 and $1,770 for the three months ended December 31, 2016 and 2015, respectively.
9. | INCOME TAXES |
The Company is a tax-exempt company incorporated in the State of Nevada and conducts substantially all of its business through its subsidiaries. The Company is subject to corporate income taxes in the PRC, Hong Kong and the United States. For the three months ended December 31, 2016, the statutory income tax rates for the Company where it has subsidiaries are as follows:
PRC | 25% | |||
Hong Kong | 16.5% | |||
the United States | 35% |
The Company is subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the relevant PRC income tax laws. The EIT rate for companies operating in the PRC is 25%.
The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the three months ended December 31, 2016 and 2015, the Company had no unrecognized tax benefits. As of December 31, 2016, the Company had operating loss to be utilized to offset future taxable income in the amount of $399,926, which will expire in 2021. The Company reviews deferred tax assets for a valuation allowance based upon whether it is more likely than not that the deferred tax asset will be fully realized. At December 31, 2016 and 2015, a valuation allowance is provided against the entire deferred tax assets based upon management’s assessment as to their realization.
10. | EQUITY |
Common Stock
On April 13, 2016, the Company executed a share exchange agreement to acquire all of the issued and outstanding ordinary shares of ND BVI from the ND BVI Shareholder in exchange for the issuance to the ND BVI Shareholder of 250,000,000 shares of its common stock, par value $0.0001 per share. See Note 1.
On May 1, 2016, the Company closed a private placement transaction under which the Company sold an aggregate of 229,775 shares of its common stock at $0.10 per share, for total gross proceeds of $22,977.
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11. | COMMITMENTS |
The Company has operating leases for its office space. At December 31, 2016, minimum lease payment for operating leases with remaining terms in excess of one year is $nil.
On September 1, 2015, a total of nine individuals filed separate complaints against the Company for breach of contract in the people’s court of Jiande city, Jiangsu province, P.R. China (the “Court”). On September 8, 2015, all the nine plaintiffs amended their complaints but failed to pay their respective court fees in time. As a result, the Court dismissed their cases on December 17, 2015.
On September 1, 2015, an individual named Xian Sha filed a complaint against the Company in the same court asserting that the Company raised funds through sales of its products to the plaintiff and failed to pay the plaintiff the promised return on her investment in the amount of $147,861 (RMB959,867), which constituted a breach of contract. The plaintiff made a motion to join an individual named Xiangyang Hou as a co-defendant on October 8, 2015. On November 2, 2015, the Court issued a civil verdict ordering the bank deposits or other assets of the co-defendant to be frozen pending the final decision of the court. One of the Company’s bank accounts has also been frozen pursuant to a court verdict dated September 25, 2015. The case proceeded to trial on December 17, 2015. At trial, the plaintiff requested additional time to produce evidence to support her claims and the court approved plaintiff’s request. As of September 30, 2016 and 2015, the Company had $nil and $4,359, respectively, in a bank account that was frozen. These balances were included under the caption, restricted cash, in the consolidated balance sheets. On July 29, 2016, the court issued a verdict approving the plaintiff’s application to withdraw the case.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions of performance; and statements of belief; and any statements of assumptions underlying any of the foregoing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
In some cases, you can identify forward looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “anticipate,” “estimate,” “predict,” “potential,” or the negative of these terms. These terms and similar expressions are intended to identify forward-looking statements. The forward-looking statements in this report are based upon management's current expectations and belief, which management believes are reasonable. However, we cannot assess the impact of each factor on our business or the extent to which any factor or combination of factors, or factors we are aware of, may cause actual results to differ materially from those contained in any forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements. These statements represent our estimates and assumptions only as of the date of this report. Except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including:
● | our ability to establish our business model and generate revenue and profit; | |
● | our ability to expand our business model beyond engaging in activities on behalf of related parties; | |
● | our ability to manage or expand operations and to fill customers’ orders on time; | |
● | our ability to maintain adequate control of our expenses as we seek to grow; | |
● | our ability to establish or protect our intellectual property; | |
● | the impact of significant government regulation in China; | |
● | our ability to implement marketing and sales strategies and adapt and modify them as needed; and | |
● | our implementation of required financial, accounting and disclosure controls and procedures and related corporate governance policies. |
Overview
We are engaged in the business of distributing foods and beverages in the People’s Republic of China (the “PRC” or “China”) through our subsidiaries and affiliated entity. We do not grow, produce or manufacture any products. Instead, we act as a distributor for the products primarily based on client or market demands. Our principal products include fruits, juices, wine and nutritional supplement products made out of traditional Chinese herbs such as ginseng and edible bird’s nest. Our executive offices are located in Jiande City, Zhejiang Province, China.
For the three months ended December 31, 2016 and 2015, the Company did not generate revenues from sales and distribution of food and beverages. We expect to start selling the cherry plum drinks and cherry plum wine in the three months ended June 30, 2017. In addition, we plan to devote ourselves to the marketing and sales of cherry plum based products during the same period and hire additional sales personnel to expand our sales network. We estimate we will need approximately $300,000 to implement our plan and we believe the repayment by Mr. Xia of the loans he took from the Company will be sufficient to cover our operating expenses for the next twelve months. These loans were repaid prior to the effectiveness of the Company’s registration as a public company.
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Key Factors Affecting Our Results of Operation
Our operating entity Hangzhou Yezhiyuan was formed in November 2012 and has not generated material revenue or any profit as of the date of this report. We have limited experience and operating history in marketing and selling food and drink products. Our limited history may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects.
We expect that sales of food and drink products will be our core business and main revenue producing sectors in the future. Our main focus will be the marketing and sales of cherry plum drink and cherry plum wine. We will heavily rely on a limited number of suppliers for these products. For example, we rely on one supplier, Weifang Shoushu for the supply of cherry plum drink. We have entered into the Distribution Agreement with Weifang Shoushu for a term that ends on August 31, 2021. Even though we have the right of first refusal to renew the Distribution Agreement for another five-year term, there is no guarantee that we can maintain such exclusive contractual relationship with Weifang Shoushu after the end of the extended term.
The food and beverage business environment is rapidly evolving as a result of, among other things: changes in consumer preferences, including changes based on health and nutrition considerations and obesity concerns; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the food and beverage retail landscape is very dynamic and constantly evolving, not only in emerging and developing markets, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed markets, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace.
The food and beverage industry is subject to risks posed by food spoilage and contamination, product tampering, product recall, and consumer product liability claims. Our operations could be impacted by both genuine and fictitious claims regarding our products and our competitors’ products.
Results of Operations for the Three Months Ended December 31, 2016 Compared to the Three Months Ended December 31, 2015
For the Three Months Ended December 31, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Operating expenses | ||||||||||||
Selling, general and administrative expenses | $ | (14,876 | ) | $ | (64,528 | ) | $ | 49,652 | ||||
Bad debt expense | - | - | - | |||||||||
Total operating expenses | (14,876 | ) | (64,528 | ) | 49,652 | |||||||
Interest income | 802 | - | 802 | |||||||||
Other expenses | - | (16 | ) | 16 | ||||||||
Net loss | $ | (14,074 | ) | $ | (64,544 | ) | $ | 50,470 |
Revenues and cost of revenues
For the three months ended December 31, 2016 and 2015, the Company did not have any sales of fruits, juices, and nutritional supplement products. However, the Company expects to receive new products such as cherry plum drinks and wine and generate revenue in the quarter ended June 30, 2017.
As a trading company, the Company’s cost of revenue is comprised of the purchase cost of inventories, business tax and surcharges. During the three months ended December 31, 2016 and 2015, cost of revenues was nil.
Selling, general and administrative expenses
Selling, general and administrative expenses primarily consisted of salary and employee surcharge, office and warehouse rental expense, travel expenses, office supplies, and entertainment expenses. Selling, general and administrative expenses decreased from $64,528 for the three months ended December 31, 2015 to $14,876 for the three months ended December 31, 2016, representing a decrease of $49,652, mainly attributable to decrease of rental expenses and one-off expenses incurred in connection with becoming a public company in the United States. During the three months ended December 31, 2016, we incurred rental expenses of $3,143 as compared to rental expense of $22,924 during the three months ended December 31, 2015. We incurred fees in the amount of $19,265 related to the Company’s going public activities in the United States during the three months ended December 31, 2015.
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Net loss
Net loss for the three months ended December 31, 2016 was $14,074 representing a decrease of $50,470 from net loss of $64,544 for the three months ended December 31, 2015. The decrease in net loss for the three months ended December 31, 2016 was primarily the net effect of the changes in the following components:.
● | a decrease in the selling, general and administrative expenses of $49,652; and | |
● | an increase in interest income of $802. |
Liquidity and Capital Resources
As of December 31, 2016, we had cash and cash equivalents of $407,247 as compared to $1,203,928 as of September 30, 2016. We had a working capital of $1,050,899 and $1,108,371 as of December 31, 2016 and September 30, 2016, respectively. The change was a result of loans extended to a related party who is in trial production of organic food, which the Company may distribute or sell in the future.
As of December 31, 2016, the Company has incurred accumulated deficits totaling $399,926 since inception and has not yet generated steady revenues from its operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. Management believes that it has developed a liquidity plan, as summarized below, that, if executed successfully, will provide sufficient liquidity to meet the Company obligations for a reasonable period of time.
● | Bank Financing and Other Financial Support |
The Company currently mainly relies on shareholders for capital to fund its operation. However, it also plans to negotiate with several banks for bank facilities so as to meet increasing business expenditures.
In addition, in July and August 2016, the Company received a repayment of loans of RMB 8,397,183 (approximately $1.24 million) Zhangzhou Yezhiyuan made to Mr. Xia, which will be used for the Company’s operations.
Meanwhile, the Company is also seeking other strategic investors with experience in the distribution of foods and beverages.
● | Improvement in Working Capital Management |
To actively manage the Company’s cash flow and working capital requirements, management has implemented measures to closely monitor the Company’s inventory levels and manage the collection of the Company’s receivable balances. In addition, the Company has been negotiating with a number of potential vendors, to obtain preferential pricing terms and more favorable payment terms.
The following table sets forth the summary of our cash flows for the three months ended December 31, 2016 and 2015.
For the Three Months Ended December 31, | ||||||||
2016 | 2015 | |||||||
Net Cash Provided by Operating Activities | $ | 226,474 | $ | 25,822 | ||||
Net Cash Used in Investing Activities | (987,665 | ) | (3,795 | ) | ||||
Net Cash Used in Financing Activities | - | (17,727 | ) | |||||
Effect of foreign exchange rate on cash | (35,490 | ) | (652 | ) | ||||
Cash and cash equivalents at beginning of year | 1,203,928 | - | ||||||
Cash and cash equivalents at end of year | $ | 407,247 | $ | 3,648 |
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Cash Flow from Operating Activities
For the three months ended December 31, 2016, the net cash provided by operating activities was $226,474, as compared to net cash provided by operating activities of $25,822 for the three months ended December 31, 2015, representing an increase of cash outflow of $200,652. We incurred a net loss for the three months ended December 31, 2016 of $14,074, a change of $50,470 from the three months ended December 31, 2015, during which we incurred a net loss of $64,544. In addition to the change in net loss, the increase in net cash provided by operating activities was primarily the result of several factors, including:
● | The due from related parties decreased by $106,456 and nil for the three months ended December 31, 2016 and 2015, respectively, while the due to related parties increased by $186,409 and nil for the three months ended December 31, 2016 and 2015, respectively. This is mainly due to that the Company collected outstanding balance and received further advances from the same related party who is controlled by Mr. Xia Jianrong. | |
● | The Company received advances from customers of nil and $81,558 for the three months ended December 31, 2016 and 2015, respectively. |
Cash Flow from Investing Activities
The Company had net cash used in investing activities of $987,665 which consists of loans to a to a related party in the amount of $987,665 during the three months ended December 31, 2016, as compared to $3,795 used in investing activities for purchase of office equipment and computer software during the three months ended December 31, 2015.
Cash Flow from Financing Activities
For the three months ended December 31, 2016, the net cash used in financing activities was nil, as compared to $17,727 for the three months ended December 31, 2015, representing advances to the Company’s sole officer and director.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Inflation
We do not believe our business and operations have been materially affected by inflation.
Critical Accounting Policies
We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amount of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the condensed financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our condensed financial statements and other disclosures included in this report.
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(a) | Use of estimates |
The preparation of consolidated financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews these estimates and assumptions using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates.
(b) | Fair values of financial instruments |
ASC Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
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 assets or liability, either directly or indirectly, for substantially the full term of the financial instruments | |
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Critical Accounting Policies (continued)
(c) | Inventories and cost of revenues |
Inventories are merchant products for trading business. Inventories are stated at the lower of cost or market value. Cost is determined using first in first out method.
Cost of revenues includes all expenditures incurred in bringing the goods to the point of sale. Costs of revenues include direct costs of the merchant products and business taxes.
(d) | Revenue recognition |
Revenue from the sale of products is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. In most cases, these conditions are met when the product is delivered to the customer.
Recently issued accounting standards
In October 2016, the FASB issued a new accounting standard that revises the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The accounting standard is effective for the Company beginning with the quarter ending April 30, 2018, with early adoption permitted. The Company is currently in the process of assessing what impact this new standard may have on its consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable as we are currently considered a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934, our principal executive officer and principal financial officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that such information is accumulated and communicated to our company’s management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of the following material weaknesses in internal control over financial reporting which are indicative of many small companies with a small staff:
● | The Company has one member of its Board of Directors who also serves as the Principal Executive Officer and Principal Accounting Officer. The Company has no audit committee and no other independent directors. |
● | The Company has limited personnel. Accordingly, the Company has a lack of segregation of duties to ensure proper levels of authorization for transactions and review. |
● | The Company has not implemented internal control procedures over financial reporting in accordance with the Sarbanes-Oxley Act. |
Management anticipates that such disclosure controls and procedures will not be effective until the above material weaknesses are remediated.
We expect to implement the following measures in the fiscal year ending September 30, 2017 to remediate the material weaknesses identified, subject to obtaining additional financing: (i) hire a CFO with US qualification and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out above are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings and no such proceedings are known to be contemplated.
No director, officer or affiliate of the issuer, and no owner of record or beneficiary of more than five percent of the securities of the issuer, or any security holder is a party adverse to the small business issuer or has a material interest adverse to the small business issuer.
ITEM 1A. RISK FACTORS
A smaller reporting company is not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS.
Exhibit | Description | |
31.1* | Certification by Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes Oxley Section 302 | |
32.1** | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | |
101.INS * | XBRL Instance Document | |
101.SCH * | XBRL Taxonomy Extension Schema Document | |
101.CAL * | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF * | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB * | XBRL Taxonomy Extension Label Linkbase Document XBRL | |
101.PRE * | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith. |
** | Furnished herewith. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATURAL DESTINY INC. | ||
Date: February 21, 2017 | By: | /s/ Jianrong Xia |
Name: | Jianrong Xia | |
Title: | Chief
Executive Officer (principal executive officer) and Chief Financial Officer (principal accounting and financial officer) |
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