NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Business
Jialijia Group Corporation Limited (the
“Company”), formerly known as Rizzen, Inc., was incorporated as a corporation under the laws of the State of Nevada
on October 21, 2015.
On July 10, 2019, the Company entered into
a share purchase/exchange agreement (the “Exchange Agreement”) with Huazhongyun Group Co., Limited (“Huazhongyun”),
a company incorporated under the laws of Hong Kong, and Na Jin, the sole shareholder of Huazhongyun (the “Shareholder”)
and the Chief Executive Officer of the Company. Huazhongyun owns 6,000,000 shares (the “Company Shares”) of the Company,
which represented approximately 82% of the shares of the Company’s common stock, issued and outstanding, at the time of execution
of the Exchange Agreement. The Shareholder owns an aggregate of 10,000 ordinary shares of Huazhongyun (“Huazhongyun Shares”),
which constitute all of the issued and outstanding shares of Huazhongyun.
Pursuant to the Exchange Agreement, among
other matters, the Shareholder will sell and transfer all of the Huazhongyun Shares in exchange for all of the Company Shares.
As a result, the Shareholder will directly own the Company Shares, which represent approximately 82% of the issued and outstanding
shares of the Company’s common stock at the time of execution of the Exchange Agreement and Huazhongyun will become a wholly-owned
subsidiary of the Company.
Jialijia Jixiang Investment (Changzhou)
Co., Ltd, (“Jialijia (Changzhou)”) is a company incorporated under the laws of the PRC on June 13, 2017. Huazhongyun
owned all of the equity interests in Jialijia Jixiang Investment (Changzhou) Co., Ltd. (“WFOE”), a wholly-foreign owned
entity formed under the laws of China. Rucheng Wenchuan Gas Co., Ltd. (“Rucheng Wenchuan”) was incorporated under the
laws of the People’s Republic of China (the “PRC”) on March 31, 2006.
On January 7, 2019, Jialijia (Changzhou)
entered into an equity transfer agreement (the “Equity Transfer”) with Mr. Jiannan Wu, the shareholder who owned 94.77%
of Rucheng Wenchuan’s outstanding shares. Pursuant to the Equity Transfer, Mr. Jiannan Wu agreed to transfer 70% of his ownership
of Rucheng Wenchuan to Jialijia (Changzhou), in exchange of RMB 1,000,000 and 2,860,000 common shares of the Company owned by Huazhongyun.
Immediately after the equity transfer agreement, Jialijia (Changzhou) owns 70% of the ownership and becomes the controlling shareholder
of Rucheng Wenchuan. Both Huazhongyun and Jialijia (Changzhou) are holding companies and have not carried out substantive business
operations of their own. Rucheng Wenchuan is primarily engaged in the production and sale of gases for industrial and medical purposes,
such as oxygen and nitrogen, in the PRC.
Pursuant to the Exchange Agreement, on
August 29, 2019 (the “Closing Date”), Na Jin sold and transferred all of the Huazhongyun Shares to the Company in exchange
for all of the Company Shares and the Company received all of the outstanding Huazhongyun Shares. As a result, on the Closing Date,
Na Jin directly owned Company Shares representing approximately 48% of the issued and outstanding shares of the Company’s
common stock, Huazhongyun became a wholly-owned subsidiary of the Company and the Company owned 70% of the outstanding equity interest
in Rucheng Wenchuan through Huazhongyun and WFOE.
The acquisition of Huazhongyun and WFOE
is treated as a reverse merger (the “Reverse Merger”) for accounting purposes. As a result of the consummation of the
Reverse Merger on August 29, 2019, the Company, through its subsidiaries, is engaged in the production and sale of gases for industrial
and medical purposes, such as oxygen and nitrogen, in the PRC. The Company is in the process of improving its facilities and has
not commenced its gas production or generated any revenues.
Note 2. Basis of Presentation
The consolidated balance sheets as of June
30, 2019 and December 31, 2018 and the consolidated statements of income and comprehensive income for the three and six months
ended June 30, 2019 and 2018 combine the historical consolidated statements of balance sheets and income and comprehensive income
of the Company, Huazhongyun, Jialijia (Changzhou), and have been prepared as if the Reverse Merger had closed on January 1, 2018.
Both the Company, and Huazhongyun and WFOE are under common control.
The unaudited consolidated financial information
was prepared using the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.
The acquisition of Rucheng Wenchuan by
Jialijia (Changzhou) is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations (“ASC 805”) with Jialijia (Changzhou) as the acquiring entity.
In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash
assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value
of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus,
more reliably measurable.
Under ASC 805, all of the Rucheng Wenchuan
assets acquired and liabilities assumed in this business combination are recognized at their acquisition-date fair value. The excess
of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.
Note 3. Purchase Price
In connection with the acquisition of Rucheng
Wenchuan, Jialijia (Changzhou) entered into an equity transfer agreement (the “Equity Transfer”) with Mr. Jiannan Wu,
the shareholder who owned 94.77% of Rucheng Wenchuan’s outstanding shares on January 7, 2019. Pursuant to the Equity Transfer,
Mr. Jiannan Wu agreed to transfer 70% of his ownership of Rucheng Wenchuan to Jialijia (Changzhou), in exchange of RMB 1,000,000,
approximately $145,983, and 2,860,000 common shares of the Company owned by Huazhongyun. Immediately after the equity transfer
agreement, Jialijia (Changzhou) owns 70% of the ownership and becomes the controlling shareholder of Rucheng Wenchuan.
Goodwill as a result of the acquisition
of Rucheng Wenchuan is calculated as follows:
Purchase consideration:
|
|
|
|
Cash and cash equivalents
|
|
$
|
145,983
|
|
Common stock (1)
|
|
|
2,431,000
|
|
Total consideration
|
|
|
2,576,983
|
|
Estimated Fair Value of Assets Acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,822
|
|
Advance to supplier
|
|
|
101,811
|
|
Other current assets
|
|
|
2,909
|
|
Property and equipment
|
|
|
492,413
|
|
Total assets acquired
|
|
|
605,955
|
|
Estimated Fair Value of Liabilities Assumed:
|
|
|
|
|
Due to related parties
|
|
|
2,552,596
|
|
Accrued expenses and other current liabilities
|
|
|
32,560
|
|
Total liabilities assumed
|
|
|
2,585,156
|
|
Total net assets
|
|
|
(1,979,201
|
)
|
Noncontrolling interests
|
|
|
(593,760
|
)
|
Total net assets acquired
|
|
|
(1,385,441
|
)
|
Goodwill as a result of the acquisition
|
|
$
|
3,962,424
|
|
|
(1)
|
2,860,000 shares of the Company’s common stock to be issued to Mr. Jiannan Wu in connection with the Equity Transfer. Those shares were valued at $0.85 per share, the closing share price of the Company on January 7, 2019.
|
During the nine months ended September
30, 2019, the Company has recorded goodwill impairment in full amount.
Note 4. Going Concern
These consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. As reflected in the Company’s accompanying consolidated financial statements,
for the nine months ended September 30, 2019, the Company had a net loss of $4,238,556. Additionally, the Company had an accumulated
deficit of $4,281,680 and working capital deficit of $2,726,098 as of September 30, 2019, and has not yet generated revenues. The
ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable. The Company can give no assurances that any additional capital that it is able to obtain, if
any, will be sufficient to meet its needs.
If the Company is unable to successfully
commence its business operations in a short period of time, or unable to raise additional capital or secure additional lending,
the Company may need to curtail or cease its operations. The Company believes that these matters raise substantial doubt about
the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments
relating 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.
In order to continue as a going concern,
the Company will need, among other things, additional capital resources. Management plans to obtain such resources for the Company
include obtaining capital from the sale of its equity, and short-term and long-term borrowings from banks, stockholders or other
related party(ies). However, management cannot provide any assurance that the Company will be successful in accomplishing
any of its plans.
Note 5. Summary of Significant Accounting
Policies
Basis of Accounting
The financial statements and accompanying
notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of consolidation
The consolidated financial statements include
the financial statements of Jialijia Group Corporation Limited, Huazhongyun Group Co., Limited, Jialijia Jixiang Investment (Changzhou)
Co., Ltd and its 70% owned subsidiary, Rucheng Wenchuan Gas Co., Ltd. All inter-company transactions and balances are eliminated
in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the amount of revenues and expenses during the reporting periods. Management makes
these estimates using the best information available at the time the estimates are made. However, actual results could differ materially
from those results.
Cash and Cash Equivalents
The Company considers all cash on hand
and in banks, certificates of deposit with banks and other highly-liquid investments with maturities of three months or less, when
purchased, to be cash and cash equivalents. There is no insurance securing these deposits in the PRC. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Advances to Suppliers
The Company advances funds to certain
suppliers for the purchase of machinery and equipment. Based on management’s evaluation, no allowance for advances to suppliers
is required at the balance sheet dates.
Property and Equipment
Property and equipment are recorded at
cost less accumulated depreciation. Gains or losses on disposals are reflected as gain or loss in the year of disposal. All ordinary
repair and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes
is provided using the straight-line method over the estimated useful lives of the assets:
|
|
Estimated
Useful
Life
|
Buildings
|
|
20 years
|
Machinery and equipment
|
|
10 years
|
Office equipment
|
|
5 years
|
Vehicles
|
|
5 years
|
Costs incurred in constructing new facilities,
including progress payments and other costs related to construction, are capitalized and transferred to property, plant and equipment
on completion, at which time depreciation commences.
Impairment of Long-lived Assets
The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
There was no impairment reassessed and recorded by the management for the nine months ended September 30, 2019 and 2018.
Impairment of Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business
combinations under the purchase method of accounting. Goodwill is assessed for impairment annually or if an event occurs or circumstances
change that would indicate the carrying amount may be impaired. The impairment to be recognized is measured by the amount by which
the carrying amount of the asset exceeds the fair value of the asset. During the nine months ended September 30, 2019, the goodwill,
in amount of $3,962,424, as a result of the acquisition of Rucheng Wenchuan (see Note 3), was fully recognized as impairment during
the nine months ended September 30, 2019.
Income Taxes
The Company accounts for income taxes using
an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood
of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
Under ASC 740, a tax position is recognized
as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with
a tax examination being presumed to occur. The evaluation of a tax position is a two-step process. The first step is to determine
whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related
appeals or litigations based on the technical merits of that position. The second step is to measure a tax position that meets
the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position
is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent
period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria
should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. Penalties and
interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred.
Foreign Currency Translation
The Company uses the United States dollar
(“U.S. dollars”) for financial reporting purposes. The functional currency of the Company and its subsidiaries is the
Chinese Yuan or Renminbi (“RMB”). The Company’s subsidiaries maintain their books and records in their functional
currency, being the primary currency of the economic environment in which their operations are conducted. For the Company and its
subsidiaries whose functional currencies are other than the U.S. dollar, all asset and liability accounts were translated at the
exchange rate on the balance sheet date; stockholders’ equity is translated at the historical rates and items in the income
statement and cash flow statements are translated at the average rate in each applicable period. Translation adjustments resulting
from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. The resulting
translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred.
Fair Values of Financial Instruments
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active
markets for identical assets or liabilities.
Level 2 – quoted prices for similar
assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable
(for example cash flow modeling inputs based on assumptions)
The Company’s financial instruments
primarily consist of cash and cash equivalents, other receivables, advances to suppliers, accrued expenses, other payables, and
related party borrowings. As of the balance sheet dates, the estimated fair values of the financial instruments were not materially
different from their carrying values as presented on the balance sheets. This is attributed to the short maturities of the instruments
and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity
and risk profile at respective balance sheet dates.
Recent Accounting Pronouncements
In August 2018, the FASB issued Accounting
Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements
for Fair Value Measurement”, which changes the fair value measurement disclosure requirements of ASC 820. This update is
effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. The Company does
not expect the adoption of ASU 2018-13 to have a material impact on its financial statements.
Note 6. Advance to Suppliers
The Company had advance to suppliers of
$187,748 and $93,079 as of September 30, 2019 and December 31, 2018, respectively. Advance to suppliers was made related to the
purchase of equipment.
Note 7. Property, Plant, and Equipment, Net
Property, plant, and equipment consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
1,542,526
|
|
|
$
|
-
|
|
Buildings
|
|
|
30,675
|
|
|
|
-
|
|
|
|
|
1,573,201
|
|
|
|
-
|
|
Less: Accumulated depreciation
|
|
|
(1,109,505
|
)
|
|
|
-
|
|
Less: Accumulated impairment
|
|
|
(97,525
|
)
|
|
|
-
|
|
Property, plant, and equipment, net
|
|
$
|
366,171
|
|
|
$
|
-
|
|
Depreciation expense for the nine months ended September 30, 2019 and 2018 were $112,463 and $0, respectively.
Note 8. Accrued Expenses
Accrued expenses consist of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Accrued local taxes
|
|
$
|
35,940
|
|
|
$
|
-
|
|
Accrued payroll
|
|
|
168
|
|
|
|
-
|
|
|
|
$
|
36,108
|
|
|
$
|
-
|
|
Note 9. Income Tax
United States
The Company was incorporated in the United
States of America and is subject to United States federal taxation. No provisions for income taxes have been made, as there was
no taxable income from U.S. operations for the nine months ended September 30, 2019 and 2018. The U.S. Tax Cuts and Jobs Act (the
“Act”) was enacted on December 22, 2017. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35%
to 21%.
PRC
Effective on January 1, 2008, the PRC Enterprise
Income Tax Law, EIT Law, and Implementing Rules impose an unified enterprise income tax rate of 25% on all domestic-invested enterprises
and foreign investment enterprises in PRC, unless they qualify under certain limited exceptions. As such, starting from January
1, 2008, the Company’s subsidiary in PRC are subject to an enterprise income tax rate of 25%. The Company had recorded no
income tax provisions for the nine months ended September 30, 2019 and 2018.
Provision for income tax expense (benefit)
consists of the following:
|
|
For the Nine Months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
USA
|
|
|
-
|
|
|
|
-
|
|
China
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
USA
|
|
|
-
|
|
|
|
-
|
|
China
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total provision for income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The following is a reconciliation of the
statutory tax rate to the effective tax rate:
|
|
For the Nine Months
ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
U.S. statutory tax benefit
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
Change in deferred tax asset valuation allowance
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
PRC statutory tax
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Net permanent differences
|
|
|
(25.0
|
)%
|
|
|
(25.0
|
)%
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company periodically evaluates the
likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by the valuation
allowance to the extent that the future realization of the deferred tax assets is not judged to be more likely than not. The Company
considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative
earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carryforward periods available to
the Company for tax reporting purposes, and other relevant factors.
At September 30, 2019 and December 31,
2018, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable
income, the Company determined that it was more likely than not that its deferred tax assets would not be realized and have a
100% valuation allowance associated with its deferred tax assets.
Note 10. Related Party Transactions and Balances
The related parties of the company with
whom transactions are reported in these consolidated financial statements are as follows:
Name of entity or Individual
|
|
Relationship with the Company
|
Shenzhen Wenchuan Gas Co., Ltd.
|
|
Mr. Jiannan Wu is the president and legal representative of this entity
|
Rucheng County Minhang Special Gas Co., Ltd
|
|
Mr. Jiannan Wu is the president and legal representative of this entity
|
Jiannan Wu
|
|
Shareholder, director, General Manager
|
Dongzhi Zhang
|
|
Chairman of the Board
|
Na Jin
|
|
Shareholder, director, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
|
Due to related parties:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Shenzhen Wenchuan Gas Co., Ltd.
|
|
$
|
2,383,115
|
|
|
$
|
-
|
|
Dongzhi Zhang
|
|
|
386,196
|
|
|
|
189,115
|
|
Rucheng County Minhang Special Gas Co., Ltd.
|
|
|
48,509
|
|
|
|
-
|
|
Na Jin
|
|
|
85,174
|
|
|
|
88,546
|
|
Jiannan Wu
|
|
|
15,669
|
|
|
|
-
|
|
|
|
$
|
2,918,663
|
|
|
$
|
277,661
|
|
Due to related parties were non-trade
balances advanced from its related parties for the Company’s purchase of equipment and daily operating expenses. The balances
are unsecured, non-interest bearing, and payable on demand.
Note 11. Equity
The Company has authorized 1,000,000,000
shares of Common Stock at par value of $0.001. As of September 30, 2019 and December 31, 2018, the Company had 12,445,222 and 7,285,000
shares of common stock, issued and outstanding, respectively.
On May 15, 2019, the Company issued 817,108
shares of its common stock at a price per share of $0.02 to nine (9) subscribers. From July 22, 2019 to July 29, 2019, the Company
revised the subscription agreements with the 9 subscribers, which cancelled 14,785 shares and issued additional 346,416 shares
to the 9 subscribers. In addition, the Company revised the issuance price to $0.03 per share.
In July, 2019, the Company entered into a securities subscription agreement (the “Subscription Agreement”) with each
of fifty-four (54) investors (the “Investors”) who purchased an aggregate of 3,011,483 shares of the Company’s
common stock at a price of $0.03 per share. Pursuant to each of the Subscription Agreements, the Company issued its shares of common
stock to each Investor in the respective amounts as set forth in the Subscription Agreement.
In addition, on July 24 2019, Ms. Na Jin,
the Chief Executive Officer of the Company, purchased 1,000,000 shares of the Company’s common stock at a price of $0.01
per share.
As of September 30, 2019, Huazhongyun
owned 6,000,000 shares of the Company. These shares have been reclassified and recorded as treasury stock at the cost of $0.02
per share, as a result of the Reverse Merger.
Note 12. Subsequent Events
The Company has evaluated subsequent events
through the date which the consolidated financial statements were available to be issued. All subsequent events requiring recognition
as of September 30, 2019 have been incorporated into these consolidated financial statements and there are no subsequent events
that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”