Tengjun Biotechnology Corp. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

or

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 333-169397

Tengjun Biotechnology Corp.

(Exact name of small business issuer as specified in its charter)

East Jinze Road and South Huimin Road, Food Industry Economic and Technology Development District,
Jianxiang County, Jining City, Shandong Province, China 

(Address of principal executive offices and zip code)

(86) 0537-8711599

(Registrant’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 last 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of May 8, 2023, was 100,711,196.

Securities registered pursuant to Section 12(b) of the Act:

TABLE OF CONTENTS 

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TENGJUN BIOTECHNOLOGY CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements

TENGJUN BIOTECHNOLOGY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

TENGJUN BIOTECHNOLOGY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT

(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

TENGJUN BIOTECHNOLOGY CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

TENGJUN BIOTECHNOLOGY CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS

Tengjun Biotechnology Corp. (formerly known as China Herb Group Holdings Corporation, the “Company”) was incorporated under the name “Island Radio, Inc.” under the laws of the State of Nevada on June 28, 2010. On December 9, 2019, the Company changed its corporate name to Tengjun Biotechnology Corp. (“Tengjun”).

Business Combination 

Tengjunxiang Biotechnology Ltd. (“Tengjunxiang”) is a holding company incorporated in the Cayman Islands on July 19, 2021. On August 5, 2021, Tengjunxiang formed a wholly-owned subsidiary, Tengjunxiang Biotechnology HK Limited (“Tengjunxiang HK”), under the laws of Hong Kong. Shandong Minfu Biology Science and Technology Co., Ltd. (“Shandong Minfu”) is a company incorporated under the laws of the People’s Republic of China (the “PRC”) on August 29, 2021. Tengjunxiang HK owns all of the equity interests in Shandong Minfu, a wholly-foreign owned entity formed (“WFOE”) under the laws of PRC. 

Shandong Tengjunxiang Biotechnology Co., Ltd (“Shandong Tengjunxiang”) was incorporated under the laws of PRC on June 27, 2014. Jinxiang County Kanglong Water Purification Equipment Co., Ltd (“Jinxiang Kanglong”), a wholly-owned subsidiary of Shandong Tengjunxiang, was formed under the laws of the PRC on January 6, 2015. Shandong Tengjunxiang and Jinxiang Kanglong have been under common control. Shandong Tengjunxiang and its subsidiary, Jinxiang Kanglong are primarily engaged in processing, packaging, distribution and sale of dandelion teas, and producing and sale of water purifiers in China, and plans to increase its tea processing and water purifier production lines, and expand its sales channels in the next one to two years.

On December 15, 2021, all shareholders and the Board of Shandong Tengjunxiang agreed to increase its registered capital to RMB 100 million, of which RMB 94.95 million shall be contributed by Shandong Minfu and the remaining RMB 5.05 million shall be contributed by fourteen other shareholders. On December 16, 2021, Tengjunxiang completed its restructuring transaction (the “Restructuring Transaction”). As a result of the Restructuring Transaction, Tengjunxiang, through its subsidiaries, directly owns 94.95% of the ownership of Shandong Tengjunxiang and therefore became the controlling shareholder of Shandong Tengjunxiang.

All of the entities of the Restructuring Transaction are under common control of Mr. Xianchang Ma, the controlling shareholder of Tengjunxiang, before and after the Restructuring Transaction, which results in the consolidation of Tengjunxiang and its subsidiaries and has been accounted for as a reorganization of entities under common control at carrying value and for accounting purpose, the reorganization was accounted for as a recapitalization. The consolidated financial statements are prepared on the basis as if the Restructuring Transaction became effective as of the beginning of the first period presented in the accompanying consolidated financial statements.

On December 23, 2021, the Company entered into a Share Purchase/Exchange Agreement (the “Share Exchange Agreement”) with Tengjunxiang, and eleven shareholders of Tengjunxiang (the “Selling Shareholders”). The Selling Shareholders collectively owned 100% of all issued and outstanding shares of Tengjunxiang (the “Tengjunxiang Shares”). Pursuant to the Share Exchange Agreement, the Selling Shareholders jointly agreed to sell or transfer to the Company one hundred percent (100%) of the Tengjunxiang Shares in exchange for a total of 19,285,714 shares of the Company’s common stock. As a result of such exchange (the “Stock Exchange”), Tengjunxiang has become a wholly-owned subsidiary of the Company and the Selling Shareholders collectively have received 19,285,714 shares of the Company’s common stock, representing approximately 29.53% of the then issued and outstanding shares of the Company’s common stock.

In connection with the acquisition of Tengjunxiang pursuant to the Share Exchange Agreement, the Company with its subsidiaries commenced its business operations in processing, packaging, distribution and sale of dandelion teas, producing and sale of water purifiers in China through Tengjunxiang and its subsidiaries in the People’s Republic of China. The acquisition of Tengjunxiang is treated as a reverse acquisition (the “Reverse Acquisition”).

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements and information have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the SEC’s regulations for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the Company’s financial position, results of operations, comprehensive income, cash flows, and stockholders’ equity for the periods presented. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on April 17, 2023.

NOTE 2. LIQUIDITY

The Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has just started to generate revenues and turned around to be profitable since 2022. During the year ended December 31, 2021, the Company had a net loss of $747,525. As of December 31, 2021, the Company had an accumulated deficit of $3,187,804, working capital deficit of $11,687,585, and cash of $561,297 used in operating activities. For the three months ended March 31, 2023, the Company had a net profit of $390,587. As of March 31, 2023, the Company had an accumulated profit of $8,521,704, working capital of $7,260,671, and cash balance of $12,014,466.

The Company’s ability to continue as a going concern will be dependent upon its ability to execute on its business plan, including the ability to generate revenue and the Company’s ability to raise additional capital. Although no assurances can be given as to the Company’s ability to deliver on its revenue plans or that unforeseen expenses may arise, management has evaluated the significance of the conditions as of March 31, 2023 and has concluded that due to the receipt of the net proceeds from the completion of the Initial Public Offering and cash provided by operating activities during the year of 2022 and the first quarter of the year 2023, the Company has sufficient cash on hand to satisfy its anticipated cash requirements for the next twelve months from the issuance of these financial statements.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The consolidated 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 Tengjun Biotechnology Corp., Tengjunxiang and its 100% owned subsidiaries, Tengjunxiang HK and WOFE, and its 94.95% owned subsidiaries, Shandong Tengjunxiang and Jinxiang Kanglong. All inter-company transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of consolidated 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. As of March 31, 2023, the Company’s estimates primarily consisted of the allowance for obsolete inventory and impairment assessment on fixed assets and other long-lived assets. These estimates required management’s judgment, and actual results could differ from these estimates.

Reclassification

Certain classifications have been made to the prior year’s financial statements to conform to the current year presentation. The reclassification had no impact on previously reported net loss or accumulated deficit.

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. 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.

Advance to suppliers

The Company makes advances to certain vendors for construction and purchase of equipment. The Company had advances to suppliers of $85,298,237 and $416,911 as of March 31, 2023 and December 31, 2022, respectively. Based on management’s evaluation, no allowance for advances to suppliers was recorded as of March 31, 2023 and December 31, 2022.

Inventories

The Company’s inventories primarily consist of dandelion teas and water purifiers. Inventories are valued at the lower of cost (determined on a weighted average basis) and net realizable value. Inventories mainly consist of raw materials, goods in process, and finished goods. The Company reviews its inventories regularly for possible obsolete goods and establishes reserves when determined necessary. Allowance for obsolete inventory as of March 31, 2023 and December 31, 2022 was $36,790 and $36,299, respectively.

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 period 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:

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.

Construction in Progress

Construction in progress represents direct costs of construction, interest and design fees incurred. No interest was capitalized for the three months ended March 31, 2023 and 2022. Capitalization of these costs ceases and the construction in progress is transferred to property, plant, and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is recognized until it is completed and ready for intended use. Construction in progress as of March 31, 2023 and December 31, 2022 was $8,146,134 and 7,734,862, respectively.

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. Based on management’s evaluation, no impairment of long-live assets was recognized for the three months ended March 31, 2023 and 2022.  

Value added tax (“VAT”)

All China-based enterprises are subject to a VAT imposed by the PRC government on their domestic product sales and services. The Company’s subsidiaries in the PRC are subject to VAT at rates ranging from 0% to 17% on proceeds received from customers, and are entitled to a deduction for VAT already paid or borne on the products purchased by them. The VAT payable will be presented on the balance sheets when input VAT is less than the output VAT. Receivable balance, prepaid VAT, will be presented on the balance sheets when input VAT is larger than the output VAT.

Advances from customers

Payments received before all the relevant criteria for revenue recognition are satisfied are recorded as advance from customers. When all revenue recognition criteria are met, the advances from customers are recognized as revenue.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. To determine the revenue to be recognized, the Company applies the following five-step model:

The Company generates revenues mainly from sales of packaged dandelion teas and water purifiers. The Company is also engaged in the sale of certain nutraceutical products and water treatment accessories. Revenue from the sales of goods is recognized when the control over the promised goods is transferred to customers.

Cash payments received or due from customers before revenue recognized are recorded as advances from customers. The advance from customers is recognized as revenue when the Company’s performance obligation is completed.

Cost of goods sold

Cost of goods sold consists primarily of cost of goods purchased, direct raw material cost, direct labor cost, and cost of manufacturing overheads including the depreciation of production equipment.

Selling and marketing expenses

Selling and marketing expenses primarily consist of advertising costs, agency fees, costs for promotional materials, and commission costs made to sales force. The selling and marketing expenses for the three months ended March 31, 2023 and 2022 were $7,077,178 and $3,357,973, respectively.

General and administrative expenses

General and administrative expenses primarily consist of payroll and benefit costs for corporate employees, legal, consulting, professional expenses, rental expenses and other corporate overhead costs.

Concentration of Credit Risk

The operations of the Company are primarily in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, and by the general state of the PRC economy.

The Company has cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC. Cash in state-owned banks is covered by insurance up to RMB 500,000 ($72,500) per bank. The Company has not experienced any losses in such accounts and believes they are not exposed to any risks with their cash in these bank accounts.

The Company generated total revenue of $8,516,646 during the three months ended March 31, 2023. No customer accounted for over 10% of total revenue during the three months ended March 31, 2023.

For the Company’s water purifier business segment, the Company purchases total inventory of $380,471 from one supplier during the three months ended March 31, 2023. One supplier accounted for over 100% of the Company’s total purchases.

For the dandelion teas business segment, no supplier accounted for over 10% of total purchase during the three months ended March 31, 2023.

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.

Related parties

The Company follows ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions. Parties are related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, such as a family member or relative, shareholder, or a related corporation.

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 the 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.

The following exchange rates were used to translate the amounts from RMB into United States dollars (“USD$”) for the prospective periods:

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.

The Company’s financial instruments primarily consist of cash and cash equivalents, advances to suppliers, prepaid expenses, other receivable, accounts payable, accrued expenses, other payables, and related party borrowings. As for 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.

Lease

The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) using the modified retrospective approach, electing the practical expedient that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019.

The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. The Company’s future minimum based payments used to determine the Company’s lease liabilities mainly include minimum based rent payments. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The adoption of ASC 842 had no material impact on the Company’s consolidated balance sheets, results of operations or cash flows. In addition, the adoption of ASC 842 did not result in a cumulative-effect adjustment to the opening balance of retained earnings (accumulated deficit). Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur. The Company current does not have any operating or financing leases that last for more than twelve months.

Segment Reporting

ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s chief operating decision maker organizes segments within the Company for making operating decisions assessing performance and allocating resources. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

The Company manages its business in two operating segments, dandelion teas and water purifier, all of which are located in the PRC. All of its revenues are derived from the PRC. All long-lived assets are located in PRC.

The Company’s sale of dandelion teas is affected by the dandelion plants’ life cycle. A dandelion plant’s life cycle generally consists of five main stages and its leaves, flowers, and roots are not ready for production of teas until May of each year. Therefore, if the Company does not have enough storage of the previous year’s dandelion ingredients for producing teas, it will have no sales for the first quarter. As a result, for the three months ended March 31, 2023, the Company had no sales of dandelion teas.

The following table shows the Company’s operations by business segment for the three months ended March 31, 2023 and 2022:

The following table shows the Company’s assets by business segment as of March 31, and December 31, 2022:

Income (Loss) per Share Calculation 

Basic net income (loss) per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per shares is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which provides guidance on the acquirer’s accounting for acquired revenue contracts with customers in a business combination. The amendments require an acquirer recognizes and measures contract assets and contract liabilities acquired in a business combination at the acquisition date in accordance with ASC 606 as if it had originated the contracts. This guidance also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. The new guidance is required to be applied prospectively to business combinations occurring on or after the date of adoption. This guidance is effective for the Company for the year ending March 31, 2024 and interim reporting periods during the year ending March 31, 2024. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.

NOTE 4. INVENTORIES, NET

Inventories consisted of the following: 

NOTE 5. PROPERTY, PLANT, AND EQUIPMENT, NET

Property, plant, and equipment consisted of the following:  

Depreciation expenses for the three months ended March 31, 2023 and 2022 were $45,210 and $84,111, respectively.

NOTE 6. OTHER RECEIVABLE

Other receivable consisted of the following on March 31, 2023 and December 31, 2022:

During the year ended 31, 2022, the Company made loans to various individual sales agents in the aggregate amount of $41,775,015 pursuant to the agreements with each of the sales agents. The loans were made to each of the sales agents for the purpose of market expansion, and all loans shall be repaid in full before December 31, 2023. These loans are unsecured and bear no interest. During the three months ending March 31, 2023, approximately $39,178,129 of the $41,775,015 loans were repaid and the remaining $2,596,886 of the loan shall be repaid before December 31, 2023.

In addition, during the three months ended 31, 2023, the Company also issued new loans to various individual sales agents in the aggregate amount of $61,882,976 pursuant to the new agreements with each of the sales agents. The loans were made to each of the sales agents for the purpose of market expansion, and all loans shall be repaid in full before December 31, 2023. These loans are unsecured and bear no interest.

NOTE 7. ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following on March 31, 2023 and December 31, 2022:

NOTE 8. INCOME TAX

United States

The Company was incorporated in the United States of America and is subject to United States federal taxation. 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%.

Cayman Islands

Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.

Hong Kong

Tengjunxiang HK is incorporated in Hong Kong and is subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% on its taxable income generated from operations in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Additionally, payments of dividends by the subsidiary incorporated in Hong Kong to the Company are not subject to any Hong Kong withholding tax.

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 subsidiaries in PRC are subject to an enterprise income tax rate of 25%. The Company had recorded income tax provision of $3,442,767 and $92,955 for the three months ended March 31, 2023 and 2022.

The following table summarizes the income from operations before income taxes by jurisdiction:

Provision for income tax expense (benefit) consists of the following: 

The following table summarizes a reconciliation of income tax expense for operations, calculated at the U.S. statutory federal income tax rate of 21% to total income tax expense (benefit):

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.

As of March 31, 2023 and December 31, 2022, 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 of USA would not be realized and have a 100% valuation allowance associated with its deferred tax assets. 

NOTE 9. RISKS AND CONTINGENCIES

Covid-19

The global outbreak of the COVID-19 pandemic is having a significant negative impact on the global economy, which has adversely affected the Company’s business and financial results. Starting in late January 2020, the COVID-19 pandemic triggered a series of lockdowns, social distancing requirements and travel restrictions that have significantly and negatively affected, and may continue to negatively affect, our businesses in China. The Company had suspended its normal business operations from early 2020 and did not generate any revenue in the year 2021. The COVID-19 pandemic also presented and may continue to present challenges to the Company’s business operations as well as the business operations of the Company’s merchants, business partners and other participants in the Company’s ecosystem, such as closure of offices and facilities, disruptions to or even suspensions of normal business and logistics operations, as well as restrictions on travel. It is not possible to determine the ultimate impact of the COVID-19 pandemic on the Company’s business operations and financial results, which is highly dependent on numerous factors, including the duration and spread of the pandemic and any resurgence of the COVID-19 pandemic in China or elsewhere, actions taken by governments, the response of businesses and individuals to the pandemic, the impact of the pandemic on business and economic conditions in China, consumer demand, the Company’s ability and the ability of sales agents, logistics service providers and other participants in the Company’s ecosystem to continue operations in areas affected by the pandemic. The COVID-19 pandemic may continue to adversely affect the Company’s business and results of operations.

Concentration Risk

For the water purifier business segment, the Company relied on one supplier that represented 100% of the total purchases, during the three months ended March 31, 2023. In the event of losing the one vendor without alternative providers, the Company’s water purifier business will be materially and adversely affected.

NOTE 10. RELATED PARTY TRANSACTIONS AND BALANCES

The related party of the company with whom transactions are reported in these financial statements are as follows:

Due from related party:

Due from related party represent advances to its related parties for working capital purpose and receivable from the related party for investment purpose.

Due to related parties:

Due to related parties represent advances from its related parties for the Company’s payment for construction, purchase of equipment, and daily operating expenses. The balances are unsecured, non-interest bearing, and payable on demand.

NOTE 11. EQUITY

Preferred Stock

The total number of preferred shares authorized that may be issued by the Company is 5,000,000 shares with par value of $0.001 per share.

As of March 31, 2023 and December 31, 2022, the Company had no shares of its preferred stock issued and outstanding.

Common Stock

The total number of common shares authorized that may be issued by the Company was 70,000,000 shares with a par value of $0.001 per share. On March 30, 2022, the board of directors of the Company adopted a resolution to increase its authorized capital from 70,000,000 to 200,000,000 shares of its common stock by amending and restating the Company’s articles of incorporation. On March 31, 2022, the Company decided to remove restrictive legend from 9,908,465 shares of common stock, $0.001 par value per share, held by the Company’s twelve unrelated shareholders in accordance with Section 4(a)(1) of the Security Act of 1933. On March 24, 2023, the Company removed restrictive legend from 6,580,710 shares of common stock, $0.001 par value per share, held by the Company’s fourteen unrelated shareholders in accordance with Rule 144. As of March 31, 2023, the Company had a total of 79,519,994 restricted common stock shares and a total of 19,789,175 unrestricted common stock shares.

Common Stock Issued for Reverse Merger

On December 23, 2021, pursuant to the Share Exchange Agreement with Tengjunxiang (see Note 1), the Company issued 19,285,714 shares of its common stock to eleven Selling Shareholders of Tengjunxiang.

On July 7, 2022, the Company sold an aggregate of 25,000,000 shares of its common stock at a price of $0.10 per share to unrelated nine investors pursuant to the signed stock purchase agreements.

On October 4, 2022, the Company sold an aggregate of 6,000,000 shares of its common stock at a price of $0.05 per share, to two investors pursuant to the restricted stock agreements with the investors. Of a total of 6,000,000 shares of the common stock sold, 4,000,000 shares were sold to one of the two investors who was a former officer of the Company. The Company received advance payments of $300,000 from the two investors in September 2022 and recognized the advance payment as subscribed stock on September 30, 2022. As of March 31, 2023, all 6,000,000 common stock shares were issued and outstanding.

Common Stock Issued on Initial Closing of Public Offering

On January 9, 2023, the company conducted its initial closing for the public offering of its common stock (the “initial closing”) pursuant to the Company’s registration statement on Form S-1 initially filed with the SEC on July 22, 2022 and declared effective on November 4, 2022, whereby the Company sold 3,000,000 shares of common stock shares at $1.00 per share for total purchase price of $3,000,000 (the “Initial Closing Amount”) from the investors. The initial Closing amount equals to the minimum offering amount as set forth in the Registration Statement. As of March 31, 2023, all 3,000,000 common stock shares were issued and outstanding.

Subscribed Stock

As of December 31, 2022, the Company received a total advance payment of $2,751,828 from the investors and recognized the proceed of $2,751,828 as subscribed stock. Subscribed stock shares of 2,751,828 were issued on January 9, 2023 and outstanding as of March 31, 2023.

In January 2023, pursuant to the Company’s registration statement, the Company offered an additional 29,582 shares of common stock at $1.00 per share for a total purchase price of $29,582. As of March 31, 2023, the Company received a total advance payment of $29,582 from the investors and recognized the proceed of $29,582 as subscribed stock.

NOTE 12. SUBSEQUENT EVENTS

Additional Closing of Public Offering

On May 3, 2023, the Company conducted an additional closing of the public offering pursuant to the Company’s registration statement on Form S-1 initially filed with the SEC July 22, 2022 and declared effective on November 4, 2022, whereby the Company sold 1,402,027 shares of common stock shares at $1.00 per share for total purchase price of $1,402,027 from the investors.

Management has evaluated subsequent events through the date on which the financial statements are available to be issued. All subsequent events requiring recognition as of March 31, 2023 have been incorporated into these financial statements and there are no subsequent events that require disclosure in accordance with FASB ASC Topic 855, “Subsequent Events.”

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the results of operations and financial condition should be read in conjunction with our consolidated financial statements and notes thereto included in Item 1 of this part. This report, including the information incorporated by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The use of any of the words “believe,” “expect,” “anticipate,” “plan,” “estimate,” and similar expressions are intended to identify such statements. Forward-looking statements include statements concerning our possible or assumed future results. The actual results that we achieve may differ materially from those discussed in such forward-looking statements due to the risks and uncertainties described in the Risk Factors section of this report, in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this report, as well as in our annual report on Form 10-K. We undertake no obligation to update any forward-looking statements. 

Results of Operations - Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

The following table sets forth information from our statements of comprehensive income for the three months ended March 31, 2023 and 2022:

Revenues 

Our total revenue for the three months ended March 31, 2023 was $8,516,646, as compared to $4,284,114 for the three months ended March 31, 2022, representing an increase of $4,232,532 or 99%. The revenue increase was primarily attributed to the increase in sales of water purifiers. During the three months ended March 31, 2023, sales of dandelion teas were $0, constituting 0% of the total revenue for the quarter, and sales of water purifiers generated $8,516,646 in revenue, representing 100% of the total revenue for the quarter. During the three months ended March 31, 2022, sales of dandelion teas generated $3,463,678 in revenue, constituting approximately 80.8% of the total revenue for the quarter, and sales of water purifiers generated $820,436 in revenue, representing approximately 19.2% of the total revenue for the quarter.

The following is the sales breakdown by segment during the three months ended March 31, 2023 and 2022:

The sales of dandelion teas for the three months ended March 31, 2023 were $0, as compared to $3,463,678 for the three months ended March 31, 2022, representing a decrease of $3,463,678 or 100%. The decrease in sales of dandelion teas was mainly due to the impact of the dandelion plants’ life cycle, which generally consists of five main stages. Dandelion plants’ leaves, flowers, and roots are not ready for production of teas until May of each year. We had sales of dandelion teas in amount of $3,463,678 during the three months ended March 31, 2022 because we sold the products in inventory from prior years before our business was temporarily suspended due to COVID-19. The Company’s dandelion tea inventories were sold out by the end of last year. Therefore, for the three months ended March 31, 2023, we had no sales of dandelion teas.

The sales of water purifiers for the three months ended March 31, 2023 were $8,516,646, as compared to $820,436 for the three months ended March 31, 2022, representing an increase of $7,696,210 or 938%. The increase in sales of water purifiers was mainly driven by consumers’ higher demand for the products, the growth of our sales agents, and increased product promotion events.

Cost of Goods Sold 

Our total cost of goods sold was $521,648 for the three months ended March 31, 2023 as compared to $370,064 for the three months ended March 31, 2022, representing an increase of $151,584 or 41.0%. The increase in our total cost of goods sold was mainly due to the increase in the cost of goods sold of water purifiers. During the three months ended March 31, 2023, cost of sales of dandelion teas was $0, constituting 0.0% of the total cost of goods sold, and cost of sales of water purifiers was $521,648, constituting 100.0% of the total cost of goods sold of the quarter. During the three months ended March 31, 2022, cost of sales of dandelion teas was $273,847, constituting approximately 74.0% of the total cost of goods sold, and cost of sales of water purifiers was $96,217, constituting approximately 26.0% of the total cost of goods sold of the quarter ending March 31, 2022.

The following is the cost of goods sold breakdown by segment during the three months ended March 31, 2023 and 2022:

During the three months ended March 31, 2023, cost of sales of dandelion teas were $0 as compared to $273,847 for the three months ended March 31, 2022, representing a decrease of $273,847 or 100%, because of no sales during the three months ended March 31, 2023.

During the three months ended March 31, 2023, cost of sales of water purifiers were $521,648, as compared to $96,217 for the three months ended March 31, 2022, representing an increase of $425,431 or 442.2%. The increase in the cost of sales of water purifiers was mainly due to the increased sales in the quarter ending March 31, 2023.

Gross Profit

Our gross profit was $7,994,998 and $3,914,050 for the three months ended March 31, 2023 and 2022, respectively.

Our gross profit increased by $4,080,948 or 104% during the three months ended March 31, 2023, compared to the same period in 2022. The gross profit increase was mainly due to the increase in gross profit of water purifiers.

During the three months ended March 31, 2023 and 2022, the gross profit as a percentage of net revenue for the Dandelion teas was 0.0% and 92.1%, respectively, and the gross profit as a percentage of net revenue for the Water purifiers was approximately 93.9% and 88.3%, respectively. The gross profit as a percentage of net revenue for dandelion teas decreased 92.1% for the three months ended March 31, 2023, as compared to the same period in 2022 due to zero sales of dandelion teas in this quarter. The gross profit as a percentage of net revenue for water purifiers increased 5.6% for the three months ended March 31, 2023, as compared to the same period in 2022, driven by decreased costs incurred in purchasing materials.

The following table presents gross profit and gross profit margin by segment for the three months ended March 31, 2023 and 2022: 

Selling and Marketing Expenses

Our selling and marketing expenses primarily consist of sales commission, advertising, and product promotional expenses.

Our selling and marketing expenses were $7,077,178 for the three months ended March 31, 2023, as compared to $3,357,973 for the three months ended March 31, 2022, representing an increase of $3,719,205 or 110.8%. Such an increase was mainly driven by an increase in sales commission, because of the increase in sales.

General and administrative expenses

Our general and administrative expenses primarily consist of payroll and benefit costs for corporate employees, legal, consulting, professional expenses, rental expenses, and other corporate overhead costs.

The general and administrative expenses were $341,834 for the three months ended March 31, 2023, as compared to $230,339 for the three months ended March 31, 2022, representing an increase of $111,495 or 48.4%. Such an increase was mainly caused by the increase in accounting, legal and stock transfer agent fees that were associated with the Company’s SEC reporting and public disclosures, and the increase in the Company’s office rental expenses.

Interest income (expense)

Interest income was $11,892 for the three months ended March 31, 2023, as compared to interest loss of $24 for the three months ended March 31, 2022. Our total interest income increased by $11,868 or 49450.0% during the three months ended March 31, 2023, compared to the same period in 2022. The increase in interest income was primarily due to the interest earned from the Company’s bank savings accounts.

Other income (expense)

Other expense consists of miscellaneous non-operating cost. The other expense was $5,480 for the three months ended March 31, 2023. There was no other income or expenses for the three months ended March 31, 2022.

Income tax provision

Income tax provision was $191,811 for the three months ended March 31, 2023, as compared to $92,955 for the three months ended March 31, 2022. Our income tax provision increased by $98,856 or 106.3% during the three months ending March 31, 2023, compared to the same period in 2022. The increase in income tax provision was primarily due to the increase in income from operations during the three months ended March 31, 2023.

Net Income (Loss) 

Our net income was $390,587 for the three months ended March 31, 2023, as compared to $232,807 for the three months ended March 31, 2022, increased by $157,780 or 67.8%, because of the above factors.

Foreign Currency Translation Loss

We had a foreign currency translation gain of $127,532 during the three months ended March 31, 2023, as compared to foreign currency translation loss of $9,438 during the three months ended March 31, 2022, reflecting a change of $136,970 or 1451.3%. Such an increase in foreign currency translation gain was primarily caused by the currency exchange rate fluctuation.

Liquidity and Capital Resources

Working Capital

Our working capital was $7,260,671 as of March 31, 2023, as compared to working capital of $6,912,114 as of December 31, 2022, an increase in working capital of $348,557 or 5%. The increase in working capital is primarily due to the increase in cash inflow from revenue and the increase in the advance from customers and tax payable.

Cash Flow from Operating Activities

Our net cash provided by operating activities was $7,559,478 for the three months ended March 31, 2023, as compared to $1,260,939 for the three months ended March 31, 2022, reflecting an increase of $6,298,539 or 500%. The increase was primarily due to the increase in net income, advance from customers, tax payable and accounts payable, partially offset by the increase in advance to suppliers, loan to third parties, inventory, and the decrease in accrued liabilities and other payables during the three months ended March 31, 2023, as compared to three months ended March 31, 2022.

Cash Flow from Investing Activities

Our net cash used in investing activities was $384,760 for the three months ended March 31, 2023, as compared to that of $48,473 for the three months ended March 31, 2022, reflecting an increase of $336,287 or 694%. The increase in net cash used in investing activities was primarily due to the increase in investment in construction in progress and acquisition of equipment during the three months ended March 31, 2023, as compared to those items in the three months ended March 31, 2022. 

Cash Flow from Financing Activities

Our net cash provided by financing activities was $2,015,176 for the three months ended March 31, 2023, as compared to $190,716 of net cash provided by financing activities for the three months ended March 31, 2022, representing an increase of $1,824,460 or 957%. The increase was primarily due to the proceeds received from issuance of the Company’s stock shares and the loans from related parties during the three months ended March 31, 2023.

Off-Balance Sheet Arrangements

As of March 31, 2023, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) of the United States, which requires management to make certain estimates and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our financial statements.

While we believe that the historical experience, current trends and other factors considered support the preparation of our financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.

Inventories

Our inventories primarily consist of dandelion teas and water purifiers. Inventories are valued at the lower of cost (determined on a weighted average basis) and net realizable value. Inventories consist of raw materials, goods in process, and finished goods. We review our inventories regularly for possible obsolete goods and establishes reserves when determined necessary. As of March 31, 2023 and December 31, 2022, the allowance for obsolete inventories was $36,790 and $36,299, respectively.

Construction in Progress

Construction in progress represents direct costs of construction, interest and design fees incurred. No interest was capitalized for the three months ended March 31, 2023 and 2022. Capitalization of these costs ceases and the construction in progress is transferred to property, plant, and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is recognized until it is completed and ready for intended use. Construction in progress as of March 31, 2023 and December 31, 2022 was $8,146,134 and $7,734,862, respectively.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. To determine the revenue to be recognized, the Company applies the following five-step model:

The Company generates revenues mainly from sales of packaged dandelion teas and water purifiers. Revenue from the sales of goods is recognized when the control over the promised goods is transferred to customers.

Cash payments received or due from customers before revenue recognized are recorded as advances from customers. The advance from customers is recognized as revenue when the Company’s performance obligation is completed.

Related parties

The Company follows ASC 850, “Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions. Parties are related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or significant influence, such as a family member or relative, shareholder, or a related corporation.

Recent Accounting Pronouncements

See Note 3 to unaudited consolidated financial statements for the three months ending March 31, 2023 and 2022. 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our chief (principal) executive officer and chief (principal) accounting officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act).

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be presented or detected on a timely basis.

Based on management’s assessment, we have concluded that, as of March 31, 2023, our disclosure controls and procedures were not effective in timely alerting management to the material information relating to us required to be included in our annual and interim filings with the SEC.

Our chief executive officer and principal financial officer have concluded that our disclosure controls and procedures had the following material weaknesses:

These weaknesses were identified in our Annual Report on Form 10-K for the year ended December 31, 2021. These weaknesses have existed since our inception on June 28, 2010 and, as of March 31, 2023, have not been remediated.

To the extent reasonably possible given our limited financial and personnel resources, we intend to take measures to cure the aforementioned material weaknesses, including, but not limited to, the following:

Since the recited remedial actions will require that we hire or engage additional personnel, these material weaknesses may not be overcome in the near-term due to our limited financial resources. Until such remedial actions can be realized, we will continue to rely on the limited advice of outside professionals and consultants.

Changes in Controls and Procedures

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on us or our business.

ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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