Date of Report (Date of Earliest Event Reported):
April 11, 2018 (April 6, 2018)
Government
Regulation and Certification
Regulations
on Foreign Investment
Investment
activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment,
or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development
and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited.
Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted” category. Establishment
of wholly foreign-owned enterprises is generally allowed in the encouraged and permitted industries. Some restricted industries
are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests
in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors
are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open
to foreign investment unless specifically restricted by other PRC regulations. We conduct business operations that are restricted
to foreign investment through our PRC consolidated affiliated entities.
According
to Some Opinions on the Introduction of Foreign Capital in the Field of Culture (No.19 of Wen Ban Fa)which was enacted
and implemented on the date of July 6
th
,2005 jointly by Ministry of Culture, State Administration of Radio Film and
Television, State Press and Publication Administration, National Development and Reform Commission, Department of Commerce, foreign
investments are allowed to set up packaging and decoration printing, books and periodicals distribution, CD - ROM production and
art trading in the way of sole proprietorship or joint venture or cooperation.
Currently,
the business scope of our wholly-owned subsidiary in the PRC, CBTX, mainly includes the business of wholesale, import and export
of arts and crafts and related services, which are in the encouraged category. Under the PRC laws, the establishment of a wholly
foreign owned enterprise is subject to the approval of the Ministry of Commerce or its local counterparts and the wholly foreign
owned enterprise must register with the competent industry and commerce authority.
Regulations
Relating to Taxation
In
January 2008, the PRC Enterprise Income Tax Law took effect. The PRC Enterprise Income Tax Law applies a uniform 25% enterprise
income tax rate to both foreign-invested enterprises and domestic enterprises, unless where tax incentives are granted to special
industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from
the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax
rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax
treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1,
2008 are exempt from PRC withholding tax. Our PRC subsidiary is subject to PRC enterprise income tax at the statutory rate of
25% on its PRC taxable income.
Under
the PRC Enterprise Income Tax Law, an enterprise established outside China with “de facto management bodies” within
China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform
25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009
regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise
groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by
such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently
at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises”
to various reporting requirements with the PRC tax authorities.
Under
the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body” is defined as a
body that has material and overall management and control over the manufacturing and business operations, personnel and human
resources, finances and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested
overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident
enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible
for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books,
the company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or
directors having voting rights.
Please
see “Risk Factors—We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income
Tax Law, and we may therefore be subject to PRC income tax on our global income.”
Regulations
Relating to Labor
We
are subject to laws and regulations governing our relationship with our PRC employees, including wage and hour requirements, working
and safety conditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may
require substantial resources.
Pursuant
to the PRC Labor Law effective in 1995 and the PRC Labor Contract Law effective in 2008 and amended in 2012, a written labor contract
is required when an employment relationship is established between an employer and an employee. Other labor-related regulations
and rules of China stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer
is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules
and standards, educate employees on occupational safety and sanitation, prevent accidents at work and reduce occupational hazards.
An
employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee
after two consecutive fixed-term labor contracts, with certain exceptions. The employer also has to pay compensation to the employee
if the employer terminates an indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew
a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal,
an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations
on Paid Annual Leave for Employees issued by the State Council in December 2007 and effective as of January 2008, an employee
who has served an employer for more than one year and less than ten years is entitled to a 5-day paid vacation, those whose service
period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than 20 years are
entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer must be compensated
at three times their normal salaries for each waived vacation day.
Pursuant
to the Regulations on Occupational Injury Insurance effective in 2004, as amended in 2010, and the Interim Measures concerning
the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums
and maternity insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social
Insurance Premiums effective in 1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance
effective in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social
insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. The aforesaid measures
are reiterated in the Social Insurance Law of China effective in July 2011, which stipulates the system of social insurance of
China, including basic pension insurance, medical insurance, unemployment insurance, occupational injury insurance and maternity
insurance. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies
must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank.
Both PRC companies and their employees are required to contribute to the housing funds.
Regulation
on PRC Business Tax and Value-Added Tax
Prior
to January 1, 2012, pursuant to Provisional Regulation of China on Business Tax and its implementing rules, any entity or individual
rendering services in the territory of PRC is generally subject to a business tax at the rate of 5% on the revenues generated
from provision of such services.
On
January 1, 2012, the Chinese State Council officially launched a pilot value-added tax (“VAT”) reform program, or
Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay VAT instead of business
tax. The Pilot Industries in Shanghai included industries involving the leasing of tangible movable property, transportation services,
research and development and technical services, information technology services, cultural and creative services, logistics and
ancillary services, certification and consulting services. Revenues generated by advertising services, a type of “cultural
and creative services,” are subject to the VAT tax rate of 6%. According to official announcements made by competent authorities
in Beijing and Guangdong province, Beijing launched the same Pilot Program on September 1, 2012, and Guangdong province launched
it on November 1, 2012. On May 24, 2013, the Ministry of Finance and the State Administration of Taxation issued the Circular
on Tax Policies in the Nationwide Pilot Collection of Value Added Tax in Lieu of Business Tax in the Transportation Industry and
Certain Modern Services Industries, or the Pilot Collection Circular. The scope of certain modern services industries under the
Pilot Collection Circular extends to the inclusion of radio and television services. On August 1, 2013, the Pilot Program was
implemented throughout China. CBTX is currently subject to a VAT of 6% on its gross revenue.
Employees
We
currently have 37 full-time employees . We believe that our employee relations are strong. We intend to
continue to conduct business primarily using our employees. We believe that we will hire additional employees or maybe consultants
in the future as our operations grow. We may outsource some activities, in whole or in part, such as telemarketing, public relations,
distribution, and service design and development. We have no union employees.
Description of Properties
We neither rent nor own any properties. We
utilize the office space and equipment of our officers and directors at no cost. The Company currently has no policy with respect
to investments or interests in real estate, real estate mortgages or securities of, or interests in, persons primarily engaged
in real estate activities.
EMERGING
GROWTH COMPANY
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely
on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required
to:
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have
an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply
with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation
or a supplement to the auditor’s report providing additional information about the audit and the financial statements
(i.e., an auditor discussion and analysis);
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submit
certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;”
and
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disclose
certain executive compensation related items such as the correlation between executive compensation and performance and comparisons
of the CEO’s compensation to median employee compensation.
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In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words,
an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply
to private companies.
We
will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first
fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our
ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed
second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding
three year period.
RISK
FACTORS
The
business, financial condition and operating results of CBTX could be adversely affected by any of the following factors, in which
event the value of the equity securities of CBTX could decline, and investors could lose part or all of their investment. The
risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known
to management, or that management currently thinks are immaterial, may also impair future business operations. For purposes of
the discussion of the following risk factors, references to “we” and “our” shall include, unless otherwise
indicated, both NAEX and CBTX.
Risks
Related to Our Business
The
global economy and the financial markets may negatively affect our business and clients, as well as the supply of and demand for
works of art.
Our
business is affected by global, national and local economic conditions since the services we provide are discretionary and we
depend, to a significant extent, upon a number of factors relating to discretionary consumer spending in Hong Kong and Mainland
China. These factors include economic conditions and perceptions of such conditions by Traders, employment rates, the level of
Traders’ disposable income, business conditions, interest rates, availability of credit and levels of taxation in regional
and local markets. There can be no assurance that our services will not be adversely affected by changes in general economic conditions
in Hong Kong and globally.
The
art market is influenced over time by the overall strength and stability of the global economy and the financial markets, although
this correlation may not be immediately evident. In addition, political conditions and world events may affect our business through
their effect on the economies, as well as on the willingness of potential buyers and sellers to invest and sell art in the wake
of economic uncertainty.
A
decline in trading volumes will decrease our trading revenues.
Trading
volumes are directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market
closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of artworks
and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated depending on
market conditions and other factors beyond our control. Because a significant percentage of our revenues are tied directly to
the trading volumes on our markets, it is likely that a general decline in trading volumes would lower revenues and may adversely
affect our operating results. Declines in trading volumes may also impact our market share or pricing structures and adversely
affect our business and financial condition.
System
limitations or failures could harm our business.
Our
businesses depend on the integrity and performance of the technology, computer and communications systems supporting them. If
our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions
in service, slower response times and delays in the introduction of new services. These consequences could result financial losses
and decreased customer service and satisfaction. If trading volumes increase unexpectedly or other unanticipated events occur,
we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether
we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure
to accommodate any increases in a timely manner.
We
have insufficient insurance coverage
We
presently do not have any insurance to cover certain events such as physical damage to our office premises and resulting business
interruption, certain injuries occurring on our property and liability for breach of legal responsibilities as we believe, based
on our organization, business model and the remote possibility of the incurrence of substantial damages from such events, that
the costs of such insurance greatly exceeds the benefits of having it. However, in the possible event of a significant loss from
such an event, this may severely impact our performance or continue as a going concern.
The
success of our business depends on our ability to market and advertise the services we provide effectively.
Our ability to establish effective marketing
campaigns is the key to our success. Our advertisements promote our corporate image and our services. If we are unable to increase
awareness of our brand, the benefits of using our trading platform to invest in artwork and that such investment is secure, we
may not be able to attract new traders. Our marketing activities may not be successful in promoting our services or in retaining
and increasing our trader base. We cannot assure you that our marketing programs will be adequate to support our future growth,
which may result in a material adverse effect on our results of operations.
If
we are unable to renew the lease of our property, our operations may be adversely affected.
We
do not directly own the land over the property we lease. We may lose our leases or may not be able to renew it when it is due
on terms that are reasonable or favorable to us. This may have adverse impact on our operations, including disrupting our operations
or increasing our cost of operations.
The
failure to manage growth effectively could have an adverse effect on our employee efficiency, product quality, working capital
levels, and results of operations.
Any
significant growth in the market for our services or our entry into new markets may require an expansion of our employee base
for managerial, operational, financial, and other purposes. During any growth, we may face problems related to our operational
and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue
to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the
members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside
from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need
increased liquidity to finance the purchase of supplies, development of new products and services, and the hiring of additional
employees. For effective growth management, we will be required to continue improving our operations, management, and financial
systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will
have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that
demand and maintain the quality standards required by our existing and potential customers.
If
we need additional capital to fund our growing operations, we may not be able to obtain sufficient capital and may be forced to
limit the scope of our operations.
If
adequate additional financing is not available on reasonable terms, we may not be able to undertake our expansion plan and we
would have to modify our business plans accordingly. There is no assurance that additional financing will be available to us.
In
connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital
to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including
(i) our profitability; (ii) the release of competitive products by our competitors; (iii) the level of our investment in research
and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be
able to obtain capital in the future to meet our needs.
If
we cannot obtain additional funding, we may be required to: (i) limit our investments in research and development; (ii) limit
our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could materially adversely affect
our business and our ability to compete.
Even
if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional
capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the
holdings or rights of our existing stockholders. In addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to our Common Stock. We cannot give you any assurance that any
additional financing will be available to us, or if available, will be on terms favorable to us.
We
are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial
condition and results of operations.
Our
success is, to a certain extent, attributable to the management and operational and technical expertise of certain key personnel.
In addition, we will require an increasing number of experienced and competent executives and other members of senior management
to implement our growth plans. If we lose the services of any member of our senior management, we may not be able to locate suitable
or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt
our business and prospects.
We
are dependent on a trained workforce and any inability to retain or effectively recruit such employees, particularly distribution
personnel and regional retail managers for our business, could have a material adverse effect on our business, financial condition
and results of operations.
We
must attract, recruit and retain a sizeable workforce of qualified and trained staff to operate our business. Our ability to implement
effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment
and retention of highly skilled and experienced distribution personnel, regional retail managers and other technical and marketing
personnel. There is significant competition for qualified personnel in our business and we may not be successful in recruiting
or retaining sufficient qualified personnel consistent with our current and future operational needs.
Our
financial results may fluctuate because of many factors and, as a result, investors should not rely on our historical financial
data as indicative of future results.
Fluctuations
in operating results or the failure of operating results to meet the expectations of public market analysts and investors may
negatively impact the market price of our securities. Operating results may fluctuate in the future due to a variety of factors
that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our
securities to decline. Investors should not rely on comparisons of results of operations as an indication of future performance.
As result of the factors listed below, it is possible that in future periods results of operations may be below the expectations
of public market analysts and investors. This could cause the market price of our securities to decline. Factors that may affect
our quarterly results include:
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vulnerability
of our business to a general economic downturn in Hong Kong and mainland China;
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fluctuation
and unpredictability of the prices of the products we sell;
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changes
in the laws of Hong Kong that affect our operations; and
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our
ability to obtain necessary government certifications and/or licenses to conduct our business.
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Risks
Related to Doing Business In China
Future
inflation may inhibit our ability to conduct business profitably.
In
recent years, the economy in China including Hong Kong has experienced periods of rapid expansion and high rates of inflation.
High inflation may in the future cause the Chinese and Hong Kong governments to impose controls on credit and/or prices, or to
take other action, which could inhibit economic activity in China and Hong Kong, and thereby harm the market for our services.
Changes
in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition
and results of operations and may result in our inability to sustain our growth and expansion strategies.
Most
of our operations are conducted in the PRC and a significant percentage of our revenue is sourced from the PRC. Accordingly, our
financial condition and results of operations are affected to a significant extent by economic, political and legal developments
in the PRC.
The
PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets,
and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in
China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises significant control over China’s economic
growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating
financial services and institutions and providing preferential treatment to particular industries or companies.
While
the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on
us. Our financial condition and results of operation could be materially and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past
certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased
economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse
effect on our businesses, financial condition and results of operations.
If
relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price
may decrease
.
At
various times during recent years, the U.S and China have had significant disagreements over political and economic issues. Controversies
may arise in the future between these two countries that may affect our economic outlook both in the U.S and in China. Any political
or trade controversies between the U.S and China, whether or not directly related to our business, could reduce the price of our
common stock.
Future
inflation in China may inhibit the profitability of our business in China.
In
recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth
can lead to growth in the money supply and rising inflation. If prices for our services and products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to
the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability
of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls
on credit and/or prices, or to take other action, which could inhibit economic activity in China and thereby harm the market for
our services and products.
The
fluctuation of the Renminbi may have a material adverse effect on your investment.
The
exchange rates between the Renminbi and the U.S. dollar and other foreign currencies are affected by, among other things, changes
in China’s political and economic conditions. In July 2005, the PRC government changed its policy of pegging the value of
the Renminbi to the U.S. dollar, and the Renminbi was permitted to fluctuate within a band against a basket of certain foreign
currencies. As a result, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. However,
the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange
rates and achieve policy goals. For almost two years after July 2008, the Renminbi traded within a very narrow range against the
U.S. dollar, remaining within 1% of its July 2008 high. As a consequence, the Renminbi fluctuated significantly during that period
against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would
increase exchange rate flexibility of the Renminbi. However, it remains unclear how this flexibility might be implemented. There
remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result
in a further and more significant appreciation of the Renminbi against the U.S. dollar.
As
we rely on dividends and other fees paid to us by our subsidiary and affiliated consolidated entities in China, any significant
revaluation of the Renminbi could adversely affect our cash flows, revenues, earnings and financial position, and the value of,
and any dividends payable on, shares of our common stock in foreign currency terms. To the extent that we need to convert U.S.
dollars we received from our financing into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes,
appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In
addition, since our functional and reporting currency is the U.S. dollar while the functional currency of our subsidiary and consolidated
affiliated entities in China is Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar
would have a positive or negative effect on our reported financial results, which might not reflect any underlying change in our
business, financial condition or results of operations.
Restrictions
on currency exchange may limit our ability to receive and use our revenue effectively.
Substantially
all of our revenue is denominated in Renminbi. Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital
account,” which includes foreign direct investment and loans, including loans we may secure from our onshore
subsidiaries or variable interest entity. Currently, Superior Treasure Enterprise Management Consulting (Guangzhou) Co., Ltd.
(“Superior Treasure”), our major PRC subsidiary, which is a wholly-foreign owned enterprise, may purchase foreign
currency for settlement of “current account transactions,” including payment of dividends to us, without the
approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural
requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign
currencies in the future for current account transactions. Since a significant amount of our future revenue will be
denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue
generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our
shareholders, including holders of our common stock. Foreign exchange transactions under the capital account remain subject
to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This
could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the
variable interest entity.
Our
subsidiaries and affiliated entities in China are subject to restrictions on making dividends and other payments to us.
We
are a holding company, and we rely on dividends and other equity distributions paid by our PRC subsidiary for our cash and financing
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any
debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Superior Treasure
to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest
entity in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.
Under
PRC laws and regulations, Superior Treasure is a wholly foreign-owned enterprise in China. As such, Superior Treasure may pay
dividends only out of its accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations.
In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each
year, if any, to fund certain statutory reserve funds until the aggregate amount of such funds reaches 50% of its registered capital.
At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards
to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any
limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise
fund and conduct our business.
Uncertainties
with respect to the PRC legal system could have a material adverse effect on us.
The
PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil
law system may be cited as reference but have limited precedential value. Since 1979, newly introduced PRC laws and regulations
have significantly enhanced the protections available relating to foreign investments in China. Nonetheless, since these laws
and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and
regulations may not always be consistent and enforcement of these laws and regulations involves significant uncertainties, any
of which could limit the available legal protections.
In
addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing
statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings
and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. These uncertainties may
affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability
to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal
actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating
expenses and costs, and materially and adversely affect our business and results of operations.
Furthermore,
the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis
or at all, and could have a retroactive effect. As a result, we might not be aware of our violation of any of these policies and
rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual,
property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment
in China could adversely affect our business and impede our ability to continue our operations.
The
PRC’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
The
PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People’s Congress amended the
Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors
in the PRC. However, the PRC’s system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still
rudimentary and enforcement of existing laws is inconsistent. As a result, it may be impossible to obtain swift and equitable
enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The
PRC’s legal system is based on the civil law regime, that is, it is based on written statutes. A decision by one judge does
not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese
laws may be varied to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect
foreign investors. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances
affecting the PRC’s political, economic or social life, will not affect the PRC government’s ability to continue to
support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
Because
our principal assets are located outside of the United States, it may be difficult for you to enforce your rights based on U.S.
federal securities laws against us or to enforce a U.S. court judgment against us or our operating subsidiaries in the PRC.
A
substantial portion of our operations and assets are located outside of the United States. It may therefore be difficult for investors
in the United States to enforce their legal rights against us based on the civil liability provisions of the U.S. federal securities
laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, it may be
difficult to enforce such judgments in PRC courts.
We
may be required to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) of the listing and
trading of our common stock.
On
August 8, 2006, six PRC regulatory authorities, including the CSRC, jointly promulgated the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the 2006 M&A Rules, which were later amended on June 22, 2009. According
to the 2006 M&A Rules, an offshore special purpose vehicle, or SPV, refers to an overseas company controlled directly or indirectly
by domestic companies or individuals for purposes of overseas listing of equity interests in domestic companies (defined as enterprises
in the PRC other than foreign-invested enterprises). The 2006 M&A Rules require that the overseas listing by the SPV must
be approved by the CSRC. However, the applicability of the 2006 M&A Rules with respect to CSRC approval is unclear. Accordingly,
the application of the 2006 M&A Rules to the contractual arrangements of our corporate structure, including the VIE structure,
remains unclear.
We
believe that the 2006 M&A Rules do not require us to obtain prior CSRC approval for the listing and trading of our common
stock in the U.S., given that (i) our PRC subsidiary was incorporated as a wholly foreign-owned enterprise by means of direct
investment rather than by merger or acquisition by our company of the equity interest or assets of any “domestic company”
as defined under the 2006 M&A Rules, and no provision in the 2006 M&A Rules classifies the contractual arrangements between
our company, our PRC subsidiary and any of our consolidated affiliated entities as a type of acquisition transaction falling under
the 2006 M&A Rules.
Nonetheless,
in the event the CSRC subsequently determines that its prior approval is required, we could face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies. These regulatory agencies could impose fines and penalties on our operations,
limit our operating privileges, delay or restrict our sending of the proceeds from our financing outside of China into that jurisdiction,
or take other actions that could have an adverse effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our common stock. Consequently, if you engage in market trading or other activities
in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery might not occur.
We
cannot predict when the CSRC will promulgate additional rules or other guidance, if at all. Moreover, the implementing rules or
guidance, to the extent issued, could fail to resolve current ambiguities under the 2006 M&A Rules. Uncertainties or negative
publicity regarding the 2006 M&A Rules could have an adverse effect on the trading price of our common stock.
Certain
PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval
process which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by
foreign investors more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign investor takes
control of a PRC domestic enterprise. In addition, certain acquisitions of domestic companies by offshore companies that are related
to or affiliated with the same entities or individuals of the domestic companies, are subject to approval by the MOFCOM. In addition,
the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued
by the MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with national
security concerns” be subject to national security review by the MOFCOM. In addition, any activities attempting to circumvent
such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited.
There
is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition
activities in China. In addition, complying with these requirements could be time-consuming, and the required notification, review
or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a
result, our ability to seek growth through acquisitions may be materially and adversely affected.
In
addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with
our affiliated entities, we may be required to file for remedial approvals. There is no assurance that we would be able to obtain
such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us to
limit our business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into
the PRC or take other actions that could have a material and adverse effect on our business, financial condition and results of
operations.
PRC
regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans
or additional capital contributions to our PRC subsidiary and affiliated entities, which could harm our liquidity and our ability
to fund and expand our business.
We
are an offshore holding company conducting our operations in China through our PRC subsidiary. We may make loans to our PRC subsidiary
and PRC consolidated VIE subject to the approval from governmental authorities and limitations in loan size, or we may make additional
capital contributions to our PRC subsidiary.
Any
loans to our PRC subsidiary, which is treated as a foreign-invested enterprise under PRC law, are subject to PRC regulations and
foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance its activities cannot exceed statutory
limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory
limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment
as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested
company. We may also decide to finance our PRC subsidiary by means of capital contributions. Our capital contributions to our
PRC subsidiary must be approved by the Ministry of Commerce or its local counterpart. We cannot assure you that we will be able
to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the
necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiary
may be negatively affected, which could adversely affect our PRC subsidiary’s liquidity and its ability to fund its working
capital and expansion projects and meet its obligations and commitments.
On
August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration
of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the
conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB
may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not
be used for equity investments within the PRC unless otherwise provided by law. In addition, SAFE strengthened its oversight of
the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use
of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans
if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties.
On July 4, 2014, SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative
Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched the pilot
administration reform regarding conversion of foreign currency registered capitals of foreign-invested enterprises in 16 pilot
areas. According to SAFE Circular 36, some of the restrictions under SAFE Circular 142 will not apply to the settlement of the
foreign exchange capitals of an ordinary foreign-invested enterprise in the pilot areas, and such foreign-invested enterprise
is permitted to use Renminbi converted from its foreign-currency registered capital to make equity investments in the PRC within
and in accordance with the authorized business scope of such foreign-invested enterprises, subject to certain registration and
settlement procedure as set forth in SAFE Circular 36. As this circular is relatively new, there remains uncertainty as to its
interpretation and application and any other future foreign exchange related rules. On March 30, 2015, SAFE promulgated the Circular
on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or
SAFE Circular 19, to expand the reform nationwide. SAFE Circular 19 came into force and replaced both SAFE Circular 142 and SAFE
Circular 36 on June 1, 2015. However, SAFE Circular 19 continues to prohibit a foreign-invested enterprise from, among other things,
using RMB funds converted from its foreign exchange capitals for expenditure beyond its authorized business scope, providing entrusted
loans or repaying loans between non-financial enterprises. Violations of these Circulars could result in severe monetary or other
penalties. These circulars may significantly limit our ability to use RMB converted from the net proceeds of financing activities
outside of China to fund the establishment of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC
companies through our PRC subsidiary, or to establish new consolidated VIEs in the PRC.
In
light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding
companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary
government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or PRC consolidated
VIE or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or
obtain such approvals, our ability to use the proceeds from financing outside of the PRC and to capitalize or otherwise fund our
PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and
expand our business.
A
failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could
restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability
under PRC law.
On
July 4, 2014, SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which replaced the former Notice on Relevant Issues
Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special
Purpose Vehicles (generally known as SAFE Circular 75) promulgated by SAFE on October 21, 2005. On February 13, 2015, SAFE further
promulgated the Circular on Further Simplifying and Improving the Administration of Foreign Exchange Concerning Direct Investment,
or SAFE Circular 13, which took effect on June 1, 2015. This SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents
or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control
of an offshore entity established for the purpose of overseas investment or financing.
These
SAFE circulars require PRC residents to register with qualified banks in connection with their direct establishment or indirect
control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned
assets or equity interests in domestic enterprises or offshore assets or interests being deemed a “special purpose vehicle”
pursuant to SAFE Circular 37. These circulars further require amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer
or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose
vehicle fails to complete the required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited
from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities,
and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
We
may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners who are required
to make such registrations, and we may not always be able to compel them to comply with all relevant foreign exchange regulations.
As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply
with, or in the future make or obtain any applicable registrations or approvals required by all relevant foreign exchange regulations.
The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject
us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to
distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions
or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and
adversely affected.
Furthermore,
as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly
evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect
our business operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you
that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary
filings and registrations required by the foreign exchange regulations.
You
may face difficulties in protecting your interests and exercising your rights as our stockholder since we conduct the bulk of
our operations in China and other foreign locations.
We
conduct the bulk of our operations in China through CBTX, our consolidated VIE in China. Because of this factor, it may be difficult
for you to conduct due diligence on our company and business, our executive officers or director and attend stockholders meetings
if the meetings are held in China. As a result, our public stockholders may have more difficulty in protecting their interests
through actions against our management, our director or major stockholders than would stockholders of a corporation doing business
entirely or predominantly within the United States.
The
enforcement of the PRC Labor Contract Law in the PRC may adversely affect our business and our results of operations.
The
PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has
reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor
contracts, to enter into labor contracts with no fixed terms under certain circumstances or to receive overtime wages. Further,
it requires certain terminations be based on the mandatory requirement age. In the event we decide to significantly change or
decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most
advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition
and results of operations.
As
a result of these laws and regulations designed to enhance labor protection, we expect our labor costs will continue to increase.
In addition, as the interpretation and implementation of these laws and regulations are still evolving, our employment practice
may not at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur
significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely
affected.
Any
failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject
the PRC plan participants or us to fines and other legal or administrative sanctions.
In
February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007.
Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year
who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required
to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and
complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection
with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and
other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who
are granted options or other awards under our equity incentive plan will be subject to these regulations when we become a U.S.
listed company. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our
ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends
to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors,
executive officers and employees under PRC law.
We
may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be
subject to PRC income tax on our global income.
Under
the PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside
of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax
purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management
body” refers to a managing body that exercises substantive and overall management and control over the production and business,
personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the
Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto
Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the
“de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although
Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or
individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general
position on how the “de facto management body” test should be applied in determining the tax resident status of offshore
enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise,
we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and
cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law.
We
believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident
status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation
of the term “de facto management body.” If the PRC tax authorities determine that the Company or any of our subsidiaries
outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then the Company or such subsidiary could
be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we
will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that
we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our securities
may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each
case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear
whether non-PRC stockholders of our company would be able to claim the benefits of any tax treaties between their country of tax
residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your
investment in our securities.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or
other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by
non-Chinese companies.
On
February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers
of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented previous rules under the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State
Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin, an “indirect transfer” of assets, including
equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct
transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the
purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such an indirect transfer may be subject
to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment
in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains
from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes.
When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be
taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from
PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in
China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly
holding PRC taxable assets have a real commercial nature which is evidenced by their actual function and risk exposure; the duration
of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC
taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect
of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income
tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise
income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity
investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise,
a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties
or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the
payer fails to withhold any or withholds insufficient tax, the transferor shall declare and pay such tax to the tax authority
by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin
7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired
from a transaction through a public stock exchange.
There
is uncertainty as to the application of Bulletin 7, or previous rules under Circular 698. As Bulletin 7 was recently promulgated,
it is not clear how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to our offshore
restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors,
were involved. Furthermore, we, our non-resident enterprises and PRC subsidiaries may be required to spend valuable resources
to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our
previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect
on our financial condition and results of operations.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may
pursue in the future.
The
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in
particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular
59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in
Circular 698, which became effective in February 2015.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests
of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the
non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered
to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect
transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise
transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value,
the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not
only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through
the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular
698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the
purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise
conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests
of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly
owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form”
principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
We
face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other
transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities
may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and
request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become
at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required
to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident
enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and
results of operations.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable
capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although
we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future
that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income
Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular
698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse
effect on our financial condition and results of operations.
Risks
Relating to Our Corporate Structure
Our
corporate structure and, in particular, our variable interest entity contracts (the “VIE Contractual Agreements”)
are subject to significant risks, as set forth in the following risk factors.
We
depend upon the VIE Contractual Agreements in conducting our business in the PRC, which may not be as effective as direct ownership.
Although
a substantial majority of our revenue has historically been generated by our PRC subsidiaries, we have relied and expect to continue
to rely on contractual arrangements with CBTX and its shareholders to operate our business. Such contractual arrangements include:
(i) an Exclusive Technical Consulting and Service Agreement; (ii) an Exclusive Call Option Agreement; (iii) a Business Operation
Agreement; (iv) an Equity Pledge Agreement; and (v) Powers of Attorney granted by each of CBTX’s shareholders. These contractual
arrangements may not be as effective as direct ownership in providing us with control over our VIE.
If
we had direct ownership of CBTX, we would be able to exercise our rights as a shareholder to effect changes in the board of directors
of CBTX, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However,
under the current contractual arrangements, we rely on the performance by our VIE and its shareholders of their obligations under
the contracts to exercise control over our VIE. However, the shareholders of our VIE may not act in the best interests of our
company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend
to operate our business through the contractual arrangements with our VIE. We may replace the shareholders of our VIE at any time
pursuant to our contractual arrangements with it and its shareholders. However, if any dispute relating to these contracts or
the replacement of the shareholders remains unresolved, we will have to enforce our rights under these contracts through the operations
of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements
with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership
would be.
Contractual
arrangements entered into by our subsidiary and our PRC operating affiliate may be subject to scrutiny by the PRC tax authorities.
Such scrutiny may lead to additional tax liability and fines, which would hinder our ability to achieve or maintain profitability.
Under
PRC laws and regulations, transactions between related parties should be conducted on an arm’s-length basis and may be subject
to audit or challenge by the PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine
that the contractual arrangements among our subsidiary in the PRC, our affiliated entities and the shareholder of CBTX are not
conducted on an arm’s-length basis and adjust the income of our affiliated entities through the transfer pricing adjustment.
A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, increased tax liabilities of our affiliated
entities. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits, and require us to pay additional
taxes for prior tax years and impose late payment fees and other penalties on our affiliated entities for underpayment of prior
taxes. We cannot assure you that such penalties will not be imposed on us in the future. Our net income may be harmed if the tax
liabilities of our affiliated entities materially increase or if they are found to be subject to additional tax obligations, late
payment fees or other penalties.
PRC
laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. In addition,
changes in such PRC laws and regulations may materially and adversely affect our business.
There
are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited
to, the laws and regulations governing our business, and the enforcement and performance of our contractual arrangements with
CBTX and its shareholders. Although the primary business of CBTX is not within the category in which foreign investment is currently
restricted or prohibited, the uncertainty of PRC regulations and governmental policies affecting foreign ownership may result
in us being required to hold (or, conversely, being prohibited from holding), directly or indirectly, a given percentage of CBTX’s
equity interests. Our contractual arrangements with CBTX and its shareholders, which allow us to substantially control Cang Bao
Tian Xia Co., Ltd, are governed by Chinese law. We cannot assure you, however, that we will be able to enforce these contracts.
If we are unable to enforce these contracts, we could be required to deconsolidate CBTX and its subsidiaries from our financial
results.
In
addition, Chinese laws and regulations limiting foreign ownership of domestic companies are relatively new and may be subject
to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted
laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied retroactively.
Although
we believe we comply and will continue to comply with current PRC regulations, we cannot assure you that the PRC government would
agree that these operating arrangements comply with PRC licensing, registration or other regulatory requirements, with existing
policies or with requirements or policies that may be adopted in the future. If the PRC government determines that we do not comply
with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations,
restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements
with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory
or enforcement actions against us that could be harmful to our business.
Substantial
uncertainties exist with respect to the enactment timetable and final content of draft PRC Foreign Investment Law and how it may
impact the viability of our current corporate structure, corporate governance and business operations.
The
Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 (the “Draft FIL”)
aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign
Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested
Enterprise Law, together with their implementation rules and ancillary regulations. The Draft FIL embodies an expected PRC regulatory
trend to conform its foreign investment regulatory regime to prevailing international practice and the legislative efforts to
unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce is currently soliciting
comments on this draft and substantial uncertainties exist with respect to its enactment timetable, final content, interpretation
and implementation.
Among
other things, the Draft FIL expands the definition of foreign investment and introduces the principle of “actual control”
in determining whether a company is considered a foreign-invested enterprise, or an FIE. The Draft FIL specifically provides that
entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set
up in a foreign jurisdiction would nonetheless be, upon market entry clearance, treated as a PRC domestic investor provided that
the entity is “controlled” by PRC entities and/or citizens. Once an entity is determined to be an FIE, it will be
subject to the foreign investment restrictions or prohibitions set forth in the “negative list,” which will be separately
issued by the State Council at some later date. Unless the underlying business of the FIE falls within the negative list, which
calls for market entry clearance, prior approval from the government authorities as mandated by the existing foreign investment
legal regime would no longer be required for establishment of the FIE. Under the Draft FIL, VIEs that are controlled via contractual
arrangement would also be deemed as FIEs if they are ultimately “controlled” by foreign investors. Therefore, for
any companies with a VIE structure in an industry category that is on the “negative list” the VIE structure may be
deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens).
Conversely, if the actual controlling person(s) is/are of foreign nationalities, the VIEs will be treated as FIEs and any operation
in the industry category on the “negative list” without market entry clearance may be considered as illegal.
The
provision of designing, manufacturing and direct sale services of customized technical endurance apparel for the cycling, triathlon,
running and Nordic skiing markets, which we conduct through our VIE, is currently encouraged in foreign investment as set forth
in the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue, issued by the National Development and Reform
Commission and the Ministry of Commerce in 2015. The Draft FIL, if enacted as proposed, may materially impact the viability of
our current corporate structure, corporate governance and business operations in many aspects.
The
draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the companies currently employing
a VIE structure, whether or not these companies are controlled by Chinese parties, while it is soliciting comments from the public
on this point. In addition, it is uncertain whether the categorization of our industry will change. If the enacted version of
the Foreign Investment Law and the final Catalog mandate further actions, such as MOC market entry clearance or certain restructuring
of our corporate structure and operations, to be completed by companies with existing VIE structure like us, there may be substantial
uncertainties as to whether we can complete these actions in a timely manner, or at all, and our business and financial condition
may be materially and adversely affected.
The
draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase
our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting
requirements on foreign investors and the applicable FIEs. Aside from an investment implementation report and an investment amendment
report that are required for each investment and alteration of investment specifics, an annual report is mandatory, and large
foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant
with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities,
and the persons directly responsible may be subject to criminal liabilities.
If
any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and
enjoy the assets held by such entity, which could materially and adversely affect our business, financial condition and results
of operations.
We
currently conduct our operations in China through contractual arrangements with our affiliated entities. As part of these arrangements,
a substantial portion of our assets that are important to the operation of our business are held by our affiliated entities. If
any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors,
we may be unable to continue some or all of our business activities, which could materially and adversely affect our business,
financial condition and results of operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation
proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which
would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate
revenue and the market price of our common stock.
Any
failure by our consolidated variable interest entity or its shareholders to perform their obligations under our contractual arrangements
with them would have a material adverse effect on our business.
If
our consolidated variable interest entity or its shareholders fail to perform their respective obligations under the contractual
arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also
have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages,
which we cannot assure you will be effective under PRC laws. For example, if the shareholders of CBTX were to refuse to transfer
their equity interest in CBTX to us or our designee if we exercise the purchase option pursuant to these contractual arrangements,
or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their
contractual obligations.
All
the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration
in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in
accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as
the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements.
Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated
variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the
ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators
are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by
a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing
parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require
additional expense and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant
delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control
over our consolidated variable interest entity, and our ability to conduct our business may be negatively affected.
If
the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entity do not comply
with applicable PRC laws and regulations, or if these regulations or the interpretation of existing regulations change in the
future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Details
of the VIE Agreements are set out under the caption “Corporate History and Structure – VIE Agreements” above.
There are risks involved with the operation of our business in reliance on the VIE Agreements, including the risk that the VIE
Agreements may be determined by PRC regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion that
the VIE Agreements are binding and enforceable under PRC law, but has further advised that if the VIE Agreements were for any
reason determined to be in breach of any existing or future PRC laws or regulations, the relevant regulatory authorities would
have broad discretion in dealing with such breach, including:
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Imposing
economic penalties;
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Discontinuing
or restricting our operations;
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Imposing
conditions or requirements of the VIE Agreements with which we may not be able to comply;
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Requiring
our company to restructure the relevant ownership structure or operations;
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Taking
other regulatory or enforcement actions that could adversely affect our company’s business; and
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Revoking
the business licenses and/or other VIE Agreements.
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Risks
Relating to Our Common Stock
Our
majority stockholders will control our company for the foreseeable future, including the outcome of matters requiring shareholder
approval.
Mr.
Qingxi Meng, our Chairman, Chief Executive Officer, and President, has over 90% beneficial ownership of our company. As a result,
such individual will have the ability, to control the election of our directors and the outcome of corporate actions requiring
shareholder approval, such as: (i) a merger or a sale of our company, (ii) a sale of all or substantially all of our assets, and
(iii) amendments to our articles of incorporation and bylaws. This concentration of voting power and control could have a significant
effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other shareholders and be disadvantageous
to our shareholders with interests different from those individuals. Certain of these individuals also have significant control
over our business, policies and affairs as officers or directors of our company. Therefore, you should not invest in reliance
on your ability to have any control over our company.
No
public market for our common stock currently exists, and an active trading market may not ever develop or be sustained.
An
investment in our company will likely require a long-term commitment, with no certainty of return. Although our common stock is
currently quoted on the OTC Pink Market, there is no guarantee that there will be any trading in our common stock. In addition,
there is a risk that we will not be able to have our stock listed or quoted on a more established market, and even if we are able
to do so (of which no assurance can be given), we cannot predict whether an active market for our common stock will ever develop
in the future. In the absence of an active trading market:
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investors
may have difficulty buying and selling or obtaining market quotations;
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market
visibility for shares of our common stock may be limited; and
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a
lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common
stock.
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We
may require additional funding in order to progress our business in the future. If we are unable to raise additional capital,
we could be forced to delay, reduce or eliminate portions of our business.
There
is a risk that we may require an additional infusion of funds in the future to maintain and grow our business. In the event we
were to experience an economic recession or a slow growth period, such an event could adversely affect our business, liquidity
and future growth. In addition, should we experience instability in or a tightening of the capital markets, such an event could
adversely affect our ability to obtain additional capital to grow our business on terms acceptable to us or at all.
Raising
additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies
or product candidates.
We
may need to raise funding in the future to maintain and grow our business. There can be no assurance that we will be able to raise
sufficient capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or is not available
at all, we may be required to delay, scale back or eliminate the development of business opportunities and our operations and
financial condition may be adversely affected to a significant extent.
If
we raise additional capital by issuing equity securities, the percentage and/or economic ownership of our existing stockholders
may be reduced, and accordingly these stockholders may experience substantial dilution. We may also issue equity securities that
provide for rights, preferences and privileges senior to those of our common stock.
Debt
financing, if obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability
to take specific actions, such as incurring additional debt, increases in our expenses and requirements that our assets be provided
as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results.
Funding
from any source may be unavailable to us on acceptable terms, or at all. If we do not have sufficient capital to fund our operations
and expenses, our business opportunities could be substantially diminished.
The
lack of an active market impairs your ability to sell your shares of our common stock at the time you wish to sell them or at
a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares of our
common stock. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares
of our common stock and may impair our ability to expand our operations through acquisitions by using our shares as consideration.
Even
if an active trading market develops for our common stock, the market price for our common stock may be volatile.
Even
if an active market for our common stock develops, of which no assurance can be given, the market price for our common stock may
be volatile and subject to wide fluctuations due to factors such as:
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the
perception of U.S. investors and regulators of U.S. listed Chinese companies;
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actual
or anticipated fluctuations in our quarterly operating results;
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changes
in financial estimates by securities research analysts;
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negative
publicity, studies or reports;
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our
capability to match and compete with technology innovations in the industry;
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changes
in the economic performance or market valuations of other companies in the same industry;
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announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. Dollar; and
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general
economic or political conditions in or influencing China.
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In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Our
common stock is thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to
raise money or otherwise desire to liquidate your shares.
Our
common stock is “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or
near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors,
including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the
investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they
tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase
of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume
of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public
trading market for our common stock may not develop or be sustained.
Our
common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations
that may make it more difficult to sell.
Our
common stock, which is quoted on the OTC Pink Market, may be considered to be a “penny stock” if it does not qualify
for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended.
Our common stock may be a “penny stock” if it meets one or more of the following conditions: (i) the stock trades
at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted
on the Nasdaq Capital Market or, even if so, has a price of less than $5.00 per share; or (iv) is issued by a company that has
been in business less than three years with net tangible assets less than $5 million. The principal result or effect of being
designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject
to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example,
Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks
of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting
any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure
requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks
are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating
the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives.
Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or otherwise.
FINRA
sales practice requirements may also limit your ability to buy and sell shares of our common stock, which could depress the price
of shares of our common stock.
FINRA
rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending
that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers,
broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and
investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability
such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell
shares of our common stock, have an adverse effect on the market for shares of our common stock, and thereby depress price of
our common stock.
You
may face significant restrictions on the resale of your shares of our common stock due to state “blue sky” laws.
Each
state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s
residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the
reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state,
there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer
must also be registered in that state.
We
do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination
regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock.
We have not yet applied to have our securities registered in any state. There may be significant state blue sky law restrictions
on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market
for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration
or qualification.
Potential
future sales under Rule 144 may depress the market price for the common stock.
In
general, under SEC Rule 144, a person who has satisfied a minimum holding period of between six months to one-year, as well as
meeting any other applicable requirements of Rule 144, may thereafter sell such shares publicly. Therefore, the possible sale
of unregistered shares may, in the future, have a depressive effect on the price of our common stock in the over-the-counter market.
Volatility
in our common stock price may subject us to securities litigation.
The
market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share
price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have
often initiated securities class action litigation against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management’s attention and resources.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not
expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine
to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from CBTX. CBTX
may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion
of RMB into U.S. dollars or other hard currency and other regulatory restrictions.