Item 1A. Risk
Factors
Investment in our securities involves
a high degree of risk. You should carefully consider the risks described below together with all of the other information
included in this report before making an investment decision. The risks and uncertainties described below represent our known
material risks to our business. If any of the following risks actually occurs, our business, financial condition or results
of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in our securities
unless you can afford to lose your entire investment.
Risks Related to our Business
Significant decreases in the price
and availability of gold and other precious metal commodities could adversely impact our earnings, cash flows and results of operation.
The jewelry industry generally is affected
by fluctuations in the price and supply of diamonds, gold, and, to a lesser extent, other precious and semi-precious metals and
stones. In the past, we have not hedged our needs for gold or other raw materials through commodity purchasing or other common
methods such as the use of options or forward contracts. Prior to 2016, we purchased gold in order to produce jewelry and gold
products. While jewelry and gold product manufacturing is still our core business, starting in 2016, we began to purchase gold
for the purposes of investment and hedging against the risks in gold and other commodity price fluctuations.
Our investment objective is to purchase
gold in response to the rising price trend of gold for the recent years. By doing so, we have been able to use bank loans or other
third party borrowings to finance our gold investment and repay the debts with the gold purchased upon due. The upward increases
in the gold price in the last few years have enabled us to use a lesser amount of gold than originally purchased to repay the same
debts. However, gold investment has exposed us to a greater degree of risks associated with any future decreases in the price of
gold. When gold price decreases, we would have to use or sell a larger amount of gold to repay the outstanding borrowings when
they become due. The more investment we make in gold and more loans we borrow to finance such purchases, the greater the risks
we would be subject to in any future decreases in the price of gold. Any significant decreases in the price and availability
of gold could weaken our cash flow position and adversely affect our costs for conducting our business and results of operation.
On the other hand, a sudden significant
increase in the price of gold could increase our immediate costs for gold investment as well as production costs beyond the amount
that we are able to pass on to our customers, which would adversely affect our sales and profitability. A significant disruption
in our supply of gold or other commodities could decrease our production and shipping levels, materially increase our operating
costs and materially and adversely affect our profit margins. Shortages of gold or other commodities, or interruptions in transportation
systems, labor strikes, work stoppages, war, acts of terrorism, or other interruptions to or difficulties in the employment of
labor or transportation in the markets in which we purchase our raw materials, may adversely affect our ability to maintain production
of our products and sustain profitability. Although we generally attempt to pass increased commodity prices to our customers, there
may be circumstances in which we are not able to do so. In addition, if we were to experience a significant or prolonged shortage
of gold, we would be unable to meet our production schedules and to ship products to our customers in a timely manner, which would
adversely affect our sales, margins and customer relations.
If we are unable to accurately manage our inventory,
our reputation, earnings and results of operations could suffer.
We are faced with the increased challenge
of balancing our gold inventory levels to meet gold investment needs with our ability to meet our jewelry manufacturing demands.
We purchase gold based on internally generated projections, and the projections are based on many unknown assumptions around the
price and price trend of gold, consumer demands, and product pricing, among other things. If these inventory projections are too
high, our inventory may be too high, which may result in overstock of the amount of gold we purchase, lower sales prices and gross
margins and cause harm to our financial results. Conversely, if these projections are too low, and we underestimate our inventory
needs and the consumer demand for our products, we would be exposed to lost business opportunities and experience shortage in our
gold inventory to meet our production, financing and investment needs. Either situation could have a material adverse effect on
our business, results of operations, financial condition and cash flows.
We may be unable to repay our
debts as they become due.
Over the last two years, we have dramatically
increased the amount of debts we borrowed. The borrowings were used to purchase gold, and because the price of gold has increased
over the last year, we have profited by such increases. However, in the event the gold market experiences a downturn, we will find
that the assets on hand (
i.e.,
gold purchased with loans) are insufficient to repay those loans. Moreover, if the price
of gold decreases, banks may be unwilling to refinance our debts as they become due. In addition, a price drop could result in
a default under the terms of such loans, regardless of whether we are current in our payment under such loans. If this were to
happen, our business could be materially harmed.
We may need to implement additional
accounting systems, procedures and controls as we grow our business and organization to satisfy the new reporting requirements.
As a public reporting company, we are
required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including expanded disclosures
and accelerated reporting requirements and more complex accounting rules. Compliance with these new requirements may increase our
costs and require additional management time and resources. In the prior two fiscal years, our management assessed and found our
internal control over financial reporting to be ineffective. To remedy the material weakness of inadequate controls over cash management,
our Board adopted resolutions requiring management to seek the Board’s approval prior to entering into any transactions with
a value in excess of a certain threshold, and we are in the process of implementing additional policies and procedures to enhance
our internal controls. Notwithstanding these additional measures, we may still need to implement additional or enhance finance
and accounting systems, procedures and controls to satisfy new accounting and reporting requirements. If our internal control over
financial reporting continues to be determined to be ineffective, investors could lose confidence in the reliability of our internal
controls, which could adversely affect our stock price.
Jewelry purchases are discretionary,
may be particularly affected by adverse trends in the general economy, and an economic decline will make it more difficult to generate
revenue.
The success of our operations depends,
to a significant extent, upon a number of factors relating to discretionary consumer spending in China. These factors include economic
conditions and perceptions of such conditions by consumers, employment rates, the level of consumers’ disposable income,
business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation in regional and local
markets in China where we manufacture and sell our products. There can be no assurance that consumer spending on jewelry will not
be adversely affected by changes in general economic conditions in China and globally.
While the Chinese economy has experienced
rapid growth in the past decade, such growth has been uneven among various sectors of the economy and in different geographical
areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. During the past two decades,
the rate of inflation in China has been as high as approximately 20%. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability.
In the recent years, Chinese economic growth had been slowing down, and for example, GDP growth was only 6.7% in 2016. While the
China economic growth showed a considerable improvement in 2017, should it experience another slow growth for a sustained period
of time, it could substantially affect consumer demand and confidence, which could adversely impact our business, results of operation
and financial condition.
Competition in the jewelry industry
could cause us to lose market share, thereby materially and adversely affecting our business, results of operations and financial
condition.
The jewelry industry in China is highly
fragmented and very competitive. We believe that the market may become even more competitive as the industry grows and/or consolidates.
We compete with local jewelry manufacturers and large foreign multinational companies that offer products that are similar to ours.
Some of these competitors have larger local or regional customer bases, more locations, more brand equity, and substantially greater
financial, marketing and other resources than we have. As a result of this increasing competition, we could lose market share,
thereby materially and adversely affecting our business, results of operations and financial condition.
We may need to raise additional
funds in the future. These funds may not be available on acceptable terms or at all, and, without additional funds, we may not
be able to maintain or expand our business. The sale of additional shares or equity or debt securities could result in additional
dilution to our shareholders.
Our operations require substantial funds
to finance our operating expenses, to maintain and expand our manufacturing, marketing and sales capabilities and to cover public
company costs. Without these funds, we may not be able to meet our goals. We believe that our current cash and cash equivalents
and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We
may, however, require additional cash resources due to changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain one or more additional credit facilities. If we cannot raise additional
funds when needed, or on acceptable terms, we may not be able to effectively execute our growth strategy take advantage of future
opportunities, or respond to competitive pressures or unanticipated requirements. In addition, we may be required to scale back
or discontinue expansion plans, or obtain funds through strategic alliances that may require us to relinquish certain rights.
We may seek additional funding through
public or private financing or through collaborative arrangements with strategic partners. However, you should also be aware that
in the future:
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we cannot be certain that additional capital will be available on favorable terms, if at all;
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any available additional financing may not be adequate to meet our goals; and
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any equity financing would result in dilution to stockholders.
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In addition, the incurrence of indebtedness
would result in increased debt service obligations and could result in operating and financing covenants that would restrict our
operations.
Our ability to maintain or increase
our revenue could be harmed if we are unable to strengthen and maintain our brand image.
We believe that the primary factors
in facilitating customer buying decisions in China’s jewelry sector include price, confidence in the merchandise sold, and
the level and quality of customer service. The ability to differentiate our products from competitors’ by our brand-based
marketing strategies is a key factor in attracting consumers, and if our strategies and efforts to promote our brand, such as television
and magazine advertising and beauty contest sponsorships fail to garner brand recognition, our ability to generate revenue may
suffer. If we are unable to differentiate our products, our ability to sell our products wholesale and our planned sale of products
retail will be adversely affected. If we fail to identify or react appropriately or timely to customer buying decisions, we could
experience a reduction in consumer recognition of our products, a diminished brand image, higher markdowns, and costs to recast
overstocked jewelry. These factors could result in lowering selling prices and sales volumes for our products, which could adversely
affect our financial condition and results of operations.
There is only one source in China
for us to obtain the precious metals used in our jewelry products; accordingly, any interruptions of our arrangement with this
source would disrupt our ability to fulfill customer orders and substantially affect our ability to continue our business operations.
Under PRC law, the supply of precious
metals such as platinum, gold, and silver is highly regulated by PRC government agencies. The Shanghai Gold Exchange (“the
Exchange”) is the only supplier in China for gold used for our jewelry products (including the gold we lease from leading
PRC banks). We are required to obtain and maintain several membership and approval certificates from government agencies in order
to do business involving precious metals. The loss of our relationship or failure to renew our membership with the Exchange, or
its inability to furnish precious metals to us (or the banks we lease from) as anticipated in terms of cost, quality, and timeliness,
would adversely affect our ability to fulfill customer orders in accordance with our required delivery, quality, and performance
requirements. If this situation were to occur, we would not have any alternative suppliers in China to obtain our raw materials
from, which would result in a decline in revenue and revenue potential, and ultimately risk the overall continuation of our business
operations.
If we are not able to adapt to
changing jewelry trends in China, our inventory may be overstocked and we may be forced to reduce the price of our overstocked
jewelry or incur the cost to recast it into new jewelry.
Our jewelry sales depend on consumer
fashions, preferences for jewelry and the demand for particular products in China. Jewelry design trends in China can and do change
rapidly. The ability to accurately predict future changes in taste, respond to changes in consumer preferences, carry the inventory
demanded by customers, deliver the appropriate quality, price products correctly, and implement effective purchasing procedures
all have an important influence on determining sales performance and maximizing gross margin. If we fail to anticipate, identify
or react appropriately to changes in styles and trends, we could experience excess inventories, higher than normal markdowns or
an inability to sell our products. If such a situation were to exist, we would need to incur additional costs to recast our products
to fit the demand, and the labor and manufacturing costs previously invested in the recast products would be lost.
Our failure to manage growth effectively
could have an adverse effect on our employee efficiency, product quality, working capital levels, and results of operations.
We intend to develop the retail distribution
of our products, which we believe will result in rapid growth, but will also place significant demands on our managerial, operational
and financial resources. Any significant growth in the market for our current wholesale business and our planned retail distribution
would require us to expand our managerial, operational, financial, and other resources. During any period of growth, we may face
problems related to our operational and financial systems and controls, including quality control and delivery and service capabilities.
We also will need to continue to expand, train and manage our employee base. If we are unable to successfully build these skills
and expand our number of skilled management and staff, we may be unsuccessful in achieving our intended level of growth.
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 purchases of raw materials and supplies, development of new products and the hiring of additional employees. 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 you that we will be able to timely and effectively meet that demand and maintain the quality standards required
by our existing and potential customers.
We maintain a relatively large
inventory of our raw materials and jewelry products to support customer delivery requirements, and if this inventory is lost due
to theft, our results of operations would be negatively impacted.
We purchase large volumes of precious
metals and store significant quantities of raw materials and jewelry products at our warehouse and show room in Wuhan, China. Although
we have an inventory security system in place, we may be subject to future significant inventory losses due to third-party or employee
theft from our warehouses or other forms of theft. The implementation of enhanced security measures beyond those that we already
utilize, which include onsite police station with direct deployment of officers and instant access to Wuhan city police department,
security cameras, and alarm systems in our warehouse, would increase our operating costs. Also, any such losses of inventory could
exceed the limits of, or be subject to an exclusion from, coverage under our insurance policies. Claims filed by us under our insurance
policies could lead to increases in the insurance premiums payable by us or the termination of coverage under the relevant policy.
In addition, loss of gold inventory may cause violation of our pledge agreements of loans.
We have outstanding borrowings,
and if our ability to obtain new loans or to renew current loans from financial institutions or other third parties is substantially
diminished, our business may be severely disrupted and the results of operations could suffer.
In the recent years, we have substantially
increased our borrowings as we grew our business and expanded our operations. Almost all of our loans from financial institutions
and other unrelated third-parties are secured by restricted cash on deposit at various banks, or gold we own or have leased, as
we may agree from time to time with the respective lenders.
In addition, many of our loans are borrowed
conditioned upon personal guarantees provided by our Chairman and CEO because of his personal credit worthiness and his reputation
and expertise in the China gold industry. Thus our ability to obtain loans or credits, to a great extent, depends on the continued
services of our founder, Chairman and CEO, Mr. Zhihong Jia. If Mr. Jia is unable or unwilling to continue his service with us or
to provide personal guarantees for our loans, we may not be able to obtain new loans or renew existing loans, or our existing loans
may be deemed in default or called for immediate repayment acceleration by the lenders.
Although we have been able to receive
sufficient funding in the past, we cannot assure you that we will be able to renew our loans at maturity or obtain alternative
funding on reasonable terms from banks or other parties. If we fail to do so, we would have to repay the existing borrowings with
our cash or other assets, including our gold inventory, and our business may be severely disrupted and the results of operations
could suffer
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Our business could be materially
adversely affected if we cannot protect our intellectual property rights.
We have developed trademarks, patents,
know-how, trade-names and other intellectual property rights that are of significant value to us. In particular, we have applied
for patents on a limited number of designs of our jewelry products and trademarks as well. However, the legal regime governing
intellectual property in the PRC is still evolving and the level of protection of intellectual property rights in the PRC may differ
from those in other jurisdictions. Thus, it may be difficult to enforce our rights relating to these designs as well as our trademarks.
Any unauthorized use of, or other infringement upon our designs or trademarks, could result in potential sales being diverted to
such unauthorized sellers, and dilute the value of our brand.
While we are not aware of any
data breach in the past, any future failure to adequately maintain security and prevent unauthorized access to electronic and other
confidential information could result in a data breach which could materially adversely affect our reputation, financial condition
and operating results.
The protection of our customer, business
partner, Company and employee data is critically important to us. Our customers, business partners, and employees expect we will
adequately safeguard and protect their sensitive personal and business information. We have become increasingly dependent upon
automated information technology processes. Improper activities by third parties, exploitation of encryption technology, data-hacking
tools and discoveries and other events or developments may result in a future compromise or breach of our networks, payment terminals
or other settlement systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change
frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques
or implement adequate preventative measures. Any failure to maintain the security of our customers’ sensitive information,
or data belonging to ourselves, our business partners or other relationship third parties, could put us at a competitive disadvantage,
result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines and
penalties, resulting in a possible material adverse impact on our financial condition and results of operations. There can be no
assurance that we will not suffer a criminal cyber-attack in the future, that unauthorized parties will not gain access to personal
or business information or sensitive data, or that any such incident will be discovered in a timely manner.
We are dependent on certain key
personnel, and the loss of these key personnel could have a material adverse effect on our business, financial conditions and results
of operations.
Our success, to a great extent, has
been attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. Moreover,
our daily operation and performance rely heavily upon our senior management. There can be no assurance that we will be able to
retain these officers or that such personnel may not receive and/or accept competing offers of employment. The loss of a significant
number of these employees could have a material adverse effect upon our business, financial condition, and results of operations.
We do not maintain key-man life insurance for any of our senior management.
We rely on our distribution network
for virtually all of our sales revenues. Failure to maintain good distributor relations, or our inability to successfully execute
our planned expansion of our customer base, may affect our revenues and earnings.
Our business depends directly on the
performance of roughly 300 of our major distributors, which we also refer to as our customers. No customer accounted for more than
10% of annual sales for the nine months ended 2018 and 2017. As all purchases of our products by customers are made through purchase
orders and we do not have long-term contracts with any of our customers, it is critical that we maintain good relationships with
them. However, maintaining good relationships with existing distributors requires time and efforts by our management, and replacing
any existing distributor would be difficult and time consuming. Our failure to maintain good relationships with our distributors
could materially disrupt our product distributions and harm our net sales.
We may not maintain sufficient
insurance coverage for the risks associated with our business operations. As a result, we may incur uninsured losses.
Except for property, accident and automobile
insurance, we do not have other insurance of such as business liability or disruption insurance coverage for our operations in
the PRC. As a result, we may incur uninsured liabilities and losses as a result of the conduct of our business. There can be no
guarantee that we will be able to obtain additional insurance coverage in the future, and even if we are able to obtain additional
coverage, we may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, it could adversely
affect our business, results of operations and financial condition.
Global financial crises and economic
downturns may have an adverse effect on our businesses, results of operation and financial condition.
Global economic conditions can have
an effect on our business. If there is an additional global financial crisis or economic downturn, such as that which occurred
in 2008, it may adversely affect economies and businesses around the world, including in China, which in turn will have an adverse
impact on our business and operations.
Potential environmental liability
could have a material adverse effect on our operations and financial condition.
As a manufacturer, we are subject to
various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we
believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to
comply with these regulations at all times as the Chinese environmental legal regime is evolving and becoming more stringent. Therefore,
if the Chinese government imposes more stringent regulations in the future, we may have to incur additional and potentially substantial
costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. Further, no
assurance can be given that all potential environmental liabilities have been identified or properly quantified or that any prior
owner, operator, or tenant has not created an environmental condition unknown to us. If we fail to comply with any of the present
or future environmental regulations in any material aspects, we may suffer from negative publicity and be subject to claims for
damages that may require us to pay substantial fines or force us to suspend or cease operations.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related Commission regulations,
have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting. Our management team will need to invest significant management time and financial resources to more
fully comply with both existing and evolving standards for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
We may
have additional tax liabilities.
We are subject to income and other taxes
in the U.S. and China. Tax laws are complex and subject to constant changes as new laws are passed and new interpretations of the
law are issued or applied. The U.S. has recently enacted significant tax reform which may impact our tax liabilities. Significant
judgment is required in estimating our provision for income taxes. In our business operations and corporate structure, there are
contractual arrangements, transactions or calculations where the ultimate tax determination is uncertain. Although we believe our
tax estimates are reasonable, any final determination pursuant to tax audits could be materially different from what is reflected
in our consolidated financial statements. Should any tax authority disagree with our estimates and determine any additional tax
liabilities, including interest and penalties for us, this could adversely impact our results of operations, financial position
and cash flows.
Uncertainty
in the interpretation and application of the 2017 Tax Cuts and Jobs Act could materially affect our tax obligations and effective
tax rate
The 2017 Tax
Cuts and Jobs Act, which was signed into law on December 22, 2017, introduces significant changes to U.S. income tax law,
including how the U.S. imposes income tax on multinational corporations. Accounting for the income tax effects of the Act requires
significant judgments and estimates in the interpretation of the provisions of the Act. The U.S. Department of Treasury has authority
to issue regulations and interpretative guidance that may impact how we apply the law and impact our results of operations in the
period issued and subsequently. The Act requires complex computations not previously required under U.S. tax law. Further, compliance
with the Act and the accounting for such provisions require the accumulation of information not previously required or regularly
produced. The Treasury, the Internal Revenue Service (“IRS”), and other standard-setting bodies may issue new
guidance on how the provisions of the Act will be applied or otherwise administered that is different from our interpretation. As
additional regulatory guidance is issued, and as we perform additional analysis on the application of the law and any additional
guidance issued, our final analysis may be different from our current reported amounts, and we may make adjustments that could
materially affect our financial position and results of operations as well as our effective tax rate in the period in which the
adjustments are made.
Risks Related to Doing Business in
the PRC
Substantially all of our assets
are located in China and substantially all of our revenues are currently derived from our operations in China, and changes in the
political and economic policies of the PRC government could have a significant impact upon what business we may be able to conduct
in the PRC and accordingly on the results of our operations and financial condition.
Our business operations may be adversely
affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control
over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental
regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has
been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is
no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly
alter these policies from time to time without notice.
Our operations are subject to
PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
The PRC’s legal system is a civil
law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little
value as precedent in China. 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, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government
has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation
and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases
and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations
involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied
retroactively.
One of our principal operating subsidiaries,
Vogue-Show, is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and
regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises.
We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the
relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:
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revoking our business license, other licenses or authorities;
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requiring that we restructure our ownership or operations; and
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requiring that we discontinue some or all of our business.
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The scope of our business license
in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.
Our operating affiliate, Wuhan Kingold,
can only conduct business within its business scope, as detailed on its business license. Our license permits us to design, manufacture,
sell and market jewelry products to department stores throughout the PRC and to engage in the retail distribution of our products.
Any amendment to the scope of our business requires further application and government approval. In order for us to expand our
business beyond the scope of our license, we will be required to enter into a negotiation with the authorities for the approval
to expand the scope of our business. We cannot assure you that Wuhan Kingold will be able to obtain the necessary government approval
for any change or expansion of our business scope.
Our PRC stockholders are required
to register with the State Administration of Foreign Exchange and their failure to do so could cause us to lose our ability to
remit profits out of the PRC as dividends.
The 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, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in
connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes
material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation
term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
SAFE Circular 37 was issued to replace
the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip
Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.
If our shareholders who are PRC residents
or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing
their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our
ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
These regulations apply to our stockholders
who are PRC residents. As of the date of this registration statement, our Chairman and Chief Executive Officer, Zhihong Jia, has
obtained his registration under Circular 75, and the other PRC residents are in the process of obtaining registrations under Circular
37. However, there is no assurance that such persons can successfully complete such registrations, and there is no assurance that
all of the PRC resident stockholders and beneficiary stockholders have complied with and will comply with the SAFE registration
requirements currently or in the future. In the event that these or other of our PRC-resident stockholders do not follow the procedures
required by SAFE, we could (i) be exposed to fines and legal sanctions, (ii) lose the ability to contribute additional capital
into our PRC subsidiaries or distribute dividends to our company, (iii) face liability for evasion of foreign-exchange regulations,
and/or (iv) lose the ability to consolidate the financial statements of our PRC subsidiaries under applicable accounting principles.
PRC regulations relating to acquisitions
of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our
failure to obtain the prior approval of the China Securities Regulatory Commission, or CSRC for the listing and trading of our
common stock could have a material adverse effect on our business, operating results, reputation and trading price of our common
stock.
On August 8, 2006, the PRC Ministry
of Commerce, or MOFCOM, joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or
CSRC, and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic
Enterprises, or the Revised M&A Regulations, which took effect September 8, 2006. These rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These rules
signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM
as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, these rules establish reporting requirements for acquisition of control by foreigners
of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions
in key industries.
In addition, the Revised M&A Regulations
include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and
controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on any non-PRC stock exchange. On September 21, 2006, the CSRC published on its official
website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas
listings. However, the application of this PRC regulation remains unclear with no consensus currently existing among the leading
PRC law firms regarding the scope and applicability of the CSRC approval requirement.
Our wholly-owned BVI subsidiary, Dragon
Lead, was formerly owned by eight BVI companies whose shareholders are non-PRC individuals. We understand that some of these non-PRC
individuals are nominee shareholders holding shares on behalf of and for the interest of some PRC individuals and PRC companies
who are also Wuhan Kingold minority shareholders. These minority Wuhan Kingold shareholders do not have experience in conducting
or managing businesses outside the PRC, and therefore believe that to engage nominee shareholders to hold shares on their behalf
are in their best commercial interest, and could provide them with guidance when they evaluate whether to purchase, sell or dispose
of our shares after the closing.
Also, on December 23, 2009, immediately
before the reverse acquisition of Vogue Show, Fok Wing Lam Winnie (whose Mandarin name is Huo Yong Lin), the sole shareholder of
Famous Grow and the majority shareholder of Dragon Lead prior to the closing of the reverse acquisition, entered into the call
option with Zhihong Jia and Bin Zhao (our former general manager and former director) to comply with PRC regulations that restrict
PRC residents from owning offshore entities like us in direct exchange for their shares in the PRC operating company and as an
inducement to encourage them to provide services to Wuhan Kingold and our company. The call option does not include a vesting schedule
and continued employment is not a condition to the call option. Under the call option, as amended and restated, Fok Wing Lam Winnie
granted to Zhihong Jia certain call options to acquire up to 100% of the shares of Famous Grow at an exercise price of $1.00, which
is par value per share, or $0.001 per Famous Grow share, subject to any exercise notice, or Call Option which was determined in
an arm’s length negotiation with the parties.
The PRC regulatory authorities may take
the view that entry into the VIE Agreements by Vogue-Show and Wuhan Kingold and entry into the call option agreement by Zhihong
Jia and Fok Wing Lam Winnie may collectively constitute an onshore to offshore restructuring and a related party acquisition under
the M&A Regulations, because upon the consummation of these transactions and after the Call Option is fully exercised, PRC
individuals would become majority owners and effective controlling parties of a foreign entity that acquired ownership of Wuhan
Kingold. The PRC regulatory authorities may also take the view that the relevant parties should fully disclose to the Wuhan SAFE
or MOFCOM the overall restructuring arrangements, the existence of the reverse acquisition and its connection with the VIE Agreement.
Our PRC counsel has opined among other things that: (i) each of our VIE agreements with Wuhan Kingold are valid and enforceable
under relevant PRC laws, (ii) all government authorizations for the execution, delivery, performance and enforcement of our VIE
agreements have been obtained as required by PRC laws, (iii) the ownership structure of Vogue Show and Wuhan Kingold created by
our VIE agreements and the call options in favor of Zhihong Jia do not violate any provisions of applicable PRC laws, and (iv)
no PRC governmental approvals were required under the Revised M&A Regulations in connection with our acquisition of our current
ownership interests in any of our PRC subsidiaries or in connection with the VIE agreements. Our PRC counsel has reviewed and approved
of these statements.
We, however, cannot assure you that
the PRC regulatory authorities, MOFCOM and CSRC will take the same view as our PRC counsel. If the PRC regulatory authorities take
the view that the reverse acquisition and VIE arrangement constitute a related party acquisition under the revised M&A Regulations,
we cannot assure you we will be able to obtain any approval required from the national offices of MOFCOM or otherwise.
If the PRC regulatory authorities take
the view that the call options or the VIE arrangement constitutes a related party acquisition without the approval of the national
offices of MOFCOM, they could invalidate the call options and VIE arrangement. We may also face regulatory actions or other sanctions
from the MOFCOM or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in
the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.
If we make equity compensation
grants to persons who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation
plans for our directors and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the “Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of
An Overseas Listed Company,” also known as “Circular 78.” It is not clear whether Circular 78 covers all forms
of equity compensation plans or only those that provide for the granting of stock options. For any plans that are so covered and
are adopted by a non-PRC listed company, such as our company, after April 6, 2007, Circular 78 requires all participants who are
PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan. In addition, Circular 78
also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas
listed company’s covered equity compensation plan prior to April 6, 2007. We believe that the registration and approval requirements
contemplated in Circular 78 will be burdensome and time consuming.
Failure to comply with the United
States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
As we are a Delaware corporation and
a U.S. publicly listed company, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S.
companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Some foreign companies, including some that may compete with our company, may not be subject to these prohibitions. Corruption,
extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC. We can make no assurance,
however, that our employees or other agents will not engage in conduct for which we might be held responsible. If our employees
or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have
a material adverse effect on our business, financial condition and results of operations.
Under the Enterprise Income Tax
Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC stockholders.
Under the Enterprise Income Tax Law,
or EIT Law, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered
a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its worldwide income. The “de
facto management body” is defined as the organizational body that effectively exercises overall management and control over
production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how
the PRC tax authorities will interpret such a broad definition. If the PRC tax authorities determine that we should be classified
as a resident enterprise, then our worldwide income will be subject to income tax at a uniform rate of 25%, which may have a material
adverse effect on our financial condition and results of operations. However, it remains unclear how the PRC tax authorities will
interpret the PRC tax resident treatment of an offshore company, like us, having indirect ownership interests in PRC enterprises
through intermediary holding vehicles.
Moreover, under the EIT Law, foreign
shareholders of an entity that is classified as a PRC resident enterprise may be subject to a 10% withholding tax upon dividends
payable by such entity, unless the jurisdiction of incorporation of the foreign shareholder of such entity has a tax treaty with
the PRC that provides for a reduced rate of withholding tax, and gains realized on the sale or other disposition of shares, if
such income is sourced from within the PRC. It remains unclear whether the dividends payable by our PRC subsidiary or the gains
our foreign shareholders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident
enterprise. Any such tax will reduce the returns on your investment in our Shares.
Because our business is located
in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which we are required to do
in order to comply with U.S. securities laws.
PRC companies have historically not
adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance,
internal controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated
and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training. In addition,
we may need to rely on a new and developing communication infrastructure to efficiently transfer our information from retail outlets
to our headquarters. As a result of these factors, we may experience difficulty in establishing management, legal and financial
controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting
business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining
adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies
or material weaknesses in our internal controls, which could impact the reliability of our financial statements and prevent us
from complying with Commission rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies,
weaknesses or lack of compliance could have a materially adverse effect on our business.
If we continue to be unable to
maintain effective internal control over financial reporting or effective disclosure controls and procedures, the price of our
common stock may be adversely affected.
We are required to establish and maintain
appropriate internal control over financial reporting and put in place appropriate disclosure controls and procedures to allow
our management to make timely decisions regarding required disclosures. Failure to establish those controls, or any failure of
those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results
of operations. Any failure of our internal control over financial reporting could also prevent us from maintaining accurate accounting
records and discovering accounting errors and financial fraud.
Since we became public, our management
has continually determined that we had a material weakness in our internal control over financial reporting due to some problems
with cash management, as well as continued ineffective disclosure controls and procedures, and other significant deficiencies due
to inadequate controls over the appropriate approval procedures for certain material transactions, inadequate controls over certain
material cash transactions, and lack of technical competency in review and recording of non-routine or complex transactions. Moreover,
our management concluded that our disclosure controls and procedures continued to be ineffective this period because we continued
to fail to disclose the entry into certain material agreements within the time periods required by the Commission.
Although we are evaluating how to improve
the effectiveness of our disclosure controls and procedures and are evaluating additional remedial measures, such efforts may not
be successful. In addition, management’s assessment of internal control over financial reporting may identify additional
material weaknesses or significant deficiencies that need to be addressed or other potential matters that may raise concerns for
investors. Any actual or perceived material weaknesses or significant deficiencies that need to be addressed in our internal control
over financial reporting, or the actual or perceived ineffectiveness of our disclosure controls and procedures could have an adverse
impact on the price of our common stock.
You may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws, or other foreign laws against us or our management.
All of our current operations, including
the manufacturing and distribution of jewelry, are conducted in China. Most of our directors and officers are nationals and residents
of China. All or substantially all of the assets of these persons are located outside the United States. As a result, it may not
be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty
exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or such officers
and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof,
or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the
United States or any state thereof.
Inflation in China may inhibit
our ability to conduct business in China.
In recent years, the Chinese economy
has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply
and rising inflation. If prices for our 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 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 Chinese government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for our products.
Governmental control of currency
conversions could prevent us from paying dividends.
Shortages in the availability of foreign
currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments
to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments
of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can
be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval
from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China
to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion
restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents
us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies
to our security-holders.
Currency fluctuations and restrictions
on currency exchange may adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign
currencies and, if Chinese Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar
and our operations in China use their local currency, the Renminbi, as their functional currency. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these
currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies and China’s domestic
and international economic and political developments, as well as supply and demand in the local market. Since July 2005, the RMB
is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. We can offer no assurance
that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.
The income statements of our operations
are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens
against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies,
the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income
for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements
of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion
of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss that is recorded
as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies
other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities
create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments
to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction
may be limited and we may not be able to successfully hedge our exchange rate risks.
Risks Related to the VIE Agreements
If the PRC government determines
that the contractual arrangements through which we control Wuhan Kingold do not comply with applicable regulations, our business
could be adversely affected.
Although we believe our contractual
relationships through which we control Wuhan Kingold comply with current licensing, registration and regulatory requirements of
the PRC, we cannot assure you that the PRC government would agree, or that new and burdensome regulations will not be adopted in
the future. If the PRC government determines that our structure or operating arrangements 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.
The PRC government may determine
that the VIE Agreements are not in compliance with applicable PRC laws, rules and regulations.
Vogue-Show manages and operates our
gold jewelry business through Wuhan Kingold pursuant to the rights it holds under the VIE Agreements. Almost all economic benefits
and risks arising from Wuhan Kingold’s operations are transferred to Vogue-Show under these agreements.
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 the operations of Vogue-Show or Wuhan Kingold;
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imposing conditions or requirements in respect of the VIE Agreements with which Vogue-Show 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 the licenses or certificates of Vogue-Show, and/or voiding the VIE Agreements.
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Any of these actions could adversely
affect our ability to manage, operate and gain the financial benefits of Wuhan Kingold, which would have a material adverse impact
on our business, financial condition and results of operations.
Our ability to manage and operate
Wuhan Kingold under the VIE Agreements may not be as effective as direct ownership.
We conduct our jewelry processing and
sales businesses in the PRC and generate virtually all of our revenues through the VIE Agreements. Our plans for future growth
are based substantially on growing the operations of Wuhan Kingold. However, the VIE Agreements may not be as effective in providing
us with control over Wuhan Kingold as direct ownership
.
Under the current VIE arrangements, as a legal matter, if Wuhan
Kingold fails to perform its obligations under these contractual arrangements, we may have to (i) incur substantial costs and resources
to enforce such arrangements, and (ii) reply on legal remedies under PRC law, which we cannot be sure would be effective. Therefore,
if we are unable to effectively control Wuhan Kingold, it may have an adverse effect on our ability to achieve our business objectives
and grow our revenues.
As the VIE agreements are governed
by PRC law, we would be required to rely on PRC law to enforce our rights and remedies under them; PRC law may not provide us with
the same rights and remedies as are available in contractual disputes governed by the law of other jurisdictions.
The VIE Agreements are governed by the
PRC law and provide for the resolution of disputes through court proceedings pursuant to PRC law. If Wuhan Kingold or its shareholders
fail to perform the obligations under the VIE Agreements, we would be required to resort to legal remedies available under PRC
law, including seeking specific performance or injunctive relief, or claiming damages. We cannot be sure that such remedies would
provide us with effective means of causing Wuhan Kingold to meet its obligations, or recovering any losses or damages as a result
of non-performance. Further, the legal environment in China is not as developed as in other jurisdictions. Uncertainties in the
application of various laws, rules, regulations or policies in PRC legal system could limit our liability to enforce the VIE Agreements
and protect our interests.
The VIE Agreements may be subject
to audit or challenge by PRC tax authorities. A finding that we owe additional taxes could substantially reduce our net earnings
and the value of your investment
Under PRC laws and regulations, arrangements
and transactions among affiliated parties may be subject to audit or challenge by the PRC tax authorities. We could face material
and adverse tax and financial consequences if the PRC tax authorities determine that the VIE Agreements do not represent arm’s-length
prices. As a result of such a determination, the PRC tax authorities could adjust any of the income in the form of a transfer pricing
adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions for PRC tax purposes
recorded by us or Wuhan Kingold or an increase in taxable income, all of which could increase our tax liabilities. In addition,
the PRC tax authorities may impose late payment fees and other penalties on us or Wuhan Kingold for under-paid taxes.
Our shareholders have potential
conflicts of interest with us which may adversely affect our business.
Zhihong Jia is our Chief Executive Officer
and our Chairman, and is also the largest shareholder of Wuhan Kingold. There could be conflicts that arise from time to time between
our interests and the interests of Mr. Jia. There could also be conflicts that arise between us and Wuhan Kingold that would require
our shareholders and Wuhan Kingold’s shareholders to vote on corporate actions necessary to resolve the conflict. There can
be no assurance in any such circumstances that Mr. Jia will vote his shares in our best interest or otherwise act in the best interests
of our company. If Mr. Jia fails to act in our best interests, our operating performance and future growth could be adversely affected.
In addition, some or all of our shareholders could violate the non-competition agreements they have signed with our company by
diverting business opportunities from our company to others. In such event, our business, financial condition and results of operation
could be adversely affected.
We rely on the approval certificates
and business license held by Vogue-Show and any deterioration of the relationship between Vogue-Show and Wuhan Kingold could materially
and adversely affect our business operations.
We operate our jewelry processing and
sales businesses in China on the basis of the approval certificates, business license and other requisite licenses held by Vogue-Show.
There is no assurance that Vogue-Show will be able to renew its license or certificates when their terms expire with substantially
similar terms as the ones they currently hold.
Further, our relationship with Wuhan
Kingold is governed by the VIE Agreements that are intended to provide us with effective control over the business operations of
Wuhan Kingold. However, the VIE Agreements may not be effective in providing control over the application for and maintenance of
the licenses required for our business operations. Wuhan Kingold could violate the VIE Agreements, go bankrupt, suffer from difficulties
in its business or otherwise become unable to perform its obligations under the VIE Agreements and, as a result, our operations,
reputations and business could be severely harmed.
If Vogue-Show exercises the purchase
options it holds over Wuhan Kingold’s share capital and assets pursuant to the VIE Agreements, the payment of the purchase
price could materially and adversely affect our financial position.
Under the VIE Agreements, Wuhan Kingold’s
shareholders have granted Vogue-Show a ten-year option to purchase 100% of the share capital in Wuhan Kingold at a price determined
by appraisal by an asset evaluation institution to be jointly appointed by Vogue-Show and Wuhan Kingold’s shareholders. Concurrently,
Wuhan Kingold granted Vogue-Show a ten-year option to purchase Wuhan Kingold’s assets at a price determined by appraisal
by such asset evaluation institution. As Wuhan Kingold is already our contractually controlled affiliate, Vogue-Show’s exercising
of the above two options would not bring immediate benefits to our company, and payment of the purchase prices could adversely
affect our financial position.
Risks Related to Our Common Stock
Following the exercise of his
Call Option, our Chairman and Chief Executive Officer would exercise significant influence over us.
Our Chairman and Chief Executive Officer,
Zhihong Jia, will beneficially own or control approximately 25.5% of our outstanding shares if he chooses to fully exercise his
Call Option to purchase shares of Famous Grow. Mr. Jia thereafter could possibly have a controlling influence in determining the
outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations
and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. Mr. Jia
may also have the power to prevent or cause a change in control. In addition, without the consent of Mr. Jia, we could be prevented
from entering into transactions that could be beneficial to us. The interests of Mr. Jia may differ from the interests of our other
stockholders.
We do not foresee paying cash
dividends in the foreseeable future and, as a result, our investors’ sole source of gain, if any, will depend on capital
appreciation, if any.
We do not plan to declare or pay any
cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding
growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend
income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future. Moreover,
investors may not be able to resell their shares of our company at or above the price they paid for them.
Because we do not intend to pay dividends
on our shares, stockholders will benefit from an investment in our shares only if those shares appreciate in value.
We currently intend to retain all future
earnings, if any, for use in the operations and expansion of the business. As a result, we do not anticipate paying cash dividends
in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion
of our board of directors and will depend on factors our board of directors deems relevant, including among others, our results
of operations, financial condition and cash requirements, business prospects, and the terms of our credit facilities, if any, and
any other financing arrangements. Accordingly, realization of a gain on stockholders’ investments.
The market price for our shares may be volatile.
The market price for our shares is likely
to be highly volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;
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changes in financial estimates by securities research analysts;
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conditions in the markets for our products;
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changes in the economic performance or market valuations of companies specializing in gold jewelry;
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announcements by us, or our competitors of new products, acquisitions, strategic relationships, joint ventures or capital commitments;
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addition or departure of senior management and key personnel; and
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fluctuations of exchange rates between the RMB and the U.S. dollar.
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The following table sets forth, for
the periods indicated, the range of quarterly high and low closing sales prices for our common stock in U.S. dollars. Prior to
our listing on the NASDAQ Capital Market, these quotations reflect inter- dealer prices, without retail mark-up, mark-down or commission,
involving our common stock during each calendar quarter, and may not represent actual transactions.
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High
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Low
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2018
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First Quarter
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$
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2.02
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$
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1.23
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Second Quarter
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$
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1.44
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$
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1.21
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Third Quarter
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$
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1.27
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$
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1.00
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2017
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First Quarter
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$
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1.38
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$
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1.09
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Second Quarter
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$
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2.03
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$
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1.06
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Third Quarter
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$
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2.06
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$
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1.53
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Fourth Quarter
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$
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2.31
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$
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1.92
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Volatility in the price of our shares
may result in shareholder litigation that could in turn result in substantial costs and a diversion of our management’s attention
and resources.
The financial markets in the United
States and other countries have experienced significant price and volume fluctuations, and market prices have been and continue
to be extremely volatile. Volatility in the price of our shares may be caused by factors outside of our control and may be unrelated
or disproportionate to our results of operations. In the past, following periods of volatility in the market price of a public
company’s securities, shareholders have frequently instituted securities class action litigation against that company. Litigation
of this kind could result in substantial costs and a diversion of our management’s attention and resources.
SEC regulations concerning conflict
minerals could negatively impact our business.
In response to provisions in the Dodd-Frank
Wall Street Reform and Consumer Protection Act, in August 2013, the Securities and Exchange Commission adopted annual disclosure
and reporting requirements regarding the use of certain minerals, known as “conflict minerals,” mined from the Democratic
Republic of Congo and adjoining countries. Conflict minerals include gold.
These requirements and the changes we
may adopt as a result of compliance with them may prove both costly and time-consuming. The disclosure requirements, which began
in 2014, necessitated due diligence efforts to identify the sources of conflict minerals contained in our products. Because we
currently acquire our gold directly from the Exchange or leading Chinese banks, or lease it from leading Chinese banks, there is
uncertainty as to the amount of diligence we may be able to do on our supply chain.
Implementation of these regulations
will require us to divert management attention and resources away from our business operations. In addition, as conflict-free minerals
may only be available from a limited pool of suppliers, it may or may not include the Exchange, our primary source of gold. In
addition, if we are unable to sufficiently verify the origin of all conflict minerals used in our products, we may face reputational
challenges with customers, stockholders, or other stakeholders.
Our quarterly results may fluctuate
because of many factors and, as a result, investors should not rely on quarterly operating results 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 value
of our securities. Quarterly 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 quarterly operating results could cause the value of our securities to decline.
Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance. As
a result of the factors listed below, it is possible that in future periods the 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 China;
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fluctuation and unpredictability of costs related to the gold, platinum and precious metals and other commodities used to manufacture our products;
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seasonality of our business;
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changes in the laws of the PRC that affect our operations;
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competition from our competitors; and
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our ability to obtain all necessary government certifications and/or licenses to conduct our business.
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