(Name, Telephone, E-mail
and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section
12(b) of the Act:
Securities registered or to be registered pursuant to Section
12(g) of the Act.
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2018): 2,271,299
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated
filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
† The term “new or revised financial accounting
standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
Except as otherwise indicated by the context and for the purposes
of this report only, references in this report to:
In addition to historical information,
this report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. We use words such as “believe,” “expect,” “anticipate,” “project,”
“target,” “plan,” “optimistic,” “intend,” “aim,” “will”
or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future
operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions,
intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect,
could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Potential risks and uncertainties include, among other things, the possibility that we may not be able to maintain or increase
our net revenues and profits due to our failure to anticipate consumer preferences and develop new menswear products, our failure
to execute our business expansion plan, changes in domestic and foreign laws, regulations and taxes, changes in economic conditions,
uncertainties related to China’s legal system and economic, political and social events in China, a general economic downturn,
a downturn in the securities markets, and other risks and uncertainties which are generally set forth under Item 3 “Key information—D.
Risk Factors” and elsewhere in this report.
Readers are urged to carefully review and
consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise
interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects.
The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required
by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or
future events.
On February 3, 2017, approved by the shareholders,
our Board of Directors approved a one-for-fifteen (1-for-15) reverse stock split of the Company’s issued and outstanding common
stock. In addition, in lieu of issuing any fractional share, the Board of Directors decided that shareholders are entitled to receive
the number of shares of common stock rounded up to the next whole number. Our common stock began trading on the NASDAQ Stock Market
on a split-adjusted basis when the market opened on February 9, 2017. All references in this report to share and per share data
have been adjusted, including historical data which have been retroactively adjusted, to give effect to the reverse stock split
unless specified otherwise.
PART
I
|
ITEM 1.
|
IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
|
A.
|
Directors and Senior Management
|
Not applicable.
Not applicable.
Not applicable.
|
ITEM 2.
|
OFFER STATISTICS
AND EXPECTED TIMETABLE
|
Not applicable.
|
B.
|
Method and Expected Timetable
|
Not applicable.
|
A.
|
Selected Financial Data
|
The following table presents selected financial data regarding
our business. It should be read in conjunction with our consolidated financial statements and related notes contained elsewhere
in this annual report and the information under Item 5 “Operating and Financial Review and Prospects.” The selected
consolidated statements of comprehensive income data for the fiscal years ended December 31, 2018, 2017 and 2016, and the selected
consolidated statements of financial position data as of December 31, 2018 and 2017 have been derived from our audited consolidated
financial statements that are included in this annual report beginning on page F-1. The selected consolidated statements of comprehensive
income data for the fiscal years ended December 31, 2015 and 2014, and the selected consolidated statements of financial position
data as of December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements that are not included
in this annual report.
Our consolidated financial statements were prepared and presented
in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”). The selected financial data information is only a summary and should be read in conjunction with the
historical consolidated financial statements and related notes contained elsewhere herein. The financial statements contained elsewhere
fully represent our financial condition and operations; however, they are not indicative of our future performance.
|
|
Years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
18,535,116
|
|
|
$
|
23,762,536
|
|
|
$
|
41,200,205
|
|
|
$
|
61,343,681
|
|
|
$
|
58,832,481
|
|
Total cost of sales
|
|
|
(20,851,252
|
)
|
|
|
(35,274,352
|
)
|
|
|
(39,041,932
|
)
|
|
|
(46,511,274
|
)
|
|
|
(39,416,973
|
)
|
Gross profit
|
|
|
(2,316,136
|
)
|
|
|
(11,511,816
|
)
|
|
|
2,158,272
|
|
|
|
14,832,407
|
|
|
|
19,415,508
|
|
Distribution and selling expenses
|
|
|
(2,670,955
|
)
|
|
|
(3,265,380
|
)
|
|
|
(3,606,010
|
)
|
|
|
(6,621,256
|
)
|
|
|
(7,191,606
|
)
|
Administrative expenses
|
|
|
(4,907,020
|
)
|
|
|
(4,879,397
|
)
|
|
|
(3,543,993
|
)
|
|
|
2,798,082
|
|
|
|
(4,649,229
|
)
|
Profit for the year
|
|
|
(17,968,597
|
)
|
|
|
(14,815,596
|
)
|
|
|
(11,902,688
|
)
|
|
|
1,243,670
|
|
|
|
6,876,982
|
|
Total comprehensive income for the year
|
|
|
(20,040,295
|
)
|
|
|
(10,004,880
|
)
|
|
|
(18,028,121
|
)
|
|
|
(4,801,102
|
)
|
|
|
6,526,172
|
|
Outstanding shares
|
|
|
2,299,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
|
|
1,694,489
|
|
|
|
1,694,489
|
|
Earnings per share, basic diluted
|
|
|
-8.06
|
|
|
|
-7.96
|
|
|
|
-6.80
|
|
|
|
0.73
|
|
|
|
4.06
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,026,103
|
|
|
$
|
26,050,456
|
|
|
$
|
24,576,341
|
|
|
$
|
21,214,080
|
|
|
$
|
20,604,583
|
|
Non-current assets
|
|
|
29,837,875
|
|
|
|
40,966,319
|
|
|
|
34,754,942
|
|
|
|
47,221,529
|
|
|
|
52,929,386
|
|
Current assets
|
|
|
31,328,131
|
|
|
|
40,343,386
|
|
|
|
56,343,823
|
|
|
|
62,098,951
|
|
|
|
62,093,570
|
|
Working capital
|
|
|
24,463,446
|
|
|
|
33,060,877
|
|
|
|
48,647,185
|
|
|
|
53,598,854
|
|
|
|
52,704,076
|
|
Total assets
|
|
|
61,166,006
|
|
|
|
81,309,705
|
|
|
|
91,098,765
|
|
|
|
109,310,480
|
|
|
|
115,022,956
|
|
Current liabilities
|
|
|
6,864,685
|
|
|
|
7,282,509
|
|
|
|
7,696,638
|
|
|
|
8,500,097
|
|
|
|
9,389,493
|
|
Total liabilities
|
|
|
6,864,685
|
|
|
|
7,282,509
|
|
|
|
7,696,638
|
|
|
|
8,503,506
|
|
|
|
9,404,880
|
|
Equity
|
|
|
54,301,321
|
|
|
|
74,027,196
|
|
|
|
83,402,127
|
|
|
|
100,816,974
|
|
|
|
105,618,076
|
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
An investment in our capital stock involves a high degree
of risk. You should carefully consider the risks described below, together with all of the other information included in this annual
report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
RISKS RELATED TO OUR BUSINESS
General economic conditions, including a prolonged weakness
in the economy, may affect consumer discretionary spending, which could adversely affect our business and financial performance.
The apparel industry has historically been subject to substantial
cyclical variations. Our business and financial performance are dependent on a number of factors impacting consumer discretionary
spending, including general economic and business conditions; consumer confidence; wages and employment levels; the housing market;
consumer debt levels; availability of consumer credit; credit and interest rates; fuel and energy costs; energy shortages; taxes;
general political conditions, both domestic and abroad. Consumer product purchases, including purchases of our products, may decline
during recessionary periods. Our ability to access the capital markets may be restricted at a time when we would like, or need,
to raise capital, which could impair on our ability to open additional stores or build additional manufacturing lines. In addition,
as domestic and international economic conditions change, trends in consumer spending on discretionary items, including our merchandise,
become unpredictable and subject to reductions due to economic uncertainties. A prolonged economic recovery or an uncertain outlook
in the economy could result in additional declines in consumer discretionary spending, which could materially affect our financial
performance.
A contraction in apparel sales and production could impair
our results of operations and liquidity and jeopardize our supply base.
Apparel sales and production are cyclical and depend, among
other things, on general economic conditions and consumer spending and preferences. As the volume of apparel production fluctuates,
the demand for our products also fluctuates. A contraction in apparel sales could harm our results of operations and liquidity.
In addition, our suppliers would also be subject to many of the same consequences which could pressure their results of operations
and liquidity. Depending on an individual supplier’s financial condition and access to capital, its viability could be challenged
which could impact its ability to perform as we expect and consequently our ability to meet our own commitments.
If we are unable to anticipate consumer preferences and
develop new menswear products, we may not be able to maintain or increase our net revenues and profits.
Our success depends on our ability to identify, originate and
define apparel trends as well as to anticipate, gauge and react to changing consumer demands for menswear in a timely manner. Our
target market of consumers comprises urban males between the ages of 20 and 40 with moderate-to-high levels of disposable income.
Our business is particularly sensitive to their fashion preferences, which cannot be predicted with certainty. Our new products
may not receive consumer acceptance as consumer preferences could shift rapidly, and our future success depends in part on our
ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer
preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, we could
experience lower sales, excess inventories and lower profit margins. In a distressed economic and retail environment, many of our
competitors may engage in aggressive activities, such as markdowns or other promotional sales to dispose of excess, slow-moving
inventory, further increasing the need to react appropriately to changing consumer preferences and fashion trends. Failure to do
so could adversely affect the level of acceptance of our products, our brand image and our relationship with our distributors,
and therefore have a material adverse effect on our financial condition or results of operations.
The apparel industry is highly competitive, and if we
fail to compete effectively, we could lose our market position.
The menswear industry is highly competitive in China and worldwide. We compete with various domestic brands
with similar business models and target markets. We also compete with a growing number of international brands trying to expand
their market share in China to take advantage of rising consumer spending on casual menswear. Our primary international and domestic
competitors include Exceed, Xiniya, Cabbeen, GXG and NQ. Some of our competitors are significantly larger and have greater financial
resources than we do. In order to compete effectively, we must: (1) maintain the image of our brands and our reputation for innovation
and high quality; (2) be flexible and innovative in responding to rapidly changing market demands on the basis of brand image,
style, performance and quality; and (3) offer consumers a wide variety of high quality products at competitive prices.
The purchasing decisions of consumers are highly subjective
and can be influenced by many factors, such as brand image, marketing programs and product features. Some of our competitors enjoy
competitive advantages, including greater brand recognition and greater financial resources for competitive activities, such as
sales, marketing and strategic acquisitions. The number of our direct competitors and the intensity of competition may increase
as we expand into other product lines or as other companies expand into our product lines. Our competitors may enter into business
combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations
or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities,
standards or consumer preferences. Our results of operations and market position may be adversely impacted by our competitors and
the competitive pressures in the menswear industries.
Failure to effectively promote or develop our brand could
materially and adversely affect our sales and profits.
We sell all our products under the KBS brand, from which we
derive most of our revenues. Brand image is an important factor that affects a customer’s purchasing decision for menswear
products. Our success therefore depends on, among other things, market recognition and acceptance of the KBS brand and the culture,
lifestyle, and images associated with the brand, some of which may not be within our control. We have limited control over our
distributors that we rely upon to sell our products, which may limit our ability to ensure a consistent brand image. See “Risks
Factors Related to Our Business –We have limited control over the ultimate retail sales by our distributors and our image
and business may be adversely affected if our distributors fail to adhere to, or fail to cause the third party retail outlet operators
to adhere to, our retail policies and standards.” We began designing, promoting, and selling KBS branded products in China
in 2006. To effectively promote KBS brand, we need build and maintain the brand image by focusing on a variety of promotional and
marketing activities to promote brand awareness, as well as to increase its presence in the markets in which we compete. There
is no assurance that we will be able to effectively promote or develop KBS brand, and if we fail to do so, the goodwill of KBS
brand may be undermined and our business as well as our financial results may be adversely affected. In addition, negative publicity
or disputes regarding KBS brand, products, company, or management could materially and adversely affect public perception of KBS
brand. Any impact on our ability to continue to sell KBS brand or any significant damage to KBS brand’s image could materially
and adversely affect our sales and profits.
Our business depends substantially on the continuing efforts
of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.
Our future success heavily depends on the continued service
of our senior executives and other key employees. In particular, we rely on the expertise, experience, and business contacts, of
Mr. Keyan Yan, our Chairman and Chief Executive Officer, Ms. Lixia Tu, our Director and Chief Financial Officer and Mr. Themis
Kalapotharakos, our director. If one or more of our senior executives are unable or unwilling to continue to work for us in their
present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating the
replacements into our operations, which would substantially divert management’s attention from and severely disrupt the Company
business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives
joins a competitor or forms a competing company, we may lose customers, suppliers and key employees.
Failure to execute our business expansion plan could adversely
affect our financial condition and results of operations.
A large part of our initial growth resulted
from an increase in the number of our retail sales outlets, including corporate and franchised stores, and the increased sales
volume and profitability provided by these sales outlets. The number of our sales outlets increased from 8 in 2006 to 33 in year
2018.
We have our factory located in Taihu City
in Anhui Province, China, consisting of an aggregate of 110,457 square meters of land. Currently the facility there has a production
capacity of 2 million pieces of clothes per year and can accommodate 5,000 workers. This production facility mainly produces original
equipment manufacturer (OEM) products for online stores, regional apparel brands and overseas orders. The construction commenced
in 2011 and takes place in four phases: Phase 1 consists of the construction of a 5-story dormitory; Phase 2 is to add facilities
with annual production capacity of five million pieces of clothes. We have completed the construction of facilities of Phase 1
and Phase 2 by the end of 2014. Phase 3 construction of the adjacent facility on the third parcel of land has been delayed because
the local government needs additional time to conclude negotiations with local residents over appropriate resettlement terms.
Because the time for the government to resolve this matter is uncertain, we wrote off the land use right of the third parcel of
land from account balance, according to the international framework reporting standard. Phase 4 includes building production facilities
with annual production capacity of 10 million pieces, an office building, staff quarters and living facilities on the third parcel
of land. As a result, our commitments to this facility may reduce our liquidity for an indefinite period and until it is completed.
We could also indefinitely lose opportunities to expand our sales due to any further delay of our construction.
The decision to increase our production capacity was based in
part on our projections of market demand for our products and OEM orders from other brand name owners. If actual customer demand
does not meet our projections, we will likely suffer overcapacity problems and may have to leave capacity idle or need to contract
out our facilities at an unfavorable price, which may reduce our overall profitability and adversely affect our financial condition
and results of operations. Our future success depends on our ability to expand the Company’s business to address growth in
demand for our current and future products.
Our ability to expand the Company’s business is subject
to significant risks and uncertainties, including:
|
●
|
the
unavailability of additional funding to invest more in brand recognition such as advertisement, expand our production capacity,
purchase additional fixed assets and purchase raw materials on favorable terms or at all;
|
|
●
|
our
inability to manage an online shop, hire qualified personnel and establish distribution methods;
|
|
●
|
conditions
in the commercial real estate market existing at the time we seek to expand;
|
|
●
|
delays
and cost overruns as a result of a number of factors, many of which may be beyond our control, such as problems with equipment
vendors and contract manufacturers;
|
|
●
|
failure
to maintain high quality control standards;
|
|
●
|
shortage
of raw materials;
|
|
●
|
our
inability to obtain, or delays in obtaining, required approvals by relevant government authorities;
|
|
●
|
diversion
of significant management attention and other resources; and
|
|
●
|
failure
to execute our expansion plan effectively.
|
The expansion of our business may place
significant strain on our personnel, management, financial systems and operational infrastructure and may impede our ability to
meet any increased demand for our products. To accommodate the Company’s growth, we will need to implement a variety of new
and upgraded operational and financial systems, procedures, and controls, including improvements to our accounting and other internal
management systems, by dedicating additional resources to our reporting and accounting function and improvements to our record
keeping and contract tracking system. We will also need to recruit more personnel and train and manage our growing employee base.
Furthermore, we will need to maintain and expand relationships with our current and future customers, suppliers, distributors and
other third parties, and there is no guarantee that we will succeed.
In the future, we also intend to invest more
resources to research and purchase online sales platforms and online stores. We believe that we will have better opportunities
to expand by purchasing online sales platforms or online stores. In addition, we will keep on exploring other areas and business
models, such as the use of artificial intelligence for brand promotion, learning customer preferences, and identifying shopping
trends.
If we encounter any of the risks described
above or if we are otherwise unable to establish or successfully operate online shops or additional production capacity, we may
be unable to grow our business and revenues, reduce our operating costs, maintain our competitiveness or improve our profitability
and, consequently, our business, financial condition, results of operations and prospects will be adversely affected.
If we are unable to fund capital
expenditures or obtain additional sources of liquidity when we need it, our business may be adversely affected. In addition, if
we obtain equity financing, the issuance of our equity securities could cause dilution for our stockholders. To the extent we
obtain the financing through the issuance of debt securities, our debt service obligations could increase, and we may become subject
to restrictive operating and financial covenants.
We anticipate that we will make
substantial capital investments to expand our business within the next 3 years. There is no assurance that we will have
sufficient cash to fund our anticipated capital expenditures. If we need but are unable to obtain adequate financing with on
terms favorable to us, we may be unable to successfully maintain our operations and accomplish our growth strategy. In
addition, we may be unable to generate sufficient cash internally or obtain alternative sources of capital to fund our
proposed capital expenditures, take advantage of business opportunities or respond to competitive pressures. As a result, we
may seek to sell additional equity securities, debt securities, or borrow from lending institutions. Any issuance of equity
securities could cause dilution for our stockholders. Any incurrence of indebtedness could increase our debt service
obligations and cause us to be subject to restrictive operating and finance covenants. Our ability to obtain external
financing in the future is also subject to a number of uncertainties, including:
|
●
|
Our
future financial condition, results of operations and cash flows;
|
|
●
|
general
market conditions for financing activities by companies in our industry;
|
|
●
|
economic,
political and other conditions in China and elsewhere; and
|
|
●
|
uncertain
economic prospect and tightened credit markets resulting from the recent global economic slowdown and financial market crisis.
|
If we are unable to obtain funding in a timely manner or on
commercially acceptable terms, or at all, our growth prospects and future profitability may be materially adversely affected. Adverse
changes in the capital markets could make it difficult to obtain capital or obtain it at attractive rates.
Our past results may not be indicative of our future performance
and evaluating our business and prospects may be difficult.
Our business has gone through various stages of the business
life cycle in recent years as demonstrated by our growth in net sales, which reached $99.6 million for the year ended December
31, 2013, while in 2014 our net sales decreased by 40% to $58.8 million and in year 2015 net sales went up slightly by 4.3% to
$61.3 million, our net sales decreased by 32.8% to $41.2 million in 2016, net sales decreased 42% to $23.8 million in 2017 and
net sales further decreased 22% to $18.53 million in 2018. The decrease in sales in 2016, 2017 and 2018 as compared with 2013 was
mainly due to the slowdown of the Chinese economic growth and a challenging retail environment. As a result, we cannot assure that
we will be able to achieve similar growth in future periods as recent years before 2014, and our historical operating results may
not provide a meaningful basis for evaluating our business, financial performance and prospects. Moreover, our ability to achieve
satisfactory production results at higher volumes is unproven. Therefore, you should not rely on our past results or our historical
rate of growth as an indication of our future performance.
We experience fluctuations in operating results.
Our annual and quarterly operating results have fluctuated,
and are expected to continue to fluctuate. Among the factors that may cause our operating results to fluctuate are customers’
response to merchandise offerings, the timing of the rollout of new sales outlets, seasonal variations in sales, the timing of
merchandise receipts, the level of merchandise returns, changes in merchandise mix and presentation, our cost of merchandise, unanticipated
operating costs, and other factors beyond our control, such as general economic conditions and actions of competitors.
We have historically experienced seasonal
fluctuations in our sales. A substantial portion of our revenues are typically earned during the second and fourth quarters and
we generally experience lowest revenues during the first and third quarters. If sales during the second and fourth quarters are
lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on
our annual operating results. The sales of our products are also affected by local spending behavior, which are typically affected
by seasonal shopping patterns during major Chinese holidays.
As a result of these factors, we believe that period-to-period
comparisons of historical and future results will not necessarily be meaningful and should not be relied on as an indication of
future performance.
Our failure to collect the trade receivables or untimely
collection could affect our liquidity.
Our distributors place advance purchase orders twice a year. From 2015 to 2018, we typically expect and
receive payment within 30-180 days of product delivery. In addition, approximately 83.2% of accounts receivables are within a 180
days credit term. Starting in September 2015, we extended credit to some of our customers to 150-180 days without requiring collaterals.
We perform ongoing credit evaluations of the financial condition of our customers and we generally require no collateral from our
distributors and authorized retailers to secure their payment obligations. However, our sales going forward may rely more heavily
on credit, and if we encounter future problems collecting amounts due from our clients or if we experience delays in the collection
of amounts due from our clients, our liquidity could be negatively affected.
The Chinese economy experienced a softening
of economic growth, and the apparel industry is also facing a downturn. The impact of the current and possible future economic
downturn on our distributors cannot be predicted and may be severe, causing a significant impact on their business. As a result,
our financial condition and result of operations could be negatively affected. In addition, if they cannot continue their orders
of our products due to the failure of paying us for its previous purchases, our brand image and reputation may be materially negatively
affected as well.
We rely on distributors for a substantial portion of our
sales and the loss of any of our large distributors would harm our business.
A substantial portion of our sales are made to distributors that resell our products. For the years ended
December 31, 2017 and 2018, distributors accounted for approximately 67% and 73% of our total sales, respectively, and our top
five distributors accounted for approximately 23.8% and 34.8% of our total sales, respectively. The marketing efforts of our distributors
are critical for our success. If we fail to attract additional distributors, and our existing distributors do not promote our products
at the same or at a greater level than the products of our competitors, our business, financial condition and results of operations
could be adversely affected.
Furthermore, there is no assurance that any of our distributors
will satisfy the sales targets set forth in their distribution agreements and we or they may not wish to renew the distribution
agreements in future years. Moreover, our distributors are not obliged to continue to place orders with the Company at the same
level as before or at all and there is no assurance that we would be able to obtain orders from other distributors to replace any
such lost sales on terms satisfactory to us or all. If any of our largest distributors substantially reduces its purchases from
us, or otherwise fails to renew its distribution agreement with us, we may suffer a significant loss of sales and our business,
results of operations, and financial condition may be materially and adversely affected.
We have limited control over the ultimate retail sales
by our distributors and our image and business may be adversely affected if our distributors fail to adhere to, or fail to cause
the third party retail outlet operators to adhere to, our retail policies and standards.
We rely on the contractual obligations set forth in the distribution
agreements that we enter into with our distributors, as well as policies and standards we formulate from time to time, to impose
our retail policies on these distributors in respect of the franchisee retail outlets. In addition, as we do not enter into any
agreements with the third party retail outlet operators, we rely on our distributors to ensure that these franchisee retail outlets
operate in accordance with our retail policies. As such, our control over the ultimate retail sales by our distributors and the
franchisee retail outlet operators is limited. There is no assurance that our distributors or the third party franchisee retail
outlet operators will comply with, or that the distributors will enforce, our retail policies. As a result, we may not be able
to effectively manage our sales network or maintain a uniform brand image, and cannot assure you that franchisee retail outlets
would continue to offer quality services to consumers.
In addition, if any of the distributors or third party franchisee
retail outlet operators experiences difficulties in selling our products in the retail market, they may attempt to disregard our
pricing policies and liquidate their excessive inventory buildup through aggressive discounts, which may damage the image and the
value of our brand. There is no assurance that we will be able to, in a timely manner, impose penalties on or replace any distributors
who consistently fail to comply with, or fail to cause the third party franchisee retail outlet operators appointed by them to
comply with, our retail policies in their operation of franchisee retail outlets. In such event, our business, results of operations
and financial condition may be materially and adversely affected.
We may not be able to accurately track the inventory levels
at our distributors, retailers or department store concessions.
Our ability to track the sales by our distributors to third-party
retailers and the ultimate retail sales by the retailers, and consequently their respective inventory levels, is limited. We implement
a policy to require our distributors to provide us with their sales reports on a weekly basis and we carry out random on-site inspections
of our distributors to track their inventories. The purpose of tracking the inventory level is mainly to gather information regarding
the market acceptance of our products so that we can reflect consumers’ preferences in the design and development of our
products for the next season. The tracking of inventory level also helps us to understand the market recognition of our products
in a particular region, and thus allows us to adjust our marketing strategy if necessary. The implementation of the policy, however,
requires the distributors to accurately report the relevant data to us in a timely manner, which is largely dependent on the cooperation
of the Company’s distributors. We may not always obtain the required data in time and the data provided to us by our distributors
may be inaccurate or incomplete.
Inaccurate, mistaken, incomplete or delayed
data regarding inventory levels may mislead the Company to make wrong business judgments for its production, marketing efforts
and sales strategies. If that happens, our operations and financial results may be materially adversely affected. In addition,
if we cannot manage inventory levels properly, future orders of our products may be reduced, which would materially adversely
affect our future business, financial condition, results of operation and prospects.
Our operations could be materially adversely affected
if we fail to effectively manage our relationships with, or lose the services of, our OEM contract manufacturers.
The production of our brand name products are 100% outsourced to PRC-based third-party OEM contract manufacturers.
In the years ended December 31, 2018 and 2017 we had 5 and 6 contract manufacturers, respectively. Purchases from our top five
OEM contract manufacturers accounted for approximately 92% and 88.6% of our total purchases for the years ended December 31, 2018
and 2017, respectively. As we do not enter into long-term contracts with our OEM contract manufacturers, they may decide not to
accept our future OEM orders on the same or similar terms, or at all. If an OEM contract manufacturer decides to substantially
reduce its volume of supply to us or to terminate its business relationship with us, we may not be able to find a proper replacement
in a timely manner and may be forced to default on the agreements with our distributors that sell our products. This may negatively
impact our revenues and adversely affect our reputation and relationships with our distributors that sell our products, causing
a material adverse effect on our financial condition, results of operations and prospects.
Further, if any of our OEM contract manufacturers fails to provide
the required number of products meeting our quality standards, we may have to delay delivery of products to our distributors, become
unable to supply products at all, or even recall products previously dispatched. This could cause the Company to lose revenues
or market share and damage our reputation, any of which could have a material adverse effect on our business, financial condition,
results of operations and prospects. In addition, some OEM contract manufacturers may not fully comply with certain laws, such
as labor and environmental laws. If any of our OEM contract manufacturers is found to have violated laws and regulations in the
PRC, media reports on such violations may negatively affect our reputation and image, resulting in material adverse impact on our
business, financial condition and results of operations.
While we provide the designs of our products to the OEM contract
manufacturers, as well as guidance for manufacturing the products ordered by us, we do not have direct control over the OEM contract
manufacturers. If any of them is involved in unauthorized production and sale of goods using the KBS brand, our reputation, financial
condition and results of operations may be materially adversely affected.
As the Company grows, our reliance on OEM contract manufacturers
may also grow as our added production capacity may not be sufficient to keep pace with the increased production requirements driven
by our growth. We may not be able to find sufficient additional OEM contract manufacturers to produce our products on the same
or similar terms as our existing OEM contract manufacturers, and we may not be able to achieve our growth and development goals.
Any interruption in our operations could impair our financial
performance and negatively affect our brand.
Our operations are complicated and integrated, involving the coordination of third-party OEM contract
manufacturers and external distribution processes. While these operations are modified on a regular basis in an effort to improve
outsourcing and distribution efficiency and flexibility, we may experience difficulties in coordinating the various aspects of
our operations processes, thereby causing downtime and delays. In addition, we may encounter interruption in our operations processes
due to a catastrophic loss or events beyond our control, such as fires, explosions, labor disturbances or violent weather conditions.
Any interruptions in our operations or capabilities at our facilities could result in our inability to procure our products, which
would reduce our net sales and earnings for the affected period. If there are delays in delivery times to our customers, our business
and reputation could be severely affected. Any significant delays in deliveries to our customers could lead to increased returns
or cancellations and cause the Company to lose future sales. The Company currently does not have business interruption insurance
to offset these potential losses, delays and risks so a material interruption of our business operations could severely damage
our business.
We rely heavily on our management
information system for inventory management, distribution and other functions. If our system fail to perform these functions adequately
or if we experience an interruption in our operation, our business and results of operations could be materially adversely affected.
The efficient operation of our business
is dependent on our management information systems. We rely heavily on our management information systems to manage our order entry,
order fulfillment, pricing, point-of-sale and inventory replenishment processes.
We cannot assure you that our management
information system will operate properly or without interruption. Any malfunction to any part or all of our management information
system for a prolonged period may cause delays in operations or impairment of our overall business efficiency. We also cannot ensure
that the level of security currently maintained will be sufficient to protect the system from third party intrusions, viruses,
lost or stolen data, or similar situations. Additionally, as part of our growth and development strategy over the next few years,
we plan to upgrade and improve our management information system. We cannot assure you that there will be no interruptions to our
management information system during the upgrades or that the new management information system will be able to integrate fully
with the existing information system.
The failure of our management information
system to perform as we anticipate could disrupt our business and could result in decreased revenue, increased overhead costs and
excess or out-of-stock inventory levels, causing our business and results of operations to suffer materially.
Failure to protect the integrity, security and use of
our customers’ information and media could expose us to litigation and materially damage our standing with our customers.
Increasing costs associated with information security —
such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer
fraud — could cause our business and results of operations to suffer materially. While we have taken significant steps to
protect customer and confidential information, including entering into confidentiality agreements with relevant employees and incorporate
confidentiality clauses in our policies, there can be no assurance that advances in computer capabilities, new discoveries in the
field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and
personal data. If any such compromise of our security were to occur, it could have a material adverse effect on our reputation,
operating results and financial condition. Any such compromise may materially increase the costs we incur to protect against such
information security breaches and could subject us to additional legal risk. Procurement specialists and managers are required
to sign a confidentiality agreement.
We have limited insurance coverage
in China and may not be able to recover insurance proceeds if we experience uninsured losses.
Operation of our facilities involves many
risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business
interruptions. We do not carry any business interruption insurance, product recall or third-party liability insurance for our production
facilities or with respect to our products to cover claims pertaining to personal injury or property or environmental damage arising
from defects in our products, product recalls, accidents on our property or damage relating to our operations. While business interruption
insurance and other types of insurance are available to a limited extent in China, we have determined that the risks of interruption,
cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical
for us to have such insurance. Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with
our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused
by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our
business, financial condition and results of operations.
Our inability to protect our trademarks
and other intellectual property rights may prevent us from successfully marketing our products and competing effectively.
We believe our trademarks and other intellectual property rights are important to our success and competitive
position and recognize the importance of registering the trademarks related to our KBS brand for protection against infringement.
We currently hold two registered trademarks. Failure to protect our intellectual property could harm our brand and our reputation,
and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including
our trademarks, patents, copyrights and trade secrets, could result in the expenditure of significant financial and managerial
resources. We produce, market and sell our products under registered trademarks. We regard our intellectual property, particularly
our trademarks and trade secrets to be of considerable value and importance to our business and our success. We rely on a combination
of trademark, patent, and trade secrecy laws, and contractual provisions to protect our intellectual property rights. There can
be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not
infringe or misappropriate our trademarks, trade secrets or similar proprietary rights. In addition, there can be no assurance
that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to
assert our rights. Any such claim or litigation could be costly, and we may lack the resources required to defend against such
claims. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could
have a material adverse effect on our ability to market or sell our brands, and profitably exploit our products.
Environmental regulations impose
substantial costs and limitations on our operations.
We use chemicals and produce significant emissions in our manufacturing operations. As such, we are subject
to various national and local environmental laws and regulations in China concerning issues such as air emissions, wastewater discharges,
and solid waste management and disposal. These laws and regulations can restrict or limit our operations and expose us to liability
and penalties for non-compliance. While we believe that our facilities are in material compliance with all applicable environmental
laws and regulations, the risks of substantial unanticipated costs and liabilities related to compliance with these laws and regulations
are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new
environmental compliance or remediation liabilities and costs. While we believe that we can comply with existing environmental
legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance
may prove to be more limiting and costly than anticipated.
We may be unable to establish and
maintain an effective system of internal control over financial reporting, and, as a result, we may be unable to accurately report
our financial results or prevent fraud.
We are subject to reporting obligations
under the U.S. securities law. The SEC as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), adopted
rules requiring every public company to include a management report on such company’s internal control over financial reporting
in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal
control over financial reporting. In addition, the independent registered public accounting firm auditing the financial statements
of a company that is not a non-accelerated filer under Rule 12b-2 of the Exchange Act must also attest to the operating effectiveness
of the company’s internal controls.
Failure to achieve and maintain an effective
internal control environment could result in our inability to accurately report our financial results, prevent or detect fraud
or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company,
which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause
our investors to lose confidence in the information we report, which could adversely affect our stock price.
RISKS RELATED TO DOING BUSINESS IN CHINA
Our business operation may be affected if we are forced
to relocate our manufacturing facilities and stores.
We leased the premises for our office located in Shishi and
one corporate store. However, none of our lease agreements have been registered with the relevant governmental agencies. According
to our PRC legal counsel, without registration, our rights to use and occupy the premises may not be secured if any third parties
such as other tenants who have registered their lease agreements challenge us under PRC law. Moreover, while we have taken various
measures to verify the ownership of property such as checking utility bills and search government records, most of our landlords
have declined to confirm whether they possess the property ownership certificates and land use rights certificates for our properties.
As a result, we have been unable to verify whether third parties may assert their ownership rights under PRC law against most of
our landlords or challenge most of our leases in the future. If our rights to use the premises are challenged, we may be forced
to relocate to other premises. We may not be able to relocate to a suitable premise promptly or lease alternative premises on terms
at least as favorable as our existing ones. In addition, relocation costs and interruption of production may have a material adverse
effect on our business operation and financial performance.
Changes in the economic and political policies of the
PRC government could have a material and adverse effect on our business and operations.
We conduct substantially all our business operations in China.
Accordingly, our results of operations, financial condition and prospects are significantly dependent on economic and political
developments in China. China’s economy differs from the economies of developed countries in many aspects, including the level
of development, growth rate and degree of government control over foreign exchange and allocation of resources. While China’s
economy has experienced significant growth in the past 30 years, the growth has been uneven across different regions and periods
and among various economic sectors in China. We cannot assure you that China’s economy will continue to grow, or that if
there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative
effect on its business and results of operations.
The PRC government exercises significant control over China’s
economic growth through the allocation of resources, control over payment of foreign currency-denominated obligations, implementation
of monetary policy, and preferential treatment of particular industries or companies. Certain measures adopted by the PRC government
may restrict loans to certain industries, such as changes in the statutory deposit reserve ratio and lending guidelines for commercial
banks by the People’s Bank of China, or PBOC. These current and future government actions could materially affect our liquidity,
access to capital, and ability to operate our business.
The global financial markets experienced significant disruptions
in 2008 and the United States, Europe and other economies went into recession. Since 2012, growth of the Chinese economy has slowed.
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, any stimulus measures designed to boost the Chinese economy, may contribute to higher inflation,
which could adversely affect our results of operations and financial condition. See “Risks Related to Doing Business in China
-Future inflation in China may inhibit our ability to conduct business in China.”
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and us.
We conduct substantially all of our business through our operating
subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments
in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes,
and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws
and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However,
since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always
uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available
to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources
and management attention. In addition, most of our executive officers and directors are residents of China and not of the United
States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult
for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against
our Chinese operations and subsidiaries.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and most of our current operations are conducted
in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States.
A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for
you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S.
courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors,
most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts.
Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC
Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions.
China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments
with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United
States.
The PRC government exerts substantial influence over the
manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial
control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China
may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental
regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate
may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and
efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular
regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures
Restrictions on currency exchange may limit our ability
to receive and use our sales effectively.
The majority of our sales will be settled in RMB and U.S. dollars,
and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business
activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations
in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid
commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for
capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required
to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility of the RMB in the future.
Fluctuations in exchange rates could adversely affect
our business and the value of our securities.
The value of our securities will be indirectly affected by the
foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may
be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as
well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been
pegged to the U.S. dollar. Since then the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably,
and in recent years the RMB has depreciated significantly against the U.S. dollar. With the development of the foreign exchange
market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future
announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate
significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government
policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter
into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign currencies. As a result, fluctuations in exchange rates
may have a material adverse effect on your investment.
Restrictions under PRC law on our PRC subsidiaries’
ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or
acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
Substantially all of our sales are earned by our PRC subsidiaries.
However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent
companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax
profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required
under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP
to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these
statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or
cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit
our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund
and conduct our business.
PRC regulations relating to investments in offshore companies
by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability
to inject capital into our PRC subsidiary or limit our PRC subsidiary’s ability to increase their registered capital or distribute
profits.
SAFE promulgated the Circular on Relevant Issues Concerning
Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE
Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register
with local branches of the SAFE 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, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE
Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special
purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division
or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the
required SAFE registration, the PRC subsidiaries 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. Moreover, failure to comply with the
various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange
controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct
Investment released on February 13, 2015 by SAFE, local banks will examine and handle foreign exchange registration for overseas
direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37
from June 1, 2015.
According to SAFE Circular 37, our shareholders or beneficial
owners, who are PRC residents, are subject to SAFE Circular 37 or other foreign exchange administrative regulations in respect
of their investment in our company. We have notified substantial beneficial owners of ordinary shares who we know are PRC residents
of their filing obligations. Nevertheless, we may not be aware of the identities of all of our beneficial owners who are PRC residents.
We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners
will comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration
under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure
of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant
to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who
are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation
rules, may subject such beneficial owners or our PRC subsidiary to fines and legal sanctions. Such failure to register or comply
with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiary and limit our PRC
subsidiary’s ability to distribute dividends to our company. These risks may have a material adverse effect on our business,
financial condition and results of operations.
Furthermore, SAFE Circular 37 is unclear how this regulation,
and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the
relevant PRC government authorities, and we cannot predict how these regulations will affect our business operations or future
strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital
to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. These risks could in the future
have a material adverse effect on our business, financial condition and results of operations.
We may be unable to complete a business
combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective
on September 8, 2006.
On August 9, 2006, six PRC regulatory agencies,
including the China Securities Regulatory Commission, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies
by Foreign Investors, which became effective on September 8, 2006, and was subsequently amended in 2009. This regulation, among
other things, governs the approval process of a PRC company’s participation in an acquisition of assets or equity interests.
Depending on the structure of the transaction, the regulation requires the PRC parties to make a series of applications and supplemental
applications to the government agencies for approval of acquisition of assets or equity interests from other entity. In some instances,
the application process may require a presentation of economic data concerning the transaction, including appraisals of the target
business and evaluations of the acquirer, which are designed to allow the government to assess viability of the transaction. Government
approvals will have expiration dates, by which a transaction must be completed and reported to the government agencies. Compliance
with the regulation is likely to be more time consuming and expensive than it was in the past, and provides the government more
controls over business combination of two enterprises. As a result, our ability to engage in business combination transactions
has become significantly more complicated, time consuming, and expensive. We may not be able to negotiate a transaction that is
acceptable to our stockholders or sufficiently protect their interests in a transaction.
The regulation allows PRC governmental
agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may
have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation report, and the acquisition
agreement, all of which were a part of the application for approval, depending on the structure of the transaction. The regulation
also prohibits a transaction with an acquisition price obviously lower than the appraised value of the PRC business or assets and
in certain transaction structures, and requires consideration being paid within a defined period, generally not in excess of a
year. The regulation also limits our ability to negotiate various terms of the acquisition, including the initial consideration,
contingent consideration, holdback provisions, indemnification provisions, and provisions related to the assumption and allocation
of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such
regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy
our investors and protect our stockholders’ economic interests.
PRC regulation of loans to, and direct investment in,
PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using
the proceeds of our future financings to make loans to our PRC subsidiaries, or to make additional capital contributions to our
PRC subsidiary.
We, as an offshore holding company, are permitted under PRC
laws and regulations to provide funding to our PRC subsidiary, which are treated as foreign-invested enterprises under PRC laws,
through loans or capital contributions. However, loans by us to any PRC subsidiary to finance its activities cannot exceed statutory
limits and must be registered with the local counterpart of SAFE and capital contributions to our PRC subsidiary are subject to
the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration
with other governmental authorities in China.
SAFE promulgated the Notice of the State Administration of Foreign
Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19,
effective on June 1, 2015, in replacement of 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 Circular 142,
the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of
Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning
the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19,
the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company
is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans
or the repayment of bank loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted
from foreign currency-denominated registered capital of a foreign invested enterprise to be used for equity investments within
the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested
company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit
such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration
of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16,
effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against
using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted
loans to a prohibition against using such capital to grant loans to non-associated enterprises. Violations of SAFE Circular 19
and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit our
ability to transfer any foreign currency we hold, including the net proceeds from our future financings, to our PRC subsidiary,
which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Due to the restrictions imposed on loans in foreign currencies
extended to any PRC domestic companies, we are not likely to make such loans to any of our PRC subsidiaries. Meanwhile, we are
not likely to finance the activities of our subsidiaries by means of capital contributions given the restrictions on foreign investment
in the businesses that are currently conducted by our subsidiaries.
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 to our PRC subsidiary or any consolidated variable interest entity or future capital contributions by us
to our PRC subsidiary. As a result, uncertainties exist as to our ability to provide prompt financial support to our PRC subsidiaries
when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency, including
the proceeds we received from our future financings, 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.
Any failure to comply with PRC regulations regarding employee
share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate
in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the
foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers
and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than
one year, subject to limited exceptions, and who have been granted restricted shares, options or restricted share units, or RSUs,
by us or our overseas listed subsidiaries may follow the Notice on Issues Concerning the Foreign Exchange Administration for Domestic
Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, to apply
for the foreign exchange registration. According to those regulations, employees, directors and other management members participating
in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in
China for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through
a domestic qualified agent, which may be a PRC subsidiary of the overseas listed company, and complete certain other procedures.
Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit their ability to make
payment under the relevant equity incentive plans or receive dividends or sales proceeds related thereto in foreign currencies,
or our ability to contribute additional capital into our domestic subsidiaries in China and limit our domestic subsidiaries’ ability
to distribute dividends to us. We also face regulatory uncertainties under PRC law that could restrict our ability or the ability
of our overseas listed subsidiaries to adopt additional equity incentive plans for our directors and employees who are PRC citizens
or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions.
In addition, the State Administration of Taxation has issued
circulars concerning employee share options, restricted shares or RSUs. Under these circulars, employees working in the PRC who
exercise share options, or whose restricted shares or RSUs vest, will be subject to PRC individual income tax. The PRC subsidiaries
of an overseas listed company have obligations to file documents related to employee share options or restricted shares with relevant
tax authorities and to withhold individual income taxes of those employees related to their share options, restricted shares or
RSUs. If the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes according to relevant laws, rules
and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities.
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 shareholders.
On March 16, 2007, the National People’s
Congress of China passed a new Enterprise Income Tax Law, or the EIT Law. On November 28, 2007, the State Council of China passed
its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with
“de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define
de facto management as “substantial and overall management and control over the production and operations, personnel, accounting,
and properties” of the enterprise.
On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises. According to the Criteria of de facto Management Bodies, or the Notice, further interprets the
application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified
as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations
reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons
in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept
in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise
would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10%,
when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore
enterprise incorporated by a Chinese natural person, nor detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts
of each case.
We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a “resident enterprise” for the PRC enterprise income
tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax
at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income
tax at a rate of 25%. Second, although, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries
would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued a guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for the PRC enterprise income tax
purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification
could result in a situation, which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect
to gains derived by our non-PRC stockholders from transferring our shares.
Our failure to fully comply with PRC laws relating to
social insurance and housing accumulation fund may expose it to potential administrative penalties.
The PRC laws and regulations require all employers in China
to fully contribute their own portion to the social insurance and housing accumulation funds for their employees within a certain
period of time. Failure to do so may expose the employers to make rectification for the unpaid contributions by the relevant labor
authority.
As of the date of this report, Hongri PRC has not paid housing
accumulation funds for its employees. In addition, Hongri PRC failed to make contributions to the social insurance in full amount
for its employees before 2014. PRC governmental authorities may impose penalties on Hongri PRC for failure to comply. In addition,
in the event that any current or former employee files a complaint with the PRC government, Hongri PRC may be subject to making
up the contributions to the social insurance and housing accumulation funds as well as paying administrative fines. The total cost
of these contributions and any related fines or penalties could be significant and could have a material adverse effect on our
working capital.
We may be exposed to liabilities under the Foreign Corrupt
Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse
effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA,
and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties
by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations,
agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials.
Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents,
or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards
to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less
than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we
might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions,
and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.
In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies
in which we invest or that we acquire.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate
and resolve the matter which could harm our business operations, stock price and reputation, and could result in a loss of your
investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In the past few years, U.S. publicly traded companies that have substantially all of their operations
in China, particularly companies like us have been the subject of intense scrutiny, criticism, and negative publicity by investors,
financial commentators, and regulatory agencies, such as the SEC. Much of the scrutiny, criticism, and negative publicity has centered
around financial and accounting irregularities and mistakes, lacking effective internal controls over financial accounting, inadequate
corporate governance policies or lacking of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism, and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have sharply decreased in value
and, in some cases, have become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions, and are conducting internal and external investigations into the allegations. It is not clear the effect of this sector-wide
scrutiny, criticism, and negative publicity will have on our Company, our business, and our stock price. If we become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations defending our Company. This situation will be costly, time consuming, and distract our management
from growing our company.
The disclosures in our reports and other filings with
the SEC and our other public pronouncements will not be subject to the scrutiny of any regulatory bodies in the PRC. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where all of
our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
Unlike public reporting companies whose operations are located
primarily in the United States, however, all of our operations will be located in China. Since all of our operations and business
takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that
are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business
take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other
filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China.
Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local
regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any
of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
Proceedings instituted by the SEC against five PRC-based
accounting firms could result in financial statements being determined to be not in compliance with the requirements of the Securities
Exchange Act of 1934.
In December 2012, the SEC instituted proceedings under Rule
102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms alleging that these firms had violated
U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work
papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii)
grants to the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is
found by the SEC, after notice and opportunity for a hearing, to have willfully violated, or willfully aided and abetted the violation
of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, sanctioning
four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will
not take effect until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based accounting
firms filed a petition for review of the initial decision. In February 2015, each of these four accounting firms agreed to
a censure and to pay fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years,
during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms’
audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such as suspensions, or
commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the administrative proceeding
against all four firms.
If our independent registered public accounting firm were denied,
temporarily or permanently, the ability to practice before the SEC, and we are unable to find in a timely manner another registered
public accounting firm which can audit and issue a report on our financial statements, our financial statements could be determined
to not be in compliance with the requirements for financial statements of public companies with a class of securities registered
under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the SEC’s
revocation of the registration of our common stock under the Exchange Act, which would cause the immediate delisting of our common
stock from the NASDAQ Capital Market, and the effective termination of the trading market for our common stock in the United States,
which would likely have a significant adverse effect on the value of our common stock.
Our holding company structure may limit the payment of
dividends.
We have no direct business operations, other than our ownership
of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding
company, our ability to pay dividends and meet other obligations depend upon the receipts of dividends or other payments from our
operating subsidiaries, other holdings, and investments. In addition, our operating subsidiaries, from time to time, may be subject
to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard currency, and other regulatory restrictions as
discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for conversion of RMB into U.S. dollars
may reduce the amount received by the U.S. stockholders upon conversion of dividend payments into U.S. dollars.
Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined
in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion
of their after-tax profits to fund certain reserve funds according to the Chinese accounting standards and regulations. Currently,
our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not
accumulate sufficient profits under Chinese accounting standards and regulations to satisfy certain reserve funds as required by
the Chinese accounting standards, we will be unable to pay any dividends.
After-tax profits/losses with respect to the payment of dividends
from accumulated profits and the annual appropriation of after-tax profits as calculated pursuant to the Chinese accounting standards
and regulations do not result in significant differences as compared to after-tax earnings as presented in our financial statements.
However, there are certain differences between PRC accounting standards and regulations and U.S. GAAP, arising from different treatment
of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.
RISKS RELATED TO THIS OFFERING AND THE MARKET FOR OUR SECURITIES
GENERALLY
If we fail to comply with the continued listing requirements
of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future
debt or equity financing more difficult for us.
Our common stock is traded and listed on the Nasdaq Capital
Market under the symbol “KBSF.” The common stock may be delisted if we fail to maintain certain Nasdaq listing requirements.
For instance, companies listed on NASDAQ are subject to delisting for, among other things, failure to maintain a minimum closing
bid price per share of $1.00 for 30 consecutive business days. On March 3, 2016, we received a letter from NASDAQ indicating that
for the 30 consecutive business days between January 20, 2016 and March 2, 2016, the bid price of our common stock closed below
the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5550(a)(2) for continued inclusion on The NASDAQ Capital
Market. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we had an initial grace period of 180 calendar days, or until August
30, 2016, to regain compliance with the minimum bid price requirement. After the Company effectuated a one-for-fifteen reverse
stock split of the outstanding common stock, the Company received a letter from Nasdaq on February 27, 2017 stating that because
the Company maintained the closing bid price of its common stock at $1.00 per share or greater from February 9 to February 24,
2017, they determined that the Company has regained compliance with the minimum closing bid price requirement.
We cannot ensure you that we will continue to comply with the
requirements for continued listing on The NASDAQ Capital Market in the future. If our common stock is no longer listed on The NASDAQ
Capital Market, our shares would likely trade on the over-the-counter market. If our shares were to trade on the over-the-counter
market, selling our shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions
could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted,
broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions
in our shares, further limiting the liquidity of our shares. These factors could result in lower prices and larger spreads in the
bid and ask prices for our shares. Such delisting from The NASDAQ Capital Market and continued or further declines in our share
price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly
increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
If we were delisted from NASDAQ, we may become subject
to the trading complications experienced by “Penny Stocks” in the over-the-counter market.
Delisting from NASDAQ may cause our shares of common stock to
become the SEC’s “penny stock” rules. The SEC generally defines a penny stock as an equity security that has
a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions.
One such exemption is to be listed on NASDAQ. The market price of our common stock is currently higher than $1.00 per share. However,
because the daily trading volume in our common stock is very low, significant price movement can be caused by the trading in a
relatively small number of shares. Therefore, were we to be delisted from NASDAQ, our common stock may become subject to the SEC’s
“penny stock” rules. These rules require, among other things, that any broker engaging in a purchase or sale of our
securities provide its customers with: (i) a risk disclosure document, (ii) disclosure of market quotations, if any, (iii) disclosure
of the compensation of the broker and its salespersons in the transaction and (iv) monthly account statements showing the market
values of our securities held in the customer’s accounts. A broker would be required to provide the bid and offer quotations
and compensation information before effecting the transaction. This information must be contained on the customer’s confirmation.
Generally, brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These
requirements may make it more difficult for shareholders to purchase or sell our shares. Because the broker, not us, prepares this
information, we would not be able to assure that such information is accurate, complete or current.
Trading in our shares over the last three months has been
very limited, so our stock price is highly volatile, leading to the possibility that you may not be able to sell as much stock
as you want at prevailing prices.
Because approximately 70% of our then issued and outstanding
shares of common stock was tendered in the tender offering closed on July 29, 2014, we currently have a limited amount of shares
eligible for public trading. The average daily trading volume in our common stock over the last three months is very limited. If
limited trading in our common stock continues, it may be difficult for investors to sell their shares in the public market at any
given time at prevailing prices. Moreover, the market price for shares of our common stock may be made more volatile because of
the relatively low volume of trading in our common stock. When trading volume is low, significant price movement of our common
stock can be caused by the trading in a relatively small number of shares. Volatility in our common stock could cause stockholders
to incur substantial losses.
Numerous factors, many of which are beyond our control,
may cause the market price of our Common Stock to fluctuate significantly.
There are numerous additional factors, many of which are beyond
our control, may cause the market price of our Common Stock to fluctuate significantly. These factors include:
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our earnings releases, actual or anticipated changes
in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and
investors;
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changes in financial estimates by us or by any securities
analysts who might cover our shares;
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speculation about our business in the press or the
investment community;
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significant developments relating to our relationships
with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industries;
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customer demand for our products;
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investor perceptions of our industry in general and our company in particular;
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the operating and stock performance of comparable
companies;
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general economic conditions and trends;
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major catastrophic events;
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announcements by us or our competitors of new products,
significant acquisitions, strategic partnerships or divestitures;
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changes in accounting standards, policies, guidance,
interpretation or principles;
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loss of external funding sources;
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sales of our shares, including sales by our directors,
officers or significant shareholders; and
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additions or departures of key personnel.
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Securities class action litigation is often instituted against
companies following periods of volatility in their share price. This type of litigation could result in substantial costs to us
and divert our management’s attention and resources. Moreover, securities markets may from time to time experience significant
price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008,
the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since
September 2001. These market fluctuations may adversely affect the price of our shares and other interests in our company at a
time when you want to sell your interest in us.
We do not intend to pay dividends for the foreseeable
future.
For the foreseeable future, we intend to retain any earnings
to finance the development and expansion of our business, and do not anticipate paying any cash dividends on our shares. Accordingly,
investors must be prepared to rely on sales of their shares after price appreciation to earn an investment return, which may never
occur. Investors seeking cash dividends should not purchase our shares. Any determination to pay dividends in the future will be
made at the discretion of our Board of Directors, and will depend on our results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable laws, and other factors our board deems relevant.
Certain of our shareholders hold a significant percentage
of our outstanding voting securities.
Mr. Keyan Yan, our Chairman and Chief Executive Officer, is
the beneficial owner of approximately 37% of our outstanding voting securities. As a result, he possesses significant influence
and can elect a majority of our board of directors and authorize or prevent proposed significant corporate transactions. His ownership
and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover
or other business combination or discourage a potential acquirer from making a tender offer.
Our outstanding warrants may adversely affect the market
price of our shares of common stock.
There are currently 393,836 warrants outstanding. Each warrant entitles the holder to purchase one
share of common stock at a price of $172.50. The sale or possibility of sale of the shares underlying the warrants could have an
adverse effect on the market price for our shares of common stock or our ability to obtain future financing. If and to the extent
these warrants are exercised, you may experience dilution to your holdings.
You will not be able to exercise your redeemable warrants
if we do not have an effective registration statement and a prospectus in place when you desire to do so.
No redeemable warrants will be exercisable, and we will not
be obligated to issue shares of common stock upon exercise of redeemable warrants by a holder unless, at the time of such exercise,
we have a registration statement or post-effective amendment under the Securities Act covering the shares of common stock issuable
upon the exercise of the redeemable warrants and a current prospectus relating to shares of common stock. Under the terms of a
redeemable warrant agreement between American Stock Transfer & Trust Company as warrant agent, and us, we have agreed to use
our best efforts to have a registration statement in effect covering shares of common stock issuable upon exercise of the redeemable
warrants from the date the redeemable warrants become exercisable and to maintain a current prospectus relating to shares of common
stock until the redeemable warrants expire or are redeemed, and to take such action as is necessary to qualify the shares of common
stock issuable upon exercise of the redeemable warrants for sale in those states in which the IPO was initially qualified. However,
we cannot assure you that we will be able to do so. We may be unable to have a registration statement in effect covering shares
of common stock issuable upon exercise of the redeemable warrants or to maintain a current prospectus relating to such shares of
common stock if, for example, we lack the current financial statements necessary to be included in such registration statement
or prospectus. We have no obligation to settle the redeemable warrants for cash, in any event, and the redeemable warrants may
not be exercised and we will not deliver securities therefor in the absence of an effective registration statement and a prospectus
available for use. The redeemable warrants may be deprived of any value, the market for the redeemable warrants may be limited
if there is no registration statement in effect covering the shares of common stock issuable upon the exercise of the redeemable
warrants or the prospectus relating to the shares of common stock issuable upon the exercise of the redeemable warrants is not
current and the redeemable warrants may expire worthless. If you are unable to exercise or sell your redeemable warrants, you will
have paid the full unit price for only the shares of common stock underlying the units.
Holders of warrants included in the placement units may
exercise these warrants even if an effective registration statement and a prospectus is not in place, which means they may be able
to exercise such warrants while public warrants might not be exercisable and may expire worthless.
Unlike the warrants underlying the units issued in connection
with our IPO, the warrants included in the placement units will not be restricted from being exercised in the absence of a registration
statement under the Securities Act in effect covering the shares of common stock issuable upon the exercise of the such warrants
and a current prospectus relating to shares of common stock. Therefore, the holders thereof will be able to exercise such warrants
regardless of whether the issuance of the underlying shares of common stock is registered under the Securities Act, while public
warrants might not be exercisable and may expire worthless.
We are a “foreign private issuer”
and have disclosure obligations that are different than those of U.S. domestic reporting companies. Therefore, you should not expect
to receive the same information about us as a U.S. domestic reporting company may provide. Furthermore, if we or lose our status
as a foreign private issuer, we would be required to fully comply with the reporting requirements of the Exchange Act applicable
to U.S. domestic issuers and incur significant operational, administrative, legal, and accounting costs that we would not incur
as a foreign private issuer.
We are a foreign private issuer. As a result,
we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required
by the SEC or the federal securities laws to issue quarterly reports or file proxy statements with the SEC. We are also allowed
to file our annual report with the SEC within four months of our fiscal year end. We are also not required to disclose certain
detailed information regarding executive compensation that is required from U.S. domestic issuers. Further, our directors and executive
officers are not required to report equity holdings under Section 16 of the Securities Act. As a foreign private issuer, we are
also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of
investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud
and anti-manipulation rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign
private issuer are different than those required by U.S. domestic reporting companies, our shareholders should not expect to receive
all of the same types of information about us and at the same time as information is received from, or provided by, U.S. domestic
reporting companies. We are liable for violations of the rules and regulations of the SEC, which do apply to us as a foreign private
issuer. Violations of these rules could affect our business, results of operations, and financial condition.
As a foreign private issuer, we are permitted
to rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may afford less
protection to holders of our securities.
We are exempted from certain corporate governance requirements
of the Nasdaq Stock Market by virtue of being a foreign private issuer. As a foreign private issuer, we are permitted to follow
the governance practices of our home country, the Republic of the Marshall Islands in lieu of certain corporate governance requirements
of Nasdaq. As result, the standards applicable to us are considerably different than the standards applied to domestic U.S. issuers.
For instance, we are not required to:
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have a compensation committee and a nominating committee
to be comprised solely of “independent directors; and
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hold an annual meeting of shareholders no later than
one year after the end of the Company’s fiscal year-end.
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As a result, you may not have the same protections afforded
to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.
Future sales or perceived sales of our shares of common
stock could depress our stock price.
As of the date of this report, we have 2,591,299 shares of common
stock outstanding. Many of these shares will become eligible for sale in the public market, subject to limitations imposed by Rule
144 under the Securities Act. If the holders of these shares were to attempt to sell a substantial amount of their holdings at
once, the market price of our common stock could decline. Moreover, the perceived risk of this potential dilution could cause shareholders
to attempt to sell their shares and investors to short the common stock, a practice in which an investor sells shares that he or
she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these
events would cause the number of shares of our common stock being offered for sale to increase, our common stock market price would
likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
Holders of our securities may face difficulties in protecting
their interests because we are incorporated under the Republic of the Marshall Islands law.
We are a company incorporated under the laws of the Marshall
Islands, and almost all of our assets are located outside the United States. In addition, majority of our directors and officers,
and their assets, are located outside of the United States. As a result, you may have difficulty serving legal process within the
United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments
you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions
of U.S. federal or state securities laws. You may also have difficulty bringing an original action in the appropriate court of
the Marshall Islands to enforce liabilities against us or any person based upon the U.S. federal securities laws.
Provisions of our articles of incorporation may impede
a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce
shareholders’ opportunity to influence management of the Company.
Our articles of incorporation permit our board of directors
to issue up to five million shares of preferred stock with a par value of $0.0001 from time to time, with such rights and preferences
as they consider appropriate. These terms may include voting rights including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion rights and redemption rights provisions. The issuance of any preferred
stock could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could
be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the board of directors to issue
preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control,
which in turn could prevent shareholders from recognizing a gain in the event that a favorable offer is extended and could materially
and negatively affect the market price of our common stock.
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ITEM 4.
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INFORMATION
ON THE COMPANY
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A.
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History and Development of the Company
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We are a Republic of the Marshall Islands
Company incorporated under the Marshall Islands Business Corporations Act (“BDA”) on January 26, 2012. We were originally
organized under the name “Aquasition Corp.” for the purpose of acquiring through a merger, capital stock exchange,
asset acquisition, stock purchase, or similar acquisition transaction, one or more operating businesses or assets. The address
of the Company’s principal executive office is Xingfengge Building, Baogaiyupu Industrial Park, Shishi City, Fujian Province
of china.
On March 24, 2014, we entered into a share
exchange agreement and plan of liquidation (the “Exchange Agreement”), with KBS International, Hongri International,
a then wholly owned subsidiary of KBS International and Cheung So Wa and Chan Sun Keung, each an individual and shareholder of
KBS International (each, a “Principal Stockholder”). The Exchange Agreement was subsequently amended on June 21, 2014.
The transactions contemplated in the Exchange Agreement (the “Share Exchange”) were closed on August 1, 2014. At the
closing, we acquired 100% of the issued and outstanding equity interest in Hongri International from KBS International. In exchange,
we issued an aggregate of 1,530,497 shares of common stock of the Company to KBS International. In addition, on July 29, 2014,
we completed a tender offer related to the Share Exchange and redeemed the 332,116 shares of common stock validly tendered and
not withdrawn. Pursuant to the Exchange Agreement, KBS International was liquidated and dissolved in August 2014 and the 1,530,497
shares of common stock of the Company were distributed to each shareholder of KBS International according to their respective ownership
of KBS International. As a result, following the consummation of the Share Exchange, we had a total of 1,694,489 shares of common
stock outstanding.
On October 31, 2014, we held a special
shareholder meeting and amended our Articles of Incorporation to change our name to KBS Fashion Group Limited.
On February 3, 2017, a special shareholder
meeting was held at the Company’s headquarters in China and at the meeting, our shareholders approved a proposal to grant
discretionary authority to the Board of Directors of the Company to effect a reverse stock split of issued and outstanding shares
of common stock at a ratio within the range from one-for-two up to one-for-twenty; and determine whether to pay in cash the fair
value of fractions of a share of common stock as of the time when those entitled to receive such fractions are determined, or to
entitle shareholders to receive, in lieu of any fractional share, the number of shares of common stock rounded up to the next whole
number. On February 3, 2017, after the special shareholder meeting, our Board of Directors approved a one-for-fifteen reverse stock
split of the Company’s issued and outstanding common stock. In addition, in lieu of issuing any fractional share, the Board of
Directors decided that shareholders are entitled to receive the number of shares of common stock rounded up to the next whole number.
Our common stock began trading on the NASDAQ Stock Market on a split-adjusted basis when the market opened on February 9, 2017.
On March 29, 2016, we granted an aggregate
of 73,334 restricted shares of common stock to certain executive officers and directors of the Company as compensations for their
past services in 2015 and future services to be provided in 2016.
On July 10, 2017, we granted an aggregate
of 215,000 restricted shares of common stock to certain executive officers and directors of the Company as compensations for their
services.
On February 10, 2018, we granted an aggregate
of 285,000 restricted shares of common stock to certain executive officers and directors of the Company as compensations for their
services.
On March 25, 2019, we granted an aggregate
of 305,000 registered shares of common stock pursuant to our 2018 Equity Incentive Plan to our executive officers, directors and
certain employees as compensations for their services.
On March 29, 2019, our board of directors
approved the issuance of 15,000 shares of common stock to our Investor Relationship firm as compensation for their services. The
issuance of the shares was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended
(the “Act”), for the offer and sale of securities not involving a public offering, and Regulation S promulgated thereunder.
None of the shares have been registered under the Act and neither may be offered or sold in the United States absent registration
or an applicable exemption from registration requirements.
Corporate Structure
All of our business operations are conducted through our PRC
subsidiaries. The chart below presents our corporate structure as of the date of this report.
The Securities and Exchange Commission, or SEC, maintains an
Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov.
Our web site address is http://www.kbsfashion.com. Information
contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.
Principal Capital Expenditures and
Divestitures
For the year ended December 31, 2018, our
total capital expenditures and divestitures were $nil. For the years ended December 31, 2017 and 2016, our total capital expenditures
and divestitures were $849,199 and $45,445, respectively. Such expenditures were primarily used construction of production facility
and purchasing fire protection facility. Our operating cash flow mainly funded these capital expenditures.
We are a leading casual menswear company
in China with a demonstrated track record of designing, marketing, and selling our own line of fashion menswear. Our products include
men’s apparel, footwear and accessories, primarily targeting urban males between the ages of 20 and 40 in the Tier II and
Tier III cities in China. Tier II cities generally refer to major cities located in each province of China other than the capital
city of such province. Tier III cities generally refer to county-level cities in China. Tier III cities that we focus on are the
national top 100 county cities identified by the State Statistics Bureau of China each year. These cities are characterized by
higher GDP, higher disposable income, better education and better infrastructure as compared with other county-level cities.
Our apparel products include outerwear,
knitwear, denim, tops, bottoms, accessories and footwear. Since 2006, we have launched 4,056 collections of new products, each
year with a different theme to highlight the current trends in menswear for the season.
We have established a nationwide distribution network covering 12 of China’s 32 provinces and centrally
administered municipalities. As of December 31, 2018, this network was comprised of 1 corporate store owned and operated by the
company and 40 franchised stores operated by 14 third party distributors or their sub-distributors. The number of stores has grown
from 1 corporate store and 7 franchised stores as of December 31, 2006. In the years ended December 31, 2018, 2017 and 2016, sales
through our corporate stores accounted for 13%, 29.4% and 13% of our total revenues respectively, and sales through distributors
and whole sellers accounted for 73%, 66.5% and 78% of our revenues, respectively. Total revenue from corporate stores sales for
fiscal year 2018 was $2.37 million, compared to $7.0 million for 2017 and $5.53 million for 2016.
From 2009 through 2018, total net sales
decreased from $28.1 million to $18.53 million while the net profit decreased from $9.0 million to a net loss of -$8 million.
Our Competitive Strengths
We believe that the following competitive
strengths enable us to compete effectively in and capitalize on the growing casual menswear industry in China.
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There is a sizable market for our products
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We believe that we have a sizeable potential market. Our target customers are male middle-class consumers in the 20-40 age range.
According to the national census in 2018, the population in China between 16-59 years-old was approximately 900 million. Our target
group falls into this category and is estimated to be more than 200 million people. As a result of the growing affluence in the
PRC and increased purchasing power of the PRC population, we believe that PRC consumers are becoming more willing and able to
purchase casual menswear. In addition, we believe that the purchasing decision of PRC consumers is becoming more predicated upon
brand image, product design and style, rather than just price considerations. With rising affluence and improvement in lifestyle,
we also believe the overall Chinese population is generally growing more brand name conscious and style oriented and has shown
a propensity for increased spending on casual menswear.
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We have a strong focus on design and product
development
. We believe that our in-house design and product development capabilities allow us to create unique products
that appeal to our customers. We have established a strong in-house design and product development team of 20 employees as of
April 26, 2019. Our team identifies new fashion trends by attending fashion shows and exhibitions as well as by drawing from creative
ideas in magazines and other media. Each spring and fall, we carefully plan and create a new product line for our fall/winter
and spring/summer collections of 727 SKU that encompasses our full range of product offerings, including outerwear, tops, bottoms
and accessories. We introduce new design elements into our product lines each season. With our highly skilled and creative team
of designers, we have extensive experience in creating unique designs to meet the preferences and needs of our target customer
base.
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Our trademarked brand has earned a following
in China
. Our brand was developed in 2006. Our marketing concept is “French origin, Korean design and made for Chinese.”
Our customers are middle-class consumers in the 20-40 age range. We believe that their products’ concept, marketing, design
and packaging fully match with the pro-western attitude and life styles of their target customers. We believe the KBS brand is
essential to our success to penetrate to the casual menswear market in China.
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We have an extensive and well-managed nationwide
distribution network
. We have an extensive distribution network throughout China. As of December 31, 2018, we had 1 KBS
branded corporate stores and 32 franchised stores across 10 of China’s 32 provinces and centrally administered municipalities.
The KBS branded corporate stores are required to sell only our products. We have been building up our selected distributor network
since 2007. As of December 31, 2018, we had 11 distributors operating 32 franchised stores. All of our distributors have been
working with us from 1 to 10 years. We select our distributors based on a number of criteria, including experience in the menswear
retail industry, sales channels, business resources, brand promotion capabilities and ability to help us implement our broader
business strategies. Our distributors help us respond to changing consumer tastes in a timely manner by providing regular feedback
on our products at our semi-annual sales fairs and frequent communications. The financial resources of our distributors allow
us to expand our retail network with less working capital investment from us than would be required for establishing direct stores,
as our distributors are responsible for the store rentals and cost of inventory in their stores. We sold a substantial amount
of our products through our distributors, which have allowed us to distribute our products to a wide geographic area and penetrate
markets by leveraging the local market knowledge of our distributors and their sub- distributors. We believe that our distribution
network has enabled us to expand our business and increase our sales efficiently and with less operational risk. This model has
also minimized our operational risk because we typically start production after we receive orders from our distributors. We believe
that using a distribution network to sell a substantial amount of our KBS products has enabled us to devote our resources to our
core competitive strengths of design, brand management and product development.
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We have an experienced management team
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Our management team has extensive R&D, marketing and financial experience, led by our Chief Executive Officer, Mr. Keyan
Yan. Mr. Yan has over 27 years of experience in the apparel industry and also has developed a differentiated product by international
cooperation with a Korean designer. After working in the garment industry for more than 16 years, Mr. Yan acquired and developed
the KBS brand. With his strong understanding of the apparel industry, Mr. Yan has successfully established this brand name in
the market. We are committed to attract and retain top management level executives who we believe are and will continue to be
the driving force behind our product development and growth.
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Our Growth Strategy
We intend to further strengthen our market position in the casual
menswear market in China by implementing the following strategies:
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We plan to expand our online business and purchase
one or more online sales platforms or online stores
. Together with the change in consumer trends, online sales is now
the most important sales channel in Chinese market and is becoming increasingly important globally. Sales from our stores and
distributors have been steadily decreasing, and we are now in the process of identifying the best possible ways to establish and
expand our online business. We plan to research and purchase one or more online sales platforms and online stores. We believe
that KBS will have better opportunities to expand by purchasing online sales platforms or online stores in year 2019, and the
management of KBS will keep on exploring other areas and business models, such as the use of artificial intelligence for brand
promotion, learning customer preferences, and identifying shopping trends. We consider that our policy to expand our outreach
using new technologies will add significant shareholder value.
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We plan to expand our OEM sales by attracting
more reputable and long-term clients.
We just had the renewal of a framework sales contract with two major current customers:
Hangzhou Zhi Yin Apparel Clothes Co., Ltd and Hangzhou Yiyuan Apparel Co., Ltd. These two sales contracts are expected to generate
approximately RMB 28 million in total, of which RMB 20 million relates to Hangzhou Ziyin of new 450,000 orders and RMB 8 million
relates to Hangzhou Yiyuan of new 160,000 orders for this year. We are also expanding our OEM business and to get more clients,
especially to focus on online providers, as they have expanded their market share over the past years quickly together with the
change in Chinese consumer’s preferences and occupy a large market share. By the time when we start executing the orders,
we expect that we can have sustainable and increasing business.
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We plan to invest in a Greece Based Private
Smart Tech Apparel Company.
We signed a letter of intent with Tribe, one of the most innovative smart clothing technology
companies internationally. If the transaction is consummated, we conceive that this investment will enhance and expand significantly
our client network and products offering. The smart clothing market is expected to surpass the 2 trillion US dollars in size in
2019 and we believe we are well positioned to capture a part of this market in the wider region.
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We plan to continue to raise the profile of
the KBS brand through enhanced advertising and promotional activities
. We believe that the strong association of KBS brand
with our concept of “French origin, Korean design and made for Chinese” has helped drive our brand positioning and
customers’ receptivity to our products. We intend to further build our brand and deliver a consistent brand image from product
design to sales and marketing. We seek to promote and enhance our presence in China’s casual menswear market by continuing
to adopt proactive marketing strategies and produce high quality, well- designed casual menswear for our target market. In particular,
we aim to increase awareness of our brand through: (1) multi-channel advertising strategies through national television, fashion
magazines, billboards and other media channels; (2) further assisting our distributors’ regional advertising efforts; (3)
distinctive store and product launch campaigns, including special events for new product launches and large-scale grand opening
events for new stores, particularly new corporate stores; (4) update of the decoration and layout of a number of existing stores
which have been in operation for years to improve the shopping experience; (5) participation in fashion shows; and (6) sponsorships
of selected high-impact events. We believe that these advertising and promotional activities will help to further strengthen brand
awareness in our target market and enhance customer loyalty.
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We plan to expand and build upon our design
and product development capabilities.
We intend to further strengthen our design and product development capabilities
by accelerating the commercialization of design concepts, expanding our product offerings and continuing to develop what we believe
is unique casual menswear. We plan to further invest in design and product development and expand our design and product development
team by attracting talented designers, either domestic or international, and training young graduates from leading fashion design
institutes. We believe that combining western fashion design experience with our local designer’s understanding of the China
market and aesthetic will enable us to create fashionable yet popular casual menswear for consumers in China. We also intend to
cooperate with our suppliers to develop new materials and fabrics which we believe will give customers a unique fashion product
and create new market opportunities. We believe that our focus on designing unique and quality casual menswear will allow us to
maintain our competitiveness and help to enhance our sales and overall profitability.
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We plan to expand our production capacity to expand and diversify our product offerings
. Our production facility is located in Taihu City, Anhui Province, China, consisting of total 110,557 square meters of land. Currently this facility has a production capacity of 2 million pieces of clothes per year and can accommodate 5,000 workers. This production facility mainly produces OEM products for famous sportswear producers, some successful online brand stores and fulfill some overseas orders. The construction of our facility commenced in 2011 and takes place in four phases: Phase 1 consists of the construction of a 5-story dormitory; Phase 2 is to add facilities with annual production capacity of five million pieces of clothes. We have completed the construction of facilities for Phase 1 and Phase 2 by the end of 2014. Although we have the designed capacity of 5 million pieces yearly, the facility currently may only produce 2 million pieces per year. Phase 3 construction has been delayed because the local government needs additional time to conclude negotiations with local residents over appropriate resettlement terms. Once the government settles with the local residents, the phase 3 and 4 can be continued. Phase 4 will include production facilities with annual production capacity of 10 million pieces, an office building, staff quarters and living facilities. Upon completion, the new facility is expected to have a production capacity of 20 million pieces and accommodate 5,000 workers. Please see “Production” below for a more complete explanation of our plans for the expansion of our production capacity. We anticipate that the new production facility will allow us to further refine our existing product lines by offering more styles within our existing apparel and accessories categories and to introduce additional, complementary apparel and accessories categories into our product line. We currently introduce 500 to 900 different styles of products each year and intend to increase the number of our product offerings in the future.
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We plan to expand our international market and
attract more orders from overseas.
Starting from year 2016, we have been awarded international OEM orders for producing
clothes with overseas brands. Such orders are usually large and continuous. Due to the completion of phase 2 construction of our
Anhui factory, we have enough production capacity to take on large orders. The current utilization rate of the Anhui factory is
still quite low and we expect to invest more in attracting more large orders from overseas.
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The KBS Brand
We are engaged in a highly competitive
industry in which brand image and recognition is critical to attracting customers to purchase our products. We have adopted KBS
as a uniform brand name and image for all stores in our distribution network and on all products sold in those stores. The KBS
brand was created by Ms. Qinghua Ye in 2006 and registered with the trademark administration authority in 2008. Subsequently, Ms.
Ye assigned the KBS trademark to Hongri PRC in 2008. In 2009, Hongri PRC transferred this trademark to France Cock, which then
licensed such trademark back to Hongri PRC. Based on our sharp rise in revenue since 2006, we believe that the KBS brand has gained
a following in the casual menswear market in the cities where our products are sold.
To promote our brand, we have developed
and implemented brand management policies in all of our corporate stores and franchised stores. Our brand management policies set
out detailed requirements for store decorations and display of products. This enables us to project a consistent brand image. In
addition, each season, our design and product development team develops display concepts, including the presentation of our collections
in the stores and the color schemes for the backdrops. We also work closely with our distributors to supervise the daily operations
of franchised stores through unscheduled visits to ensure that our brand management policies are properly followed.
We may suspend the supply of our products
or terminate distribution agreements in the event that any of our distributors or their sub-distributors consistently fails to
comply with our brand management policies.
Our Products
Our apparel products include cotton and down jackets, sweaters, shirts, T-shirts, jeans and trousers.
Accessories include shoes, bags, socks and caps. In 2018, the suggested retail prices of our products ranged from RMB 15 to RMB1,599
(approximately $2 to $237) for our apparel products and RMB178 to RMB1599 (approximately $26 to $236) for our accessory products.
Since 2006, we have launched 4,056 collections of new products, each year with a different theme to highlight the current trends
in menswear for the season.
Our Design
We believe one of our key strengths is our internal design and
product development team, which designs products that reinforce our brand image. Major parts of our products are designed by our
internal design and product development team with the collaboration of Korean designers. As of December 31, 2018, our design and
product development team consisted of 20 members, including one senior designer with over five years of working experience. Final
design concepts are approved by Mr. Keyan Yan, who has more than 27 years of experience in the industry. All of the other designers
are graduates of professional design schools in China. We believe that our design and product development team is innovative and
passionate and that the individual experience of each of our designers helps bring new and exciting products to our customers.
Our design and product development team conceptualizes each season’s collections through an interactive process, taking into
account our brand strategy, product image and market feedback, drawing inspirations from domestic and international fashion trends
and collaborating with both our suppliers and distributors to fine-tune our designs. In particular, we collaborate with our suppliers
to develop a variety of materials and fabrics for our products. We also involve distributors in our product selection process to
take advantage of their market intelligence, which helps us to adapt to constantly changing customer preferences in local markets.
Our designers also attend various domestic and international fashion shows to keep abreast of the latest fashion trends.
Starting from year 2015, design of our products comes from three
channels. In addition to designing products by our in-house staff, we outsource to certain reputable designers. From time to time,
our ODMs also will directly sell their designed products to us.
In a typical year, we design and make around 1,500 prototypes. After the initial product selection, internal
cost analysis of approved prototypes and final selection by distributors at the sales fairs, we eventually select approximately
750 designs for mass production. Final design of all of our products will be approved by our Chairman, Mr. Yan.
Our Distribution Network
We have established a nationwide distribution
network consisting of corporate stores and franchised stores covering 10 of China’s 32 provinces and centrally administered
municipalities.
Corporate Stores
As of December 31, 2018, we owned and operated
1 corporate store with the floor area of approximately 120 square meters. As part of our corporate strategy, we closed 17 corporate
stores in last two years because of the low profitability of certain corporate stores. In the years ended December 31, 2018, 2017
and 2016, sales through our corporate stores accounted for 13%, 29.4% and 13% of our total revenues, respectively.
We directly own and operate our corporate
store. This direct control enables us to have closer relationship with our ultimate customers and better understanding of market
trends and consumer preferences. Required capital for opening of each store depends on the location and area of the designated
store. On average, the renovation cost per store is around $67,000 and the first year of rent payment is around $140,000 including
premium paid to the previous owner. Rental period varies from two to five years. The total capital required to open a new store
is generally around $207,000 per store. Once negotiation of rent is concluded, it takes one to two months to open up a store. We
usually open up stores right before a peak season, such as labor holiday in May, National holiday in October and Chinese New Year
in January/February. On average, new stores break even after one to three months of operation.
We currently have one standard designs
for our corporate stores located in Fujian Province. They were considered as flagship stores for our distributors’ reference.
Because in year 2016 and 2015 we closed some corporate stores, the inventories of these stores were cleared through promotion exhibitions
we held in the third-tier cities at lower prices.
For corporate stores opened in second tier
cities, we normally have a higher aesthetic standard compared with corporate stores in third and fourth tier cities. We generally
locate our corporate stores at street level to access high pedestrian flow. Normally, we will sell in-season stock in our second-tier
city corporate stores. Our second-tier city corporate stores are also designed to showcase our marketability to potential distributors
so as to induce them to join our distributorship. For stores opened in the third and fourth tier cities, we normally sell some
of our slow-moving or off-season stock at a discount due to our awareness of the generally lesser amount of disposable income available
to residents of these cities. During certain times of the year, such as the New Year, Chinese New Year and Labor Day, we will organize
promotional discounts together with our franchised stores to attract more customers and increase our stock turnover.
Franchised
Stores
We sell a substantial amount of our products
to our franchised distributors who in turn sell them to retail customers through KBS branded retail stores operated by our distributors
or their sub-distributors. Since 2013, we have also been selling products to 3 provincial distributors without their own stores,
or the no-store distributors, on a trial basis. We do not have any ownership in, or controlling relationship with, these franchised
stores, but we have entered into distribution agreements with them in the Company’s standard form, pursuant to which we require
distributors and their sub-distributors to sell only KBS products in these stores. Distributors are responsible for selecting and
ordering products from us and overseeing the sales in the stores operated by them and their sub-distributors. By selling directly
to our distributors, we can recognize revenues upon delivery to our distributors and delegate the distribution responsibilities
to our distributors. This allows us to distribute our merchandise to a wide geographic area and penetrate markets by leveraging
the local market knowledge of our distributors and their sub-distributors. This also minimizes our inventory and sales risks while
allowing us to allocate our resources to our core competitive strengths of design, brand management and product development. We
believe that our cooperation with distributors has enabled us to expand our business and accelerate our sales growth at much lower
costs and operational risk and achieve brand recognition throughout China.
We have been building up our selected franchised
distributor network since 2007. As of December 31, 2018, we had 11 franchised distributors who operated 32 retail stores directly
or through their sub-distributors, all of which were stand-alone stores, which were typically located in commercial centers, including
department stores or shopping malls, in their cities. All these distributors have worked with us for about 1 to 8 years. We have
not encountered any material dispute or financial difficulty with our key distributors. The average floor area of each retail store
was approximately 78 square meters as of December 2018. The number of retail stores has grown significantly in recent years from
7 as of December 31, 2006, with the aggregate floor area increasing from 560 square meters as of December 31, 2006 to 2,635 square
meters as of December 31, 2018. In the years ended December 31, 2018, 2017 and 2016, sales through our distributors accounted for
73%, 63.3% and 78% of our revenues, respectively.
During each of the fiscal years ended December
31, 2016, 2017 and 2018, we had no customer exceeding 10% of our net sales.
Sales generated by our five best-performing
franchised distributors accounted for approximately 29.3%, 23.8% and 28.3% of our revenues in the years ended December 31, 2018,
2017 and 2016, respectively. Those top distributors have been with us since 2007 or 2008 and have grown organically with us. At
the same time, we are exploring more distributors in other regions including relatively small distributors to grow with their businesses.
Although we rely on distributors for the sales and marketing of our products, we believe our business is not substantially dependent
on any individual distributor.
We are highly selective in appointing distributors.
We select our distributors based on a number of criteria, including experience in the menswear retail industry, sales channels,
business resources, brand promotion capabilities and ability to help us implement our broader business strategies. We maintain
good relationships with many regional or local distributor candidates which we identify through our internal research and external
referrals but only appoint a handful of them to become our distributors. We evaluate the relevant experience of the distributor
candidates in operating retail stores, their financial condition and sources of funding required for the establishment of a regional
distribution network and their ability to develop a network of retail stores in the designated distribution region of a given distributor
before we make any appointment.
Once appointed, each distributor must enter
into a distribution agreement with us. We do not own any interest in any of our distributors, their sub-distributors or the retail
stores they operate. The distribution agreements we typically enter into with distributors do not allow us to be involved in the
daily operating, financing or other activities of the distributors, except that distributors need to comply with our brand management
policies and pricing and store management guidelines. Key terms of our standard distribution agreement include:
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Product Exclusivity
. Our distributors are required
to sell only our products at KBS branded retail outlets managed by them or authorized retailers.
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Geographic Coverage
. Distributors are granted
exclusive rights to distribute our products (directly and indirectly through their sub-distributors) in the retail stores within
the specified geographic area with no overlapping of distributors within our distribution network. However, we retain the right
to operate direct stores anywhere regardless of whether we have appointed distributors there.
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Duration
. The distribution agreements generally
have an initial term of one year and are renewable at our discretion after taking into account factors such as compliance with
our brand management policies and sales performance.
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Distributor Pricing
. Distributors agree to
order our products at a discount from our suggested retail prices. The discounted wholesale prices to distributors are classified
into the following three categories: provincial distributor at a discount of 35% of retail price, district distributor is 30%
of retail price and the wholesale distributor is 25% of retail price.
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Minimum Purchase Requirement
. Each of our distributors
is customarily expected to purchase a minimum amount of our products for each trade fair held biannually according to their present
and expected distribution network. The minimum is typically RMB800,000 (approximately $110,000) for each store.
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Payment and Delivery.
Normally, we expect distributors to pay us RMB0.5 million (approximately $74,000) to RMB1 million (approximately $148,148) as a deposit upon placing an order. Upon delivery of the orders, we will deduct amounts on deposit from the purchase price. For new and small district distributors, we normally require them to pay the balance before the delivery of its products. We may also accept payment on credit terms to the extent requested by distributors experiencing working capital difficulties or encouraging them to order more. The amount and duration of credit granted to each distributor will depend on its financial position and creditworthiness. We handle the arrangements for delivery of our products, but the distributors are normally expected to bear the related costs and expenses.
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Return of Products
. We will only accept product
returns from distributors for quality reasons and only if the distributors followed our standard procedures in processing the
returned products. So far, we have not experienced any product returns due to expressed quality reasons.
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Retail Pricing
. Other than at times when we
launch promotional campaigns or adjust our strategies, distributors must adopt, and are required to procure their sub-distributors
to adopt, our suggested retail prices for products. Distributors must obtain our consent before launching any distributor specific
special offers.
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Brand Management
. Distributors must comply
with our brand management policies and store management guidelines. We may impose penalties, forfeiture of deposit, suspend supply
of products and terminate the agreement in the event of any breach of such policies.
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Termination
. We may generally terminate the
distribution agreements and seek indemnification in the event of breach by distributors. In the event of some types of breach,
we may not terminate the agreement but have other remedies. For example, if a distributor fails to order all products provided
for under the distributorship agreement, we may instead impose forfeiture of deposit or withhold certain benefits.
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When opening new retail stores, our distributors
conduct research on the market potential of the proposed retail sites, after which they will provide us with an application for
opening a new retail store. In reviewing applications, we consider factors including the store location, store layout, available
area, market opportunities, competitors and estimated sales. We conduct selected on-site investigations to verify applications
filed by our distributors. Our retail stores are generally located in convenient retail locations in their respective cities and
thus benefit from high volumes of pedestrian traffic.
Effective monitoring of distributors and
their retail stores is critical to our success. We have a team in our marketing, sales and distribution department to monitor our
distributors’ and their sub-distributors’ performance, who conduct on-site inspections of selected retail stores each
quarter without prior notice to ensure compliance with our store management guidelines. According to the results of our inspections,
we, from time to time, make suggestions to our distributors with respect to the opening or closure of their retail stores. Distributors
also need to submit to us their annual/ semi-annual plans to estimate their orders for the next season and their plan to improve
the performance of existing retail stores or expand by opening new retail stores. This reporting system enables us to access up-to-date
sales projections of our distributors and their sub-distributors, which reflects the overall level of retail sales of our products.
It also provides us with the expansion plan of each distributor which helps us prepare our overall development plan in a more accurate
manner.
We invite our distributors, as well as a select number of their sub-distributors and retail store managers,
to attend our sales fairs, which are held twice a year. During the sales fairs, we discuss with our distributors and their sub-distributors
the upcoming product line. Apart from participating in two sales fairs each year, our distributors visit us from time to time and
contact us as necessary, which allows us to have access to updated market information. We also provide training for distributors
and their sub-distributors in the areas of sales techniques, customer service and product knowledge, typically prior to the launch
of our new collections each year. We believe that these investments help to improve the operations of the sales network and provide
additional value-added services to retain our distributors and their sub-distributors.
The following table lists by region the number of retail stores
operated by distributors and sub-distributors as of December 31, 2018:
Location
|
|
As of December 31,
2018
|
|
Fujian
|
|
6
|
|
Guangdong
|
|
2
|
|
Guangxi
|
|
3
|
|
Jiangsu
|
|
4
|
|
Anhui
|
|
2
|
|
Chongqing
|
|
4
|
|
Tianjin
|
|
3
|
|
Hebei
|
|
4
|
|
Sichuan
|
|
4
|
|
Total
|
|
32
|
|
Pricing Policy
We sell our products to our distributors at uniform discounts from our suggested retail prices. We have
a suggested retail price policy that applies to all our stores to help maintain brand image, ensure consistent pricing levels from
region to region and prevent price competition among our distributors. In determining our pricing strategies, we take into account
market supply and demand, production cost and the prices of our competitors’ similar products. Our sales representatives
collect and record the retail prices of our products sold by our retailers. We analyze the information collected and engage in
discussions with our distributors to ensure that they follow our pricing policy. See “Franchised Stores” above.
Production
Originally located in Shishi City in Fujian
Province and started production in 2006, our production facility is currently located in Taihu City in Anhui Province, China. The
facility currently has a production capacity of 2 million pieces of clothes per year. This production facility mainly produces
OEM products for famous sportswear producers. Our production facility was operating at full capacity between 2009 and 2012. In
2014, we produced about 0.39 million units at the operating capacity of 19.5%; while in 2015,we produced about 0.48 million units
at the operating capacity of 24%. In 2016, we produced about 0.54 million units at the operating capacity of 27%.
In 2017 and 2018, we produced about 0.30
million and 0.49 million units at the operating capacity of 15% and 25%.
Since 2011, we have been negotiating with the local government
to acquire land use rights for our current facility consisting of 110,557 square meters. We obtained a portion of such land use
rights for two parcels of land of 7,405 square meters and 2,440 square meters in March 2012 and May 2012, respectively, and have
finished the construction of 8,572 square meters of staff dormitories and 22,292 square meters as workshop buildings and offices.
We started to use the dormitory and factory in year 2015 and moved into the offices at the beginning of 2016. Due to the local
government’s need for additional time to conclude negotiations with local residents over appropriate resettlement terms,
the construction of the adjacent facility on the third parcel of land has been delayed. While we cannot guarantee when and whether
the construction of the adjacent facility on the third parcel of land will be eventually completed, we believe we will be in a
better position to schedule our construction plan once we acquire the land use right of the third parcel of land. Once completed,
our total production capacity of the facility is expected to increase to 20 million pieces per year from the current capacity of
2 million pieces per year.
All of the products produced by our ODM
and OEM contract manufacturers bear the brand name KBS. As of December 31, 2018, we had 3 ODM contract manufacturers and 3 OEM
contract manufacturers. In the years ended December 31, 2017 and 2016, we had 3 and 6 OEM contract manufacturers, respectively.
Our sourcing strategy is based upon the quality of fabrics and workmanship that our customers expect from the KBS brand. The costs
of our outsourced production amounted to approximately $8.38 million, $10.94 million and$26.1 million for years ended December
31, 2018, 2017 and 2016, respectively, accounting for approximately 27.3%, 31% and 66.8% of our total cost of sales in the respective
periods.
As of December 31, 2018, our principal ODM and OEM contract suppliers
included the following:
No.
|
|
|
1
|
|
Bai Tian Ni (Fujian) Clothing fabric Co. Ltd
|
2
|
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Shishi Hua Lai Shi Clothing Co. Ltd
|
3
|
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Jinjiang City Hongtawanheng trading Co. Ltd
|
4
|
|
Fujian Gumaite Clothing Technology Co. Ltd
|
5
|
|
Shishi Rongpeng Clothing Co. Ltd
|
6
|
|
Hubei Mingyuan Clothing Co. Ltd
|
We are not materially reliant on any single ODM or OEM contract
supplier.
Inventory Management
We recognize that controlling the level of inventory is important
to our overall operational efficiency and cost control. Based on the purchase orders our distributors and the department store
chains place at our biannual sales fairs, we are able to anticipate the demand for our products in advance and plan ahead for our
own manufacturing and the orders we will be required to place with our ODM and OEM contract manufacturers. We generally plan purchases
of raw materials and place manufacturing orders with our ODM and OEM contract manufacturers immediately after each of our two seasonal
sales fairs, usually in May for our autumn and winter products and in October for our spring and summer products, where we confirm
sales orders with our distributors and department store chains. This enables us and our ODM and OEM contract manufacturers to have
sufficient time, ranging from two to eight weeks, to produce the products and provide our products suitable for a specific season
to our distributors and department store chains on a just-in-time basis so as to minimize our inventory levels. The alternative
way to control cost is when if we have chance to buy materials which the price is much lower than market price, we will buy it
in advance and give to OEM contract manufactures use our material to produce.
Quality Control
Product quality control is a critical aspect of our business.
Our dedicated quality control team performs various quality inspection and testing procedures, including random sample testing
at different stages of our production process, to ensure that our products meet or exceed the expectations of our consumers. We
also perform routine product inspections on every batch of our products and sample testing to ensure consistent quality of our
products, including semi-finished and finished products.
We have implemented a centralized system for procurement and
inspection of raw materials and ancillary components to help ensure a stable and high quality supply. Those materials and components
that fail to meet our tests may be returned to the suppliers for replacement. Our quality control team also carries out quality
control procedures on the products produced by our ODM and OEM contract manufacturers. We conduct on-site inspections of our ODM
and OEM contract manufacturers before we enter into business relationships with them. We also send our in-house quality control
staff on-site to our ODM and OEM contract manufacturers to monitor the entire production process. The initial product inspections
are performed on-site by our staff before these products are shipped to our headquarters for further inspection and storage in
our warehouse. We also provide technical training to ODM and OEM contract manufacturers to assist them with quality control of
the production processes and inspect pre-production samples and finished products from ODM and OEM contract manufacturers. We have
not encountered any material disruptions to our business as a result of the failure of any of our ODM and OEM contract manufacturers
to meet our quality standards.
In order to further improve the quality of our products and
shorten our delivery cycle, we intend to increase our control over the manufacturing process and production cycle of our ODM and
OEM contract manufacturers, primarily by requiring our ODM and OEM contract manufacturers to implement stricter and more comprehensive
quality control procedures, which cover each stage of the production process, from raw material selection and procurement to finished
products packaging and delivery. We also intend to apply more stringent standards for inspecting products manufactured for us by
our ODM and OEM contract manufacturers.
Marketing and Advertising
We have conducted multi-channel marketing
campaigns to advertise our products to our target customers through advertising in newspapers, magazines, the Internet, and billboards,
and organizing regular and frequent in-store marketing activities and road shows.
We have implemented strict requirements
on our distributors with respect to the display and promotion of our products to ensure consistent branding and enhance marketing
results. Our distributors are required to ensure that our marketing strategies are implemented at the retail outlets managed or
authorized by them, including displaying our products according to our specifications and using our billboard advertisements. We
also assign sales representatives to monitor the in-store displays of our products at various retail outlets on a regular basis
to help ensure that our retailers have followed our product display policies.
In the years ended December 31, 2018, 2017 and 2016 our total
advertising and promotional expenses amounted to approximately $1.21 million, $1.59 million and $1.55 million, respectively, which
accounted for approximately 6.6%, 7.5% and 3.8% of our revenues in the respective periods.
Competition
The menswear industry in China is a fragmented
industry. Competition mainly comes from local market players such as Exceed, Xiniya, Zuoan and Cabbeen. We believes that we differentiate
ourselves by providing more fashionable, younger-looking and leisure products, and competitive pricing without giving up the casual
feel of our products.
We compete primarily on the basis of product
design, brand recognition, operational efficiency and a low cost structure. Some of our domestic competitors have a stronger customer
base, greater resources and more industry expertise than us. However, we believe that we can continue to successfully compete with
our local competitors due to our unique product designs.
Intellectual Property
We currently have the licenses to use two registered trademarks
in the PRC.
The registered trademarks on which we have licenses are the
following:
Trademark
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|
Registration No.
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|
|
Valid Term
|
KBS
|
|
|
4342760
|
|
|
Jan 1, 2019 - August 28, 2028
|
|
|
|
|
|
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Ka bi sports
|
|
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5462336
|
|
|
March 14, 2010 - March 12,2020
|
We believe that these trademarks provide
significant value as they are important for marketing and building brand recognition. We are not aware of any third party currently
using trademarks similar to our trademarks in the PRC on the same products.
Insurance
We do not have any business liability,
interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business
insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the
risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure.
See “Risk Factors—Risks Related to Our Business—We have limited insurance coverage in China and may not be able
to recover insurance proceeds if we experience uninsured losses.”
Regulation
Because our primary operating subsidiaries
are located in China, we are subject to China’s national and local laws detailed below. We believe that we are in material
compliance with all registrations and requirements for the issuance and maintenance of all licenses required by the governing bodies
and that all license fees and filings are current. This section summarizes the major PRC regulations relating to our business.
Regulations Relating to Foreign Investment
Investment activities in the PRC by foreign investors are mainly
governed by the Guidance Catalog of Industries for Foreign Investment (2017 revision), or the Catalog, which was promulgated jointly
by MOFCOM and the National Development and Reform Commission, or the NDRC, on June 28, 2017 and entered into force on July 28,
2017. The Catalog divides industries into four categories in terms of foreign investment, which are “encouraged,” “restricted,”
and “prohibited,” and all industries that are not listed under one of these categories are deemed to be “permitted.”
Establishment of wholly foreign-owned enterprises is generally allowed in 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, foreign investment in restricted category projects is subject to 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.
In June 2018, MOFCOM and NDRC promulgated the Special Management
Measures (Negative List) for the Access of Foreign Investment, or the Negative List, effective July 2018. The Negative List expands
the scope of permitted industries by foreign investment by reducing the number of industries that fall within the Negative List
where restrictions on the shareholding percentage or requirements on the composition of board or senior management still exists.
Foreign investment in value-added telecommunications services (except for e-commerce) falls within the Negative List.
In October 2016, MOFCOM issued the Interim Measures for Record-filing
Administration of the Establishment and Change of Foreign-invested Enterprises, or FIE Record-filing Interim Measures, most recently
amended in July 2017. Pursuant to FIE Record-filing Interim Measures, the establishment and change of foreign-invested enterprises
are subject to record-filing procedures, instead of prior approval requirements, provided that such establishment or change does
not involve special entry administration measures. If the establishment or change of foreign-invested enterprises matters involve
the special entry administration measures, the approval of the Ministry of Commerce or its local counterparts is still required.
Regulations Relating to Product Quality
The principal legal provisions governing
product liability are set forth in the PRC Product Quality Law, which was promulgated in February 1993 by the SCNPC and amended
in July 2000 and August 2009.
The PRC Product Quality Law stipulates
the responsibilities and obligations of product sellers and producers. Violations of the PRC Product Quality Law may result in
the imposition of fines. In addition, the seller or producer may be ordered to suspend its operations, and its business license
may be revoked. There may also be criminal liability in serious cases.
According to the PRC Product Quality Law,
consumers or other victims who suffer injury or property losses due to product defects may demand compensation from the manufacturer
as well as the seller. After compensating the consumer, the seller may recover the corresponding amount from the manufacturer if
the manufacturer is responsible for the product defects, and vice versa.
Regulations Relating to Consumer Protection
The principal legal provisions for the
protection of consumer interests are set forth in the Law of the PRC on Protection of Consumer Rights and Interests, or the Consumer
Protection Law, which was promulgated in October 1993 amended in October 2013. The Consumer Protection Law sets forth standards
of behavior that businesses must observe in their dealings with consumers.
Violations of the Consumer Protection Law
may result in the imposition of fines. In addition, the violating entity may be ordered to suspend its operations, and its business
license may be revoked. There may also be criminal liability in serious cases.
According to the Consumer Protection Law,
if the legal rights and interests of a consumer are violated during the purchase or use of goods, the consumer may seek compensation
from the seller. If the manufacturer or an upstream distributor is responsible, after compensating the consumer, the seller may
recover the corresponding amount from the manufacturer or the upstream distributor. Consumers or other persons who suffer personal
injury or property damages due to defects in products may seek compensation from the manufacturer as well as the seller. After
compensating the consumer, the seller may recover the corresponding amount from the manufacturer if the manufacturer is responsible
for the product defects, and vice versa.
Regulations Related to Trademarks
The PRC Trademark Law, adopted in 1982
and revised in 2001 and 2013, protects the proprietary rights to registered trademarks. The Trademark Office under the State Administration
of Industry and Commerce handles trademark registration and grants a term of ten years to registered trademarks and another ten
years to trademarks as requested upon expiry of the prior term. Trademark license agreements and transfer agreements must be filed
with the Trademark Office for record.
Regulations Relating to Environmental Matters
Our facilities are subject to various governmental regulations
related to environmental protection. We use a myriad of chemicals in our operations and produce emissions that could pose environmental
risks. Our manufacturing facilities are subject to various pollution control regulations with respect to noise, water and air pollution
and the disposal of waste and hazardous materials, including, China’s Environmental Protection Law, Law of the People’s
Republic of China on Appraising of Environment Impacts, China’s Law on the Prevention and Control of Water Pollution and
its implementing rules, China’s Law on the Prevention and Control of Air Pollution and its implementing rules, China’s
Law on the Prevention and Control of Solid Waste Pollution, and China’s Law on the Prevention and Control of Noise Pollution.
We are subject to periodic inspections by local environmental protection authorities.
We did not incur material costs in environmental
compliance in fiscal years 2018, 2017 and 2016. We believe we are in material compliance with the relevant PRC environmental laws
and regulations. We are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.
Regulations Related to Employment
The
PRC Labor Law
and the
Labor Contract Law
require
that employers must execute written employment contracts with full-time employees. All employers must compensate their employees
with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result
in the imposition of fines and other administrative sanctions, and serious violations may constitute criminal offences.
On December 28, 2012, the PRC Labor Contract Law was amended
with effect on July 1, 2013 to impose more stringent requirements on labor dispatch. Under such law, dispatched workers are
entitled to pay equal to that of full-time employees for equal work, but the number of dispatched workers that an employer hires
may not exceed a certain percentage of its total number of employees as determined by the Ministry of Human Resources and Social
Security. Additionally, dispatched workers are only permitted to engage in temporary, auxiliary or substitute work. According to
the
Interim Provisions on Labor Dispatch
promulgated by the Ministry of Human Resources and Social Security on January 24,
2014, which became effective on March 1, 2014, the number of dispatched workers hired by an employer shall not exceed 10%
of the total number of its employees (including both directly hired employees and dispatched workers). The Interim Provisions on
Labor Dispatch require employers not in compliance with the PRC Labor Contract Law in this regard to reduce the number of its dispatched
workers to below 10% of the total number of its employees prior to March 1, 2016.
Enterprises in China are required by PRC laws and regulations
to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance
plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident
fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances,
of the employees as specified by the local government from time to time at locations where they operate their businesses or where
they are located. The enterprise may be ordered to pay the full amount within a deadline if it fails to make adequate contributions
to various employee benefit plans and may be subject to fines and other administrative sanctions.
Regulations Relating to Foreign Exchange
Regulations on Foreign Currency Exchange
Under the PRC Foreign Currency Administration Rules promulgated
on January 29, 1996 and last amended on August 5, 2008 and various regulations issued by the State Administration of
Foreign Exchange and other relevant PRC government authorities, payment of current account items in foreign currencies, such as
trade and service payments, payment of interest and dividends can be made without prior approval from the State Administration
of Foreign Exchange by following the appropriate procedural requirements. By contrast, the conversion of RMB into foreign currencies
and remittance of the converted foreign currency outside the PRC for the purpose of capital account items, such as direct equity
investments, loans and repatriation of investment, requires prior approval from the State Administration of Foreign Exchange or
its local office.
On February 13, 2015, the State Administration of Foreign
Exchange promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, effective
from June 1, 2015, which cancels the requirement for obtaining approvals of foreign exchange registration of foreign direct
investment and overseas direct investment from the State Administration of Foreign Exchange. The application for the registration
of foreign exchange for the purpose of foreign direct investment and overseas direct investment may be filed with qualified banks,
which, under the supervision of the State Administration of Foreign Exchange, may review the application and process the registration.
The Circular of the State Administration of Foreign Exchange
on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise was promulgated
on March 30, 2015 and became effective on June 1, 2015. According to this Circular, a foreign-invested enterprise may,
according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for
which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests (or for which the bank
has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to
settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use its
capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic
equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic re-investment
registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange bureau
(bank) at the place of registration. The Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies
on the Control over Foreign Exchange Settlement of Capital Accounts was promulgated and became effective on June 9, 2016.
According to this Circular, enterprises registered in PRC may also convert their foreign debts from foreign currency into Renminbi
on self-discretionary basis. This Circular provides an integrated standard for conversion of foreign exchange under capital account
items (including but not limited to foreign currency capital and foreign debts) on self—discretionary basis, which applies
to all enterprises registered in the PRC. This Circular reiterates the principle that Renminbi converted from foreign currency-denominated
capital of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments
in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC
unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make loans for related enterprises
unless it is within the business scope or to build or to purchase any real estate that is not for the enterprise own use with the
exception for the real estate enterprise.
On January 26, 2017, the State Administration of Foreign
Exchange promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and
Compliance Verification, which stipulates several capital control measures with respect to the outbound remittance of profits from
domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board
resolutions regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic
entities must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to this Circular,
domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions,
contracts and other proof as a part of the registration procedure for outbound investment.
Regulations on Foreign Exchange Registration of Overseas
Investment by PRC Residents
The State Administration of Foreign Exchange issued the Circular
on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles,
or Circular 37, which became effective in July 2014, to replace the Circular of the State Administration of Foreign Exchange
on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip Investments by Domestic Residents through
Offshore Special Purpose Vehicles, to regulate foreign exchange matters in relation to the use of special purpose vehicles
by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Circular 37
defines a “special purpose vehicle” as an offshore entity established or controlled, directly or indirectly, by PRC
residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or
offshore assets or interests, while “round trip investment” is defined as direct investment in China by PRC residents
or entities through special purpose vehicles, namely, establishing foreign-invested enterprises to obtain the ownership, control
rights and management rights. Circular 37 stipulates that, prior to making contributions into a special purpose vehicle, PRC
residents or entities be required to complete foreign exchange registration with the State Administration of Foreign Exchange or
its local branch. In addition, the State Administration of Foreign Exchange promulgated the Notice on Further Simplifying and Improving
the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which amended Circular 37 and became
effective on June 1, 2015, requiring PRC residents or entities to register with qualified banks rather than the State Administration
of Foreign Exchange in connection with their establishment or control of an offshore entity established for the purpose of overseas
investment or financing.
PRC residents or entities who had contributed legitimate onshore
or offshore interests or assets to special purpose vehicles but had not obtained registration as required before the implementation
of the Circular 37 must register their ownership interests or control in the special purpose vehicles with qualified banks.
An amendment to the registration is required if there is a material change with respect to the special purpose vehicle registered,
such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases
in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures
set forth in Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers
of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed
on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions,
such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital
inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange
administration regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulations relating
to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiary to liability
or penalties, limit our ability to inject capital into our PRC subsidiary or limit our PRC subsidiary’s ability to increase
their registered capital or distribute profits.”
Regulations on Stock Incentive Plans
The State Administration of Foreign Exchange promulgated the
Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan
of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous rules issued
by the State Administration of Foreign Exchange in March 2007. Pursuant to the Stock Incentive Plan Notice and other relevant
rules and regulations, PRC residents participating in stock incentive plan in an overseas publicly-listed company are required
to register with the State Administration of Foreign Exchange or its local branches and follow certain other procedures. Participants
of a stock incentive plan who are PRC residents must conduct the registration and other procedures with respect to the stock incentive
plan through a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company or another qualified
institution appointed by the PRC subsidiary. In addition, the PRC agent is required to update the relevant registration should
there be any material change to the stock incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf
of the PRC residents who have the right to exercise the employee stock options, apply to the State Administration of Foreign Exchange
or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise
of the employee stock options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock
incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the
PRC opened by the PRC agents prior to distribution to such PRC residents.
We have adopted an equity incentive plan in 2018, under which
we will have the discretion to award incentives and rewards to eligible participants. We have advised the recipients of awards
under our equity incentive plan to handle relevant foreign exchange matters in accordance with the Stock Incentive Plan Notice.
However, we cannot guarantee that all employee awarded equity-based incentives can successfully register with SAFE in full compliance
with the Stock Incentive Plan Notice. See “Risk Factors—Risks Related to Doing Business in China—Any failure
to comply with PRC regulations regarding employee share incentive plans may subject the PRC plan participants or us to fines and
other legal or administrative sanctions.”
Regulations on Dividend Distribution
Distribution of dividends of foreign investment enterprises
are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and amended in 2000 and 2016, respectively, and the
Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990 and amended in 2001 and 2014, respectively. Under
these regulations, foreign investment enterprises in the PRC may distribute dividends only out of their accumulative profits, if
any, determined in accordance with PRC accounting standards and regulations. In addition, no less than 10% of the accumulated profits
of the foreign investment enterprises in the PRC are required to be allocated to fund certain reserve funds each year unless these
reserves have reached 50% of the registered capital of the enterprises. A PRC company is not permitted to distribute any profits
until any losses from previous fiscal years have been offset. Profits retained from prior fiscal years may be distributed together
with distributable profits from the current fiscal year. Under our current corporate structure, our Marshall Islands holding company
may rely on dividend payments from Hongri PRC, which is a wholly foreign-owned enterprise incorporated in China, to fund any cash
and financing requirements we may have. Limitation on the ability of our other PRC subsidiaries to make remittance to Hongri PRC
and on the ability of Hongri PRC to pay dividends to us could limit our ability to access cash generated by the operations of those
entities. See “Risk Factors—Risks Related to Doing Business in China—We rely to a significant extent on dividends
and other distributions on equity paid by our principal operating subsidiary to fund offshore cash and financing requirements.”
Regulations Relating to Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including
the Ministry of Commerce, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation,
the State Administration for Industry and Commerce, the China Securities Regulatory Commission and the State Administration of
Foreign Exchange, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which
became effective on September 8, 2006 and was amended on June 22, 2009. These regulations, among other things, require
that (i) PRC entities or individuals obtain approval from the Ministry of Commerce before they establish or control a special
purpose vehicle overseas, provided that they intend to use the special purpose vehicle to acquire their equity interests in a PRC
company at the consideration of newly issued share of the special purpose vehicle, or Share Swap, and list their equity interests
in the PRC company overseas by listing the special purpose vehicle in an overseas market; (ii) the special purpose vehicle
obtains approval from the Ministry of Commerce before it acquires the equity interests held by the PRC entities or PRC individual
in the PRC company by Share Swap; and (iii) the special purpose vehicle obtains China Securities Regulatory Commission approval
before it lists overseas. See “Risk Factors—Risks Related to Doing Business in China—The approval of the China
Securities Regulatory Commission may be required in connection with this offering under a PRC regulation. The regulation also establishes
more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through
acquisitions.”
Regulations Relating to Taxation
Dividend Withholding Tax
In March 2007, the National People’s Congress enacted
the Enterprise Income Tax Law which became effective on January 1, 2008 and amended on February 24, 2017. According to
Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China
to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Pursuant to the Notice of
the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, issued on January 29, 2008 and
supplemented and revised on February 29, 2008, and the Arrangement between Mainland China and the Hong Kong Special Administrative
Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, which became effective
on December 8, 2006 and applicable to income derived in any year of assessment commencing on or after April 1, 2007 in
Hong Kong and in any year commencing on or after January 1, 2007 in the PRC, such withholding tax rate may be lowered to 5%
if a Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by PRC tax authorities and holds
at least 25% of the equity interest in that particular PRC subsidiary at all times within the 12-month period immediately prior
to the distribution of the dividends. Furthermore, pursuant to the Announcement on Issues concerning “Beneficial Owners”
in Tax Treaties issued on February 3, 2018 by the State Administration of Taxation, when determining the status of “beneficial
owners,” a comprehensive analysis may be conducted through materials such as articles of association, financial statements,
records of capital flows, minutes of board of directors, resolutions of board of directors, allocation of manpower and material
resources, the relevant expenses, functions and risk assumption, loan contracts, royalty contracts or transfer contracts, patent
registration certificates and copyright certificates, etc. However, even if an applicant has the status as a “beneficiary
owner,” if the competent tax authority finds necessity to apply the principal purpose test clause in the tax treaties or
the general anti-tax avoidance rules stipulated in domestic tax laws, the general anti-tax avoidance provisions shall apply.
Enterprise Income Tax
In December 2007, the State Council promulgated the Implementing
Rules of the Enterprise Income Tax Law, which became effective on January 1, 2008. The Enterprise Income Tax Law and its relevant
implementing rules (i) impose a uniform 25% enterprise income tax rate, which is applicable to both foreign-invested enterprises
and domestic enterprises (ii) permits companies to continue to enjoy their existing tax incentives, subject to certain transitional
phase-out rules and (iii) introduces new tax incentives, subject to various qualification criteria.
The Enterprise Income Tax Law also provides that enterprises
organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China
may be considered PRC resident enterprises and therefore be subject to PRC enterprise income tax at the rate of 25% on their worldwide
income. The implementing rules further define the term “de facto management body” as the management body that exercises
substantial and overall management and control over the production and operations, personnel, accounts and properties of an enterprise.
If an enterprise organized under the laws of jurisdiction outside China is considered a PRC resident enterprise for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, it would be subject to the PRC enterprise
income tax at the rate of 25% on its worldwide income. Second, a 10% withholding tax would be imposed on dividends it pays to its
non-PRC enterprise shareholders and with respect to gains derived by its non-PRC enterprise shareholders from transfer of its shares.
On October 17, 2017, the State Administration of Taxation
issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident Enterprise Income Tax at Source, or Bulletin 37,
which replaced the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises
issued by the State Administration of Taxation on December 10, 2009, and partially replaced and supplemented rules under the
Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7,
issued by the State Administration of Taxation on February 3, 2015. Under Bulletin 7, 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 indirect transfer may be
subject to PRC enterprise income tax. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant
gain is to be regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax
filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates
to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected
to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 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. Pursuant to Bulletin 37, the withholding party shall declare and pay the withheld tax to the
competent tax authority in the place where such withholding party is located within seven days from the date of occurrence of the
withholding obligation. Both Bulletin 37 and Bulletin 7 do 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. See “Risk
Factors—Risks Related to Doing Business in China—We and our existing 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.”
Value-Added Tax
In November 2011, the Ministry of Finance and the State
Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In March 2016,
the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan
for Replacing Business Tax by Value-Added Tax. Pursuant to this Pilot Plan and the relevant notice, value added tax at a rate of
6% is generally imposed, on a nationwide basis, on the revenue generated from the provision of service in lieu of business tax
in the modern service industries. Value added tax of a rate of 6% applies to revenue derived from the provision of some modern
services. Unlike business tax, a taxpayer is allowed to offset the qualified input value added tax paid on taxable purchases against
the output value added tax chargeable on the modern services provided.
|
C.
|
Organizational Structure
|
See “—A. History and Development
of the Company—Corporate Structure” above for details of our current organizational structure.
|
D.
|
Property, Plants and Equipment
|
Our company has established a nationwide
distribution network covering 12 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2018,
this network was comprised of 1 corporate store owned and operated by us and 32 franchised stores operated by 11 third-party distributors
or their sub-distributors.
Relocated from Shishi City, Fujian, China in March 2011, our
company’s production facility is currently located in Taihu City in Anhui Province, China. The facility has a production
capacity of 2 million pieces per year and we move in upon the completion of phase 2 in year 2015. By relocating from the coastal
area to Anhui Province, our new facility takes advantage of lower labor costs and a more stable labor supply. We manufacture a
variety of menswear products, including, jeans, shirts, suits and socks. Because of its variety and complexity in the production
process, these products require special sewing machines and workmanship, which we currently do not possess. As a result, the Company
is not yet able to produce KBS branded products and has outsourced its KBS branded product manufacturing to other established ODM
and OEM manufacturers in the Fujian and Zhejiang regions. The Company has completed the second phase construction of its new factory
at the end of 2014. The second phase has an annual production capacity of 5 million pieces subject to our purchasing additional
equipment. Currently Anhui factory mainly produces OEM orders and some international orders.
Our production facility consists of total
110,557 square meters of land. We obtained a portion of such land use rights for two parcels of land of 7,405 square meters and
2,440 square meters in May 2012 and have finished the construction of 8,572 square meters of staff dormitories and 22,292 square
meters as workshop buildings and offices. We started to use the dormitory and factory in year 2015 and moved into the offices at
the beginning of 2016. Due to the local government’s need for additional time to conclude negotiations with local residents
over appropriate resettlement terms, the construction of the adjacent facility on the third parcel of land has been delayed. We
believe we will be in a better position to schedule our construction plan once we acquire the land use right of the third parcel
of land. Once the construction of the new production facilities is completed, our total production capacity of the facility is
expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per year.
In 2016, we closed 1 corporate store and as
of December 31, 2018, we leased the premises for our sole remaining corporate store. We have undertaken various measures to verify
the lessees’ rights to the property leased to us in respect of its stores. In China, all land is owned by the State or other
governmental bodies, and “ownership” is generally evidenced by a land use rights certificate. We rent some stores
that were located in rural areas where land use rights are held collectively by villages and records regarding the ownership of
land use rights are frequently not kept. In these cases, the company has confirmed our ability to lease the stores through communications
with village authorities, and has reviewed electricity and water bills to confirm utilities are being paid by the parties leasing
the premises to us. Based on the results of these efforts, we believe the risk of third party claims against our leases of these
stores is relatively small and the measures taken by our company are sufficient to verify the land use rights for all of its stores.
In addition, the property used as our head
office and corporate store is leased from a related party, whose ownership of the property has been verified by our company. We
paid a total of RMB720,000, RMB 720,000, and RMB 720,000, as rental fees for the existing corporate stores during the fiscal years
2016, 2017 and 2018, respectively. The total area of these 2 corporate stores is 158 square meters. The sales of each store and
its location are shown below:
Area
|
|
Sales in fiscal year 2016(USD)
|
|
|
Sales in fiscal year 2017(USD)
|
|
|
Sales in fiscal year 2018(USD)
|
|
Shishi factory
|
|
|
1,240,354.74
|
|
|
|
772,299
|
|
|
|
691,431
|
|
Quanzhou Dayang (closed in 2016)
|
|
|
470,280.90
|
|
|
|
-
|
|
|
|
-
|
|
Total:
|
|
|
1,710,635.64
|
|
|
|
772,299
|
|
|
|
691,431
|
|
|
ITEM 4A.
|
UNRESOLVED
STAFF COMMENTS
|
Not required.
|
ITEM 5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
We are engaged in the design, development,
marketing and sale of casual menswear in China, including apparel and accessories, which we market under the KBS brand. The KBS
brand was developed in 2006. Before 2012, we were engaged in the design, development, marketing and sale of fashion sportswear
in China. Since our products feature a unique and stylish design that is more fashionable than traditional sportswear, as well
as quality fabrics and materials and the sportswear market was becoming more and more competitive, in late 2011 we turned our
focus on casual menswear market which has higher profit margin. KBS’s apparel products include cotton and down jackets,
sweaters, shirts, T-shirts, Jeans and trousers. Accessories include shoes, bags, belts and caps. In 2016, the suggested retail
prices of KBS’s products ranged from RMB199 to RMB1,499 for its apparel products and RMB15 to RMB899 for its accessory products.
KBS holds new products launch events twice every year, one in spring and the other in autumn. Since 2006, we have launched about
1,500
,536
collections of new products each year with a different theme to highlight
the current trends for the season. KBS’s marketing concept is “French origin, Korean design and made for Chinese.”
KBS’s customers are male middle-class consumers in the 20-40 age range, primarily located in tier two and tier three cities
in China. The company has adopted “KBS” as a uniform brand name, which stands for “Keep Best Style”, and
KBS are designed by us for a uniform look and feel that fits our brand image, with in-store displays that accentuate the quality
and style of our products across all stores in our distribution network and on all products sold in those stores. We believe that
the KBS brand has become a recognized brand name in the cities where their products are sold.
We have established a nationwide distribution
network covering 10 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2018, this network
was comprised of 1 corporate store owned and operated by us and 32 franchised stores operated by 11 third-party distributors or
their sub-distributors. The number of stores grew significantly from 1 corporate store and 7 franchised stores as of December 31,
2006 to 31 corporate stores as of December 31, 2012 and 96 franchised stores as of December 31, 2013, and decreased to 84 stores
as of December 31, 2014. Because of the recent softening of economic growing in China and fierce competition from our competitors,
online store sales of franchised stores and corporate stores went down in 2015 as compared with the previous year. In 2017 and
2018, the distributors closed 15 and 8 franchised stores, respectively, and we closed 1 corporate store in year 2016. We generate
more revenues from OEM in 2018 and intend to generate more in OEM and target area from acquisitions.
KBS also acts as an original design manufacturer,
or ODM, upon request. Income from such services accounted for 14%, 7.3% and 9% of revenue for the years ended December 31, 2018,
2017 and 2016, respectively.
Relocated from Shishi City, Fujian, China
in March 2011, KBS’s production facility is currently located in Taihu City in Anhui Province, China. The company believes
that the shortage of labor and rising wage expectations in China, especially in the coastal area, could have a material impact
on our operations as well as its suppliers’ cost of manufacturing. By relocating from the coastal area to inland Anhui Province,
our new facility takes advantage of lower labor costs and a more stable labor supply. Since the company’s original production
team was not ready to produce the new style KBS products, KBS has outsourced its product manufacturing to other established ODM
manufacturers. As such, KBS’s own production facility in Taihu mainly takes OEM orders from other sportswear companies, like
Xtep. Our production facility in Taihu, Anhui Province includes three parcels of land with a total area of 110,557 square meters.
We have obtained land use rights for two parcels of land with an area of 9,845 square meters in 2012 and have finished the construction
of 8,572 square meters of staff dormitories and 22,292 square meters as workshop buildings and offices. We started to use the dormitory
and factory in year 2015 and moved into the offices at the beginning of 2016. Due to the local government’s need for additional
time to conclude negotiations with local residents over appropriate resettlement terms, the construction of the adjacent facility
on the third parcel of land has been delayed. We believe we will be in a better position to schedule our construction plan once
we acquire the land use right of the third parcel of land. Once the government settles with the local residents, the phase 3 and
4 can be continued. Once completed, our total production capacity of the facility is expected to increase to 20 million pieces
per year from the current capacity of 2 million pieces per year. We do not necessarily rely on our own production facility to satisfy
the demand of our products as we may outsource some or all of the production work to various ODM and OEM manufacturers in China.
|
A.
|
Principal Factors Affecting Financial Performance
|
Our operating results are primarily affected by the following
factors:
|
●
|
Growth of China’s menswear industry
. With approximately one-fifth of the world’s population and a fast-growing gross domestic product, China represents a significant growth opportunity for a wide variety of retail goods, including apparel. The enhanced living standards and increased disposable income that has resulted from the vibrant economic growth has driven the rapid development of the men’s apparel market in China in recent years. China is currently one of the world’s largest men’s apparel markets. As a leading provider of casual menswear in China, we believe we are well positioned to capitalize on the favorable economic, demographic and industry trends in this sector.
|
|
●
|
Brand
recognition
. We derive all of our revenues from sales of the KBS branded products in China, and our success depends on
the market perception and acceptance of the KBS brand and the culture, lifestyle and images associated with this brand. Market
acceptance of our brand may affect the selling prices and market demand for our products, the profit margin of us can achieve,
and our ability to grow.
|
|
●
|
Ratio of franchised stores to corporate stores in our sales network
.
The ratio of franchised stores to corporate stores in terms of floor area in our sales network affects our results of operations in a given period. The franchised stores operated by our distributors have been and will continue to be the main contributor to our revenue for the foreseeable future. Under the distribution business model, we sell directly to our distributors and recognize revenues upon delivery of our products to them. Such distribution network has enabled us to accelerate sales growth at a much lower cost than opening direct stores and has limited our inventory and sales risks. Corporate stores operated by us, on the other hand, despite incurring more significant capital expenditures as compared with franchised stores, allow us more control over our brand and the consumer’s shopping experience, which are important factors for the overall success of our business. In addition, our corporate store sales generally have a higher gross profit margin than sales to distributors because we are able to sell the products at retail prices directly to the end-consumers and because we recognize expenses relating to our corporate stores as selling and distribution expenses. Therefore, the ratio of franchised stores to corporate stores in our sales network will affect our gross profit margin.
|
|
●
|
Product
offering and pricing
. Our success depends on our ability to identify, originate and define menswear trends as well as
to anticipate, gauge and react to changing consumer demands for menswear in a timely manner. Most of our products are subject
to changing consumer preferences and fashion trends that cannot be predicted with certainty. Our new products may not receive
consumer acceptance as consumer preferences could shift rapidly, and our future success depends in part on our ability to anticipate
and respond to these changes.
|
|
●
|
Fluctuations
in raw material supply and prices.
The per unit cost of producing our products depends on the supply and price of
raw materials, particularly fabrics such as cotton, wool and polyester, which have experienced volatility in past years. Increases
in the price of raw materials would negatively impact our gross margins if we are not able to offset such price increases through
increases in our selling price or changes in product offerings and mix.
|
Financial
Statement Presentation
Revenue.
During the periods covered
by this section, we generated revenue from sales of our menswear products.
Cost of sales.
During the periods
covered by this section, our cost of sales primarily consisted of the costs of our outsourcing cost, raw materials, labor and overhead.
We did not have any inward or outward freight charges as these charges are borne by our distributors and suppliers.
Gross profit and gross margin.
For
the periods covered by this section, our gross profit is equal to the difference between our net sales and cost of sales. Our gross
margin is equal to the gross profit divided by net sales. Our gross margin may not be comparable to those of other retail entities
since some retail entities include all of their distribution network costs in cost of sales and others, like us, include these
expenses in another statement of operations line item.
Administrative expenses.
For the
periods covered by this section, general and administrative expenses consisted primarily of compensation and benefits to our general
management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with
general operations.
Selling expenses.
For the periods
covered by this section, our selling and marketing expenses consisted primarily of compensation and benefits to our sales and marketing
staff, store rent, business travel, coordination with distributor marketing and promotions, transportation costs and other sales
related costs.
Comparison of Fiscal Years Ended December 31, 2018, 2017
and 2016
The following table sets forth key components
of our results of operations, for the years ended December 31, 2018, 2017 and 2016, both in U.S. dollars and as a percentage of
or revenue.
|
|
Year ended
December 31, 2018
|
|
|
Year ended
December 31, 2017
|
|
|
Year ended
December 31, 2016
|
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
18,535,115
|
|
|
|
|
|
|
|
23,762,536
|
|
|
|
|
|
|
|
41,200,205
|
|
|
|
|
|
Cost of sales
|
|
|
-20,851,252
|
|
|
|
-112
|
%
|
|
|
-35,274,352
|
|
|
|
-148
|
%
|
|
|
-39,041,932
|
|
|
|
-95
|
%
|
Gross (loss)/profit
|
|
|
-2,316,137
|
|
|
|
-12
|
%
|
|
|
-11,511,816
|
|
|
|
-48
|
%
|
|
|
2,158,272
|
|
|
|
5
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution and selling expenses
|
|
|
-2,670,955
|
|
|
|
-14
|
%
|
|
|
-3,265,380
|
|
|
|
-14
|
%
|
|
|
-3,606,010
|
|
|
|
-9
|
%
|
Administrative expenses
|
|
|
-4,907,020
|
|
|
|
-26
|
%
|
|
|
-4,879,397
|
|
|
|
-21
|
%
|
|
|
-3,543,993
|
|
|
|
-9
|
%
|
Total operating expenses
|
|
|
-7,577,975
|
|
|
|
-41
|
%
|
|
|
-8,144,776
|
|
|
|
-34
|
%
|
|
|
-7,150,003
|
|
|
|
-17
|
%
|
Other income
|
|
|
122,139
|
|
|
|
1
|
%
|
|
|
461,564
|
|
|
|
2
|
%
|
|
|
555,051
|
|
|
|
1
|
%
|
Other gains and losses
|
|
|
-13,522,300
|
|
|
|
-73
|
%
|
|
|
-122,244
|
|
|
|
-1
|
%
|
|
|
-11,123,767
|
|
|
|
-27
|
%
|
Loss from operations
|
|
|
-23,294,273
|
|
|
|
-126
|
%
|
|
|
-19,317,272
|
|
|
|
-81
|
%
|
|
|
-15,560,447
|
|
|
|
-38
|
%
|
Finance costs
|
|
|
-96,444
|
|
|
|
1
|
%
|
|
|
-96,385
|
|
|
|
0
|
%
|
|
|
-71,783
|
|
|
|
0
|
%
|
Change in fair value of warrant liabilities
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
|
3,409
|
|
|
|
0
|
%
|
Loss before tax
|
|
|
-23,390,717
|
|
|
|
-126
|
%
|
|
|
-19,413,657
|
|
|
|
-82
|
%
|
|
|
-15,628,821
|
|
|
|
-38
|
%
|
Income tax
|
|
|
5,422,119
|
|
|
|
29
|
%
|
|
|
4,598,061
|
|
|
|
19
|
%
|
|
|
3,726,133
|
|
|
|
9
|
%
|
Loss for the year
|
|
|
-17,968,598
|
|
|
|
-97
|
%
|
|
|
-14,815,596
|
|
|
|
-62
|
%
|
|
|
-11,902,688
|
|
|
|
-29
|
%
|
A breakdown of revenue, percentage
of revenue and percentage of gross margin by segment for the respective periods is as follows:
By
business
|
|
Distribution
network
|
|
|
Corporate
stores
|
|
|
OEM
|
|
|
Consolidated
|
|
|
|
Year
ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
|
Year
ended December 31,
2016
|
|
|
Year
ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
|
Year
ended December 31,
2016
|
|
|
Year
ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
|
Year
ended December 31,
2016
|
|
|
Year ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
|
Year
ended December 31,
2016
|
|
Sales
to external customers
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
|
|
2,574,588
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
18,535,115
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
Segment
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
|
|
2,574,588
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
18,535,115
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
%
of Sales
|
|
|
73
|
%
|
|
|
63
|
%
|
|
|
78
|
%
|
|
|
13
|
%
|
|
|
29
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Segments
gross margins
|
|
|
2,245,944
|
|
|
|
2,277,858
|
|
|
|
6,623,617
|
|
|
|
-5,402,994
|
|
|
|
-14,291,680
|
|
|
|
-5,727,349
|
|
|
|
845,700
|
|
|
|
502,007
|
|
|
|
1,262,005
|
|
|
|
-2,316,136
|
|
|
|
-11,511,816
|
|
|
|
2,158,273
|
|
Gross
margin rate
|
|
|
17
|
%
|
|
|
15
|
%
|
|
|
21
|
%
|
|
|
-227
|
%
|
|
|
-205
|
%
|
|
|
-104
|
%
|
|
|
33
|
%
|
|
|
29
|
%
|
|
|
36
|
%
|
|
|
-12
|
%
|
|
|
-48
|
%
|
|
|
5
|
%
|
Segment sales
For the year ended December 31, 2018, total
revenue decreased by 22% from $23.8 million in 2017 to $18.5 million. Our total revenue of 2017 decreased by 33% from $41.2 million
to $23.8 million for the year ended December 31, 2016. The Company reports financial and operating results in three segments: distributor
network, corporate stores and OEM.
Distributor Network —
Revenue
from the Company’s distributor network in year 2018 decreased by 10% from $15 million in 2017 to $13 million primarily due
to a decrease in sales volume. There was a decrease of revenue from the Company’s distributor network in year 2017 by 53%
from $32.1 million in year 2016 primarily due to a decrease in sales volume. The distributor segment accounted for 73% of the total
revenue in 2018, compared to 63% and 78% during years 2017 and 2016, respectively.
In year 2018, gross profit margin for the
company’s distributor network increased to 17% from 15% for year 2017 as the company adjusted the selling price of new products.
The sales went down in year 2018 because we suspended sales of new products to some distributors which failed to pay off debts
to us due to overstock during previous periods. We also terminated some cooperation with some distributors due to their failure
to pay off debts owed to us.
In year 2017, gross profit margin for the
company’s distributor network decreased to 15% from 21% for year 2017 as the company adjusted the selling price, and the
sales went down in year 2017 because we suspended sales of new products to some distributors which failed to pay off debts to us
due to overstock during previous periods. We also terminated some cooperation with some distributors due to their failure to pay
off debts owed to us.
The Company’s distributor network
currently consists of 11 distributors in 12 provinces. Most of these distributors, either directly or through their sub-distributors,
operate KBS-branded stores. Some wholesale distributors sold the products to multi-branded stores and online stores. As of December
31, 2018, distributors operated a total of 32 KBS-branded stores, primarily in second and third tier cities. KBS products distributed
to the fourth and fifth tier cities are primarily sold in multi-branded department stores.
Corporate Stores — Total
revenue
from corporate store sale for fiscal year 2018 was $2.37 million, compared to $6.98 million for year 2017. In 2018 sales from corporate
store decreased as compared to 2017 due to a decrease in promotion sales of repurchased inventory from certain distributors which
are unable to pay off the debts owed to us.
Total revenue from corporate store sales
for fiscal year 2017 was $6.98 million, compared to $5.53 million for year 2016. In 2017 sales from corporate stores increased
as compared to 2016 due to an increase in sales volume, which in turn was mainly attributable to the increase in promotion sales
on repurchased inventory from certain distributors which are unable to pay off the debts owed to us.
As of December 31, 2018, we operated 1
corporate store which located in Fujian. Total revenue from corporate store sales of 2018 decreased as compared to 2017 because
of the decrease the promotion sales of repurchased inventory.
The corporate store segment contributed
14% of total revenue in 2018, compared to 29% of 2017 and 13% of 2016. Gross profit margin for the Company’s corporate store
was -232% in 2018, compared to -205% in 2017 and -104% in 2016. The margin compression from 2016 to 2018 is primarily due to: 1)
close of 1 corporate store in 2016 and the sale of its inventory at a lower price; 2) reduction of sale price of our goods in corporate
stores to stimulate sales; 3) loss from sales of repurchased inventory from certain distributors which sold at big discounted price
in year 2017 and year 2018.
OEM
—
The
OEM segment is comprised of products that are designed by the customers but manufactured by us. Revenue from the OEM segment increased
by $0.83 million to $2.57 million for year ended December 31, 2018, compared to $1.74 million for year ended December 31, 2017.
Gross profit margin increased to 33% from 29% of year 2017. Revenue from the OEM segment decreased by $1.79 million to $1.74 million
for year ended December 31, 2017, compared to $3.53 million for year ended December 31, 2016. Gross profit margin decreased to
29% from 36% of year 2016. Our revenues from sales of OEM represented 14%, 9% and 9%, respectively of our total revenues for years
ended December 31, 2018, 2017 and 2016.
Cost of sales and gross profit
rate
Cost of sales comprises of purchasing materials,
labor costs for personnel employed in production, depreciation of non-current assets used for production purpose, outsourced manufacturing
cost, taxes and surcharges and water and electricity.
Our cost of sales decreased from $35 million
in year 2017 to $21 million in year 2018. The decrease was mainly due to the decrease in repurchased inventory from certain distributors
compared to year 2017.
The gross profit rate increased from -48% in year 2017 to -12% in year 2018 due to 1) a decrease in the
number of promotion sales in repurchased inventory from certain distributors compared to year 2017. We reacquired excess inventory
of RMB 55 million from certain distributors and sold at its net realizable value, which caused a loss at RMB 40 million; 2) the
higher price of updated new products and improvement of products quality; 3) higher profit margin of OEM segments due to lower
amortized fixed fees from big orders from certain customers. In order to keep long-term relationships with our distributors
and support their continued operation, we decided to continue to buy back some excessive inventory from certain distributors in
2018 and thereafter.
Our cost of sales decreased from $39 million
in year 2016 to $35 million in year 2017. The decrease was consistent with the decrease in our revenue, which resulted in a decrease
in purchases by $7 million. The decrease in purchases was mainly due to a challenging retail environment and close of some stores.
The gross profit rate decreased from 5%
in year 2016 to -48% in year 2017 due to 1) a decrease in the number of our franchised stores from 55 as of December 31, 2016 to
40 as of December 31, 2017; 2) in order to make more fair and friendly business environment for our all distributors, we
adjusted our price policy to have same price to our district distributors and province distributors in 2017, the price sell to
the district distributor is lower than before. 3) a slowdown in demand in menswear resulted from competition from online sales
and other international brand, which led to an oversupply in recent years and our distributors faced difficulties in selling their
products and paying back the balance owed to the company. We reacquired excess inventory of RMB 141.42 million from certain distributors
and sold at its net realizable value, which caused a loss at RMB 98.52 million. Although we are not contractually obligated to
buy back the excessive inventory from any our distributors, in order to keep long-term relationships with our distributors and
support their continued operation, we decided to do same in 2017 to buy back some excessive inventory from certain distributors
and we may implement similar plans in the following years.
Administrative expenses
Administrative expenses increased by $0.02
million or 1% to $4.9 million for year 2018 from $4.88 million for 2017. The change was mainly due to the decrease of outsourcing
design expense and the increase of the company’s share-based compensation paid to officers and directors of the company.
Administrative expenses increased by $1.34
million or 37% to $4.88 million for year 2017 from $3.54 million for 2016. The increase was mainly due to the increase in design
staff expenses and the increase attributable to the company’s share-based compensation paid to officers and directors of
the company.
Distribution and selling expenses
The selling and distribution expenses decreased
by $0.59 million or 18% to $2.7 million for the year ended December 31, 2018 from $ 3.2 million in 2017, primarily due to the decrease
of advertisement expense, products promotion expenses and entertainment expenses.
The selling and distribution expenses decreased
by $0.34 million or 9.45% to $3.2 million for the year ended December 31, 2017 from $ 3.6 million in 2016, primarily due to the
decrease of advertisement expenses and promotion expense of products including placement order meeting expense.
The advertisement expenses of 2018, 2017
and 2016 are relatively even and selling expenses accounted for 6.6%, 7.5% and 9% for 2018, 2017 and 2016, respectively.
Other gains and losses
Other gains and losses increased by $13.4
million, or 10,875%, to -$13.52 million for the year ended December 31, 2018 from -$0.12 million for year 2017. The increase was
mainly due to the impairment on Anhui property due to the decrease of its fair value.
Other gains and losses decreased by $11
million, or 98.9%, to -$0.12 million for the year ended December 31, 2017 from -$11.1 million for year 2016. The decrease was mainly
due to the fact that there was no additional provision on bad debts from three clients as in 2016.
Profit for the year
We had a loss of $18 million in 2018 as
compared to a loss of $14.81 million for 2017, representing a decrease of profit of $3 million or 21%. Net margin was -97% for
the year ended December 31, 2018, compared to -62% for the year ended December 31, 2017.
We had a loss of $14.81 million in 2017
as compared to a loss of $11.9 million for 2016, representing a decrease of profit of $2.91 million or -25%. Net margin was -62%
for the year ended December 31, 2017, compared to -29% for the year ended December 31, 2016.
Profit for the year decreased from 2018
to 2017 mainly due to the following reasons:(1)the impairment on Anhui property due to the decrease of its fair value (2) the distribution
and selling expenses decreased to a small portion of total revenue and the revenue also decreased compared to year ended December
31, 2017; (3) a slowdown in demand in menswear resulted from competition from online sales and other international brands, which
led to an oversupply in recent years and our distributors faced difficulties in selling products and paying back the balance owed
to us. We reacquired an excess inventory of RMB 55 million from certain distributors and sold at its net realizable value, which
caused a loss at RMB 40 million.
Profit for the year decreased from 2016
to 2017 mainly due to the following reasons: (1) the administrative expenses increased to a large portion of total revenue; and
(2) slowdown in demand in menswear resulted from competition from online sales and other international brand, which led to an oversupply
in recent years and our distributors faced difficulties in selling their products and paying back the balance owed to the company.
We reacquired an excess inventory of RMB 141.42 million from certain distributors and sold at its net realizable value, which caused
a loss at RMB 98.52 million.
|
B.
|
Liquidity and Capital Resources
|
As of December 31, 2018, we had cash and
cash equivalents of $21,026,103. Our cash and cash equivalents consist of cash on hand and cash in the banks. We believe that our
current levels of cash and cash equivalent and cash flows from operations will be sufficient to meet our anticipated cash needs
for at least the next 12 months. To date, we have financed our operations primarily through net cash flow from operations. Our
cash flows are driven by key performance indicators including the number of orders placed by distributors, number of outlets that
each distributor operates the pricing of our products, sales of our corporate stores, and the collect portion of account receivable.
Currently there is only minimal cash held by offshore subsidiaries and there is no need for these subsidiaries to transfer cash
to Hongri PRC.
The following table provides detailed information
about our net cash flow for all financial statement periods presented in this report:
|
|
Fiscal Year Ended December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(3,703,354
|
)
|
|
$
|
1,922,252
|
|
|
$
|
3,194,287
|
|
Net cash provided by (used in) investing activities
|
|
|
52,932
|
|
|
|
(865,365
|
)
|
|
|
45,445
|
|
Net cash provided by (used in) financing activities
|
|
|
(256,870
|
)
|
|
|
(1,095,910
|
)
|
|
|
1,679,509
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,907,291
|
)
|
|
|
(39,024
|
)
|
|
|
4,919,241
|
|
Effects of exchange rate change in cash
|
|
|
(1,117,062
|
)
|
|
|
1,513,138
|
|
|
|
(1,556,980
|
)
|
Cash and cash equivalents at beginning of the period
|
|
|
26,050,456
|
|
|
|
24,576,341
|
|
|
|
21,214,080
|
|
Cash and cash equivalent at end of the period
|
|
$
|
21,026,103
|
|
|
$
|
26,050,456
|
|
|
$
|
24,576,341
|
|
Operating Activities
The net cash provided by operating activities consists of profit
before tax, as adjusted by finance costs, change in fair value of warrant liabilities, interest income, shared based compensation,
bad debt allowance, depreciation of property, plant and equipment, amortization of prepaid lease payment and trademark, amortization
of subsidies prepaid to distributors, amortization of prepayment and premiums under operating leases, provision(Reversal) of inventory
obsolescence, provision of impairment loss in prepayments, loss(gain) on disposal of property, plant and equipment, deferred income
tax, which include trade and other receivables, prepayment and deferred expenses, inventory, trade and other payables.
Net cash used in operating activities in
fiscal year 2018 was $3.7 million, compared with net cash provided by operating activities of $1.9 million in the year ended December
31, 2017. The change is mainly due to the increase of provision of Anhui property and the increase of deferred tax due to the loss
of fiscal year 2018.
Net cash provided by operating activities in fiscal year 2017
was $1.9 million, compared with $3.2 million in the year ended December 31, 2016. The change is mainly due to the decrease in the
amount of collection of account receivable.
Investing Activities
Net cash provided by investing activities
in fiscal year 2018 was $0.05 million, compared with $0.8 million net cash used in investing activities in 2017. The net cash provided
in investing activities in 2018 was interest received from our bank deposits.
Net cash used in investing activities in fiscal year 2017 was
$0.8 million, compared with $0.04 million net cash provided by investing activities in 2016. The net cash used in investing activities
in 2017 was to purchase fire protection facility.
Financing Activities
Net cash used in financing activities
in fiscal year 2018 was $0.26 million, compared with $1.1 million net cash used in financing activities in 2017. It mainly consisted
of repayment of bank loans in 2018.
Net cash used in financing activities in fiscal year 2017 was
$1.1 million, compared with $1.68 million net cash provided by financing activities in 2016. It mainly consisted of interests paid
for our bank loans.
Loans, Other Commitments, Contingencies
As of December 31, 2018, we had bank loans
in an amount of $1,092,785. We may, however, in the future, require additional cash resources due to changing business conditions,
implementation of our strategy to expand our business or other investments or acquisitions we may decide to pursue. If our own
financial resources are insufficient to satisfy the capital requirements, we may seek to sell additional equity or debt securities
or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders.
The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and
financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us,
if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our
business operations and could harm our overall business prospects.
|
C.
|
Research and Development, Patents and Licenses, Etc.
|
Our industry is characterized by rapid technological change,
evolving industry standards and changing customer demands. These conditions require continuous expenditures on product research
and development to enhance existing products create new products and avoid product obsolescence. See Item 3 “Key Information—D.
Risk Factors—If we are unable to develop competitive new products and service offerings our future results of operations
could be adversely affected,” —“If we are unable to keep pace with the rapid technological changes in our industry,
demand for our products and services could decline which would adversely affect our revenue,” and —“Our technology
may become obsolete which could materially adversely affect our ability to sell our products and services.” For a detailed
analysis of research and development costs, see Item 5.A. “Operating Results—Results of Operations—Research and
development expenses”.
Other than as disclosed elsewhere in this annual report, we
are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2018 that are reasonably
likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would
cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
|
E.
|
Off Balance Sheet Arrangements
|
We do not have any off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or
expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in
our securities.
|
F.
|
Tabular Disclosure of Contractual Obligations
|
The table below shows our material contractual obligations as
of December 31, 2018.
|
|
Payments Due by Period
|
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Obligations
|
|
$
|
64,088,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
$
|
78,532
|
|
|
|
146,705
|
|
|
|
2,225,030
|
|
|
|
|
|
Total
|
|
$
|
64,166,768
|
|
|
|
146,705
|
|
|
|
2,225,030
|
|
|
|
|
|
Anhui Factory Construction Contract
On November 20, 2010, Hongri PRC entered into an agreement with a third party for the construction of
a new plant with a total size of 110,557 square meters, at Taihu City, Anhui at a consideration of RMB 690 million (equivalent
to approximately $104 million). This is the frame contract for the construction of Anhui factory and round estimation. By December
31, 2016 we had already paid about $37.75 million in total on the phase 1, 2, 3 of construction based on detailed phase contract
and the balance of construction cost of the Anui factory need to be determined based on the on-time budget on every phase. The
majority of funds for construction expenses came from the cash balance on the account as of December 31, 2018 and the new profit
of following year.
Anhui Land Use Right Acquisition Contract
On September 2, 2010, Hongri PRC entered into an agreement with a third party to acquire a land use right
in relation to the development of factories in Taihu City, Anhui Province, at a total consideration of RMB 43 million (approximately
$6.3 million). Full consideration was paid in September 2010. There are three parts of the land. The Company has obtained land
use rights certificates for the first parcel of land with 7,405 square meters on March 19, 2012, and the second parcel of land
with 2,440 square meters on May 26, 2012. The Company is currently in the process of obtaining the land use right certificate for
the third parcel of the land with 100,712 square meters.
Except as set forth above, we have no other material long-term
debt, capital or operating lease or fixed purchase obligations.
Inflation
Inflation and changing prices have not
had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business
in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the apparel industry
and continually maintain effective cost controls in operations.
Seasonality
Our business, like that of many retailers,
is seasonal. Historically, we have realized more of our revenue and earnings in the fourth quarter, which includes the majority
of the holiday shopping season, than in any other fiscal quarter.
Critical Accounting Policies
The preparation of financial statements
is in conformity with IFRS as issued by the IASB. It requires the Company’s management to make assumptions, estimates and
judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies,
if any. The Company has identified certain accounting policies that are significant to the preparation of Company’s financial
statements. These accounting policies are important for an understanding of the Company’s financial condition and results
of operation. Critical accounting policies are those that are most important to the portrayal of the Company’s financial
condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain
accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility
that future events affecting the estimate may differ significantly from management’s current judgments. The Company believes
the following critical accounting policies involve the most significant estimates and judgments used in the preparation of the
Company’s financial statements.
Revenue recognition (applicable from January
1, 2018)
Revenue from contracts with customers
Revenue from contracts with customers is recognised
when control of goods or services is transferred to the customers at an amount that reflects the consideration to which the Company
expects to be entitled in exchange for those goods or services.
When the consideration in a contract includes
a variable amount, the amount of consideration is estimated to which the Company will be entitled in exchange for transferring
the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is
highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated
uncertainty with the variable consideration is subsequently resolved.
When the contract contains a financing component
which provides the customer a significant benefit of financing the transfer of goods or services to the customer for more than
one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected
in a separate financing transaction between the Company and the customer at contract inception. When the contract contains a financing
component which provides the Company a significant financial benefit for more than one year, revenue recognised under the contract
includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the
period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction
price is not adjusted for the effects of a significant financing component, using the practical expedient in IFRS 15.
Revenue from the sale of goods is recognised
at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods.
Other income
Interest income is recognised on an accrual
basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the
expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Rental income is recognised on a time proportion
basis over the lease terms.
Dividend income is recognised when the shareholders’
right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow
to the Company and the amount of the dividend can be measured reliably.
Revenue recognition (applicable before January
1, 2018)
Revenue is measured
at the fair value of the consideration received or receivable and represents amounts receivable for goods sold in the normal course
of business, net of discounts and sales related taxes.
The Group’s revenue
originates (i) from corporate owned stores, (ii) distributors and (iii) the services performed as an original design manufacturer.
Revenue from all above categories is recognized when all the following conditions are satisfied:
|
●
|
the
Group has transferred to the buyer the significant risks and rewards of ownership of the goods;
|
|
●
|
the
Group has fully rendered service to the contract manufacturing customer by shipping the product to the customer;
|
|
●
|
the
Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control
over the goods sold;
|
|
●
|
the
amount of revenue can be measured reliably;
|
|
●
|
it
is probable that the economic benefits associated with the transaction will flow to the Group; and the costs incurred or to be
incurred in respect of the transaction can be measured reliably.
|
Specifically, revenue
from sale of goods is recognized when the goods are delivered and title has passed.
Value added tax (VAT)
Output VAT is 16% of product sales and taxable
services revenue, according to tax laws. The remaining balance of output VAT, after subtracting the deductible input VAT of the
period, is VAT payable.
Borrowing costs
Borrowing costs directly
attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets
are substantially ready for their intended use or sale.
All other borrowing
costs are recognized in profit or loss in the period in which they are incurred.
Retirement benefit
costs
Pursuant to the relevant
regulations of the PRC government, the Group’s subsidiaries located in the PRC participate in a local municipal government
retirement benefits scheme (the “Scheme”), whereby they contribute a prescribed percentage of the basic salaries of their
employees to the Scheme to fund their retirement benefits. Once the Scheme has been funded via contributions by the Group’s
participating subsidiaries, the local municipal government takes responsibility for the retirement benefits obligations of all
existing and future retired employees of those subsidiaries located in the PRC; accordingly, the only obligation of the Group with
respect to the Scheme is to pay the on-going required contributions as long as the employees maintain employment with the Group.
There are no provisions under the Scheme whereby forfeited contributions may be used to reduce future contributions. These plans
are considered defined contribution plans. The Group has no legal or constructive obligations to pay further contributions after
its payment of the fixed contributions into the pension schemes. Contributions to pension schemes are recognized as an expense
in the period in which the related service is performed.
Taxation
The tax expense for
the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates
to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive
income or directly in equity, respectively.
The current income tax
charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where
the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect
to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the
basis of amounts expected to be paid to the tax authorities.
Deferred tax is recognized
on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the
corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable
temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that
it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such
deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition
(other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit
nor the accounting profit.
Deferred tax liabilities
are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized
to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary
differences and they are expected to reverse in the foreseeable future.
The carrying amount
of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable
that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax assets
and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the
asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which
the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred income tax
assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities
and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either
the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Current and deferred
tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly
in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity
respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is
included in the accounting for the business combination.
Store pre-opening
cost
Store pre-opening cost
was the start-up activity costs incurred prior to opening a new store, mainly including leasing, leasehold improvements, payroll
and supplies. The accounting policies for leasing and leasehold improvements were as below. Other store pre-opening costs were
directly charged to expenses when occurred.
Leasing
Leases are classified
as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
Leasehold improvements
Leasehold improvements,
principally comprising costs of office buildings and shops renovation, are held for administrative and selling purposes. Leasehold
improvements are initially measured at cost and amortized systematically over its useful life.
Property, plant and
equipment
Property, plant and
equipment (“PPE”) including buildings held for use in the production or supply of goods or services, or for administrative
purposes other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated impairment
losses.
Depreciation is provided
to write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful
lives and after taking into account of their estimated residual value, using the straight-line method.
Construction in progress
includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in
progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category
of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as
other property assets, commences when the assets are ready for their intended use.
An item of property,
plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued
use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is de-recognized.
The Group as lessor
Rental income from operating
leases is recognized in profit or loss on a straight-line basis over the term of the relevant lease.
Land use rights
Land use rights are
stated at cost less accumulated amortization and accumulated impairment losses. Cost represents consideration paid for the rights
to use the land on which various plants and buildings are situated for periods varying from 20 to 50 years.
Amortization of land
use rights is calculated on a straight-line basis over the period of the land use rights.
Inventories
Inventories are stated
at the lower of cost and net realizable value. Costs of inventories are determined using the weighted average method. Net realizable
value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make
the sale.
Financial instruments – investments
and other financial assets (applicable from January 1, 2018)
Initial recognition and measurement
Financial assets are classified, at initial
recognition, as subsequently measured at amortised cost, fair value through other comprehensive income, and fair value through
profit or loss.
The classification of financial assets at initial
recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for
managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group
has applied the practical expedient of not adjusting the effect of a significant financing component, the Group initially measures
a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit or loss, transaction
costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical
expedient are measured at the transaction price determined under IFRS 15 in accordance with the policies set out for “Revenue
recognition (applicable from January 1, 2018)” below.
In order for a financial asset to be classified
and measured at amortised cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely
payments of principal and interest (“SPPI”) on the principal amount outstanding.
The Group’s business model for managing
financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether
cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
All regular way purchases and sales of financial
assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases
or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by
regulation or convention in the marketplace.
Subsequent measurement
The subsequent measurement of financial assets
depends on their classification as follows:
Financial assets at amortised cost (debt
instruments)
The Group measures financial assets at amortised
cost if both of the following conditions are met:
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The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows.
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The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
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Financial assets at amortised cost are subsequently
measured using the effective interest method and are subject to impairment. Gains and losses are recognised in the income statement
when the asset is derecognised, modified or impaired.
Financial assets at fair value through other
comprehensive income (debt instruments)
The Group measures debt instruments at fair
value through other comprehensive income if both of the following conditions are met:
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The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling.
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The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
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For debt instruments at fair value through
other comprehensive income, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in
the income statement and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value
changes are recognised in other comprehensive income. Upon derecognition, the cumulative fair value change recognised in other
comprehensive income is recycled to the income statement.
Financial assets at fair value through other
comprehensive income (equity investments)
Upon initial recognition, the Group can elect
to classify irrevocably its equity investments as equity investments designated at fair value through other comprehensive income
when they meet the definition of equity under HKAS 32 Financial Instruments: Presentation and are not held for trading. The classification
is determined on an instrument-by-instrument basis.
Gains and losses on these financial assets
are never recycled to the income statement. Dividends are recognised as other income in the income statement when the right of
payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Group and
the amount of the dividend can be measured reliably, except when the Group benefits from such proceeds as a recovery of part of
the cost of the financial asset, in which case, such gains are recorded in other comprehensive income. Equity investments designated
at fair value through other comprehensive income are not subject to impairment assessment.
Financial assets at fair value through profit
or loss
Financial assets at fair value through profit
or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit
or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading
if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives,
are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash
flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss,
irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at
fair value through other comprehensive income, as described above, debt instruments may be designated at fair value through profit
or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.
Financial assets at fair value through profit
or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the income
statement. This category includes derivative financial instruments and structured bank deposits.
A derivative embedded in a hybrid contract,
with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if the
economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded
derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss.
Embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Reassessment only
occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise
be required or a reclassification of a financial asset out of the fair value through profit or loss category.
A derivative embedded within a hybrid contract
containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative
is required to be classified in its entirety as a financial asset at fair value through profit or loss.
Financial instruments – impairment
of financial assets (applicable from January 1, 2018)
The Group recognises an allowance for ECLs
for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual
cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation
of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other
credit enhancements that are integral to the contractual terms.
General approach
ECLs are recognised in two stages. For credit
exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit
losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures
for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit
losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Group assesses
whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment,
the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default
occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information
that is available without undue cost or effort, including historical and forward-looking information.
The Group considers a financial asset in default
when contractual payments are 120 days past due. However, in certain cases, the Group may also consider a financial asset to be
in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts
in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no
reasonable expectation of recovering the contractual cash flows.
Debt instruments at fair value through other
comprehensive income and financial assets at amortised cost are subject to impairment under the general approach and they are classified
within the following stages for measurement of ECLs except for trade receivables which apply the simplified approach as detailed
below.
Stage 1 – Financial instruments for which
credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount
equal to 12-month ECLs
Stage 2 – Financial instruments for which
credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which
the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 – Financial assets that are credit-impaired
at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance is measured at
an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do not contain a
significant financing component or when the Group applies the practical expedient of not adjusting the effect of a significant
financing component, the Group applies the simplified approach in calculating ECLs. Under the simplified approach, the Group does
not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group
has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors
specific to the debtors and the economic environment.
For trade receivables that contain a significant
financing component and lease receivables, the Group chooses as its accounting policy to adopt the simplified approach in calculating
ECLs with policies as described above.
Financial instruments – derecognition
of financial assets (applicable from January 1, 2018)
A financial asset (or, where applicable, a
part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s
consolidated statement of financial position) when:
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the rights to receive cash flows from the asset have expired; or
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the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
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When the Group has transferred its rights to
receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained
the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards
of the asset nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of the
Group’s continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and
the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form
of a guarantee over the transferred asset is measured at the lower of the original amount of the asset and the maximum amount of
consideration that the Group could be required to repay.
Financial instruments – financial
liabilities (applicable from January 1, 2018)
Initial recognition and measurement
All financial liabilities are recognised initially
at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The Group’s financial
liabilities include trade payables, other payables, financial liabilities included in accruals and interest-bearing bank borrowings.
Subsequent measurement
After initial recognition, interest-bearing
loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of
discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the income statement
when the liabilities are derecognised as well as through the effective interest rate amortisation process.
Amortised cost is calculated by taking into
account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The
effective interest rate amortisation is included in finance costs in the income statement.
Financial instruments – derecognition
of financial liabilities (applicable from January 1, 2018)
A financial liability is derecognised when
the obligation under the liability is discharged or cancelled, or expires.
When an existing financial liability is replaced
by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified,
such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability,
and the difference between the respective carrying amounts is recognised in the income statement.
Financial instruments – offsetting
financial instruments (applicable from January 1, 2018)
Financial assets and financial liabilities
are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right
to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities
simultaneously.
Financial instruments (applicable before
January 1, 2018)
Financial assets and
financial liabilities are recognized on the consolidated statements of financial position when a group entity becomes a party to
the contractual provisions of the instrument.
Financial assets and
financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition
or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or
financial liabilities, as appropriate, on initial recognition.
The Group’s financial
assets are classified as receivables.
Effective interest
method
The effective interest
method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid
or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through
the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.
Interest income is recognized
on an effective interest basis for debt instruments.
Receivables
Receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market. Receivables (including trade and
other receivables, related parties receivables, and cash and cash equivalents) are measured at amortized cost using the effective
interest method, less any impairment (see accounting policy on impairment loss on receivables below).
Impairments of receivables
Receivables are assessed
for indicators of impairment at the end of the reporting period. Receivables are impaired where there is objective evidence that,
as a result of one or more events that occurred after the initial recognition of the receivables, the estimated future cash flows
of the receivables have been affected.
Objective evidence of
impairment could include:
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significant
financial difficulty of the issuer or counterparty;
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default
or delinquency in interest or principal payments;
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it
becoming probable that the borrower will enter bankruptcy or financial reorganization.
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For certain categories
of financial asset, such as trade and other receivables, assets that are assessed not to be impaired individually are subsequently
assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the
Group’s past experience of collecting payments, and increase in the number of delayed payments in the portfolio past the average
credit period, observable changes in national or local economic conditions that correlate with default on receivables.
An impairment loss is
recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between
the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective
interest rate.
The carrying amount
of the receivables is reduced by the impairment loss directly for all financial assets with exception of trade and other receivables,
where the carrying amount is reduced through the use of an allowance account. Changes in carrying amount of the allowance account
are recognized in profit or loss. When a trade and other receivable are considered uncollectible, it is written off against the
allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.
If, in a subsequent
period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment
losses was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying
amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment
not been recognized.
See “Introductory Notes—Forward-Looking Information.”
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ITEM 6.
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DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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A.
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Directors and Senior Management
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The following table sets forth certain information regarding
our directors and senior management, as well as employees upon whose work we are dependent, as of the date of this annual report.
NAME
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AGE
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POSITION
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Keyan Yan
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47
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Chairman and Chief Executive Officer
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Themis Kalapotharakos
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44
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Executive Director
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LixiaTu
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37
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Chief Financial Officer and Director
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John Sano
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49
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Independent Director
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Matthew C. Los
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54
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Independent Director
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Zhongmin Zhang
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76
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Independent Director
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Yuet Mei Chan
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38
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Independent Director
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Mr. Keyan Yan
. Mr. Yan has been
the Chairman of our board of directors and Chief Executive Officer since the closing of the Share Exchange on August 1, 2014. Mr.
Yan has over 16 years of senior management experience. He served as Chairman and Chief Executive Officer of KBS International between
March 2011 and August 2014. From 1994 to present, Mr. Yan has served as general manager of Hongri PRC. Prior to joining us, Mr.
Yan served as workshop manager, production manager and marketing manager of Zhenshi Knitting Factory in Shishi, China from 1989-1994.
Mr. Yan obtained a certificate of corporate management from Xiamen University in 1992.
Ms. Lixia Tu.
Ms. Tu became the
Company’s Chief Financial Officer on June 25, 2015. Ms. Tu has more than night years of accounting and audit experience,
familiar with IFRS, US GAAP, Sarbanes-Oxley and the compliance requirements of SEC. After she worked as a project manager at BDO
China Fu Jian SHU LUN PAN Certified Public Accountants for four years, she worked as a CFO or a financial consultant for some other
companies. Ms. Tu holds a Master’s degree in professional accounting from the University of Deakin in Australia. Ms. Tu is
also a member of the Chartered Association of Certified Accountants.
Mr. Themis Kalapotharakos.
Mr. Kalapotharakos
became our executive director on June 15, 2015. Mr. Kalapotharakos has acquired a range of expertise of a wide spectrum of business
activities. He has extensive high-level experience at the Shipping, Trading and Finance industries where he has founded, developed
and operated various businesses starting from the ground up. His roles involved regular communication and coordination
with investors, financial institutions, capital market authorities, custodian and administrative banks, auditors and legal counsel.
He holds a Bachelor’s degree from Cardiff University and an MSc Degree from Cass Business School in the UK.
John Sano.
Mr. Sano has been an
independent director of the Company since the closing of the Share Exchange on August 1, 2014. Mr. Sano has over 20 years of experience
in apparel & home furnishings concept, design, sourcing, production, and e-commerce. He has extensive experience in all aspects
of the retail clothing supply chain, from conceptualization to final production and distribution. Mr. Sano has also advised and
worked closely with numerous top brands in the US. He has been General Director of Sano Design Services since 2002. Mr. Sano has
an associate’s degree in interior design from Traphagen School of Design.
Mr. Matthew C. Los.
Mr. Los became
our director on October 8, 2015. Mr. Los has acquired a range of expertise of a wide spectrum of business activities. He has over
20 years’ experience at high level management, and has founded, developed and operated various businesses in the shipping,
energy, telecommunications real estate industries starting from the ground up. He also has experience in the capital markets
and was the CEO of Aquasition Corp., the predecessor of the Company, prior to the Share Exchange. Mr. Los has a BSc in Mechanical
Engineering and Computer Aided Design from University of Westminster in the UK.
Mr. Zhongmin Zhang.
Mr. Zhang became our director on
July 10, 2017. He has over 45 years of extensive experience in many facets of textile business, including in production, marketing,
and management. Currently, Mr. Zhang is the president of Zhengzhou Guangda Textile Printing & Dyeing Co., Ltd. which has an
annual production of 216 million meters of various textile products, with a value of RMB 800 million. Holding a title of Senior
Engineer, Mr. Zhang graduated from Harbin Institute of Technology in 1965. He also has certificates in finance management and civil
law.
Mr. Yuet Mei Chan.
Ms. Chan became our director on July
10, 2017. She has over 15 years of experience in the banking industry. She held several senior positions in a prestigious bank
in Hong Kong from 2001-2016. She is currently a financial consultant at AIA and specializes in analyzing financial situations and
market trends. Ms. Chan holds a diploma in Computing and Business Studies from Hong Kong St. Perth College.
No family relationship exists between any
of the persons named above.
In 2018, we paid an aggregate of approximately
$207,268 in cash as compensation to our directors and senior management as a group, and some of our directors and executive officers
also received compensation in the form of annual salaries and bonuses. We do not set aside or accrue any amounts for pension, retirement
or other benefits for our directors and senior management. However, we reimburse our directors for out-of-pocket expenses incurred
in connection with their services in such capacity.
On February 10, 2018, we granted an aggregate
of 285,000 restricted shares of common stock to our executive officers and directors as compensations for their services. All the
shares vested immediately upon granting.
On March 25, 2019, we granted an aggregate
of 305,000 shares of common stock pursuant to the Company’s 2018 Equity Incentive Plan to the Company’s executive officers,
directors and certain employees as compensations for their service. All the shares vested immediately upon granting.
2018 Equity Incentive Plan
On December 24, 2018, the Board of Directors
of the Company adopted the 2018 Equity Incentive Plan, or the 2018 Plan, pursuant to which the Company may offer up to two million
shares of common stock as equity incentives to its directors, employees and consultants. Such number of shares is subject to adjustment
in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends, or other change
in the corporate structure of the Company affecting the shares issuable under the 2018 Plan. As of December 31, 2018, we have not
granted any equity awards under the 2018 Plan.
The following paragraphs summarize the
terms of our 2018 Plan:
Purpose
. The purposes of the 2018
Plan are to promote the long-term growth and profitability of the Company and its affiliates by stimulating the efforts of employees,
directors and consultants of the Company and its affiliates who are selected to be participants, aligning the long-term interests
of participants with those of shareholders, heightening the desire of participants to continue in working toward and contributing
to our success, attracting and retaining the best available personnel for positions of substantial responsibility, and generally
providing additional incentive for them to promote the success of our business through the grant of awards of or pertaining to
our common stock. The 2018 Plan permits the grant of ISOs, NSOs, Restricted Shares, Restricted Share Units, Share Appreciation
Rights, Performance Units and Performance Shares as the administrator of the 2018 Plan may determine.
Administration
. The 2018 Plan is
administered by our Board. The administrator has the authority to determine the specific terms and conditions of all awards granted
under the 2018 Plan, including, without limitation, the number of shares of common stock subject to each award, the price to be
paid for the shares and the applicable vesting criteria. The administrator has discretion to make all other determinations necessary
or advisable for the administration of the 2018 Plan.
Eligibility
. NSOs, Restricted Shares,
Restricted Share Units, Share Appreciation Rights, Performance Units and Performance Shares may be granted to employees, directors
or consultants either alone or in combination with any other awards. ISOs may be granted only to employees of the Company, and
of any parent or subsidiary.
Shares Available for Issuance Under
the 2018 Plan
. Subject to adjustment as described below, (a) the maximum aggregate number of shares that may be issued under
the 2018 Plan is 2,000,000 shares of common stock, (b) to the extent consistent with Section 422 of the Internal Revenue Code of
1986, as amended (the “Code”), not more than an aggregate of 2,000,000 shares of common stock may be issued under ISOs,
and (c) not more than 200,000 shares of common stock (or for awards denominated in cash, the Fair Market Value of 200,000 shares
of common stock on the Grant Date, as defined in the 2018 Plan), may be awarded to any individual participant in the aggregate
in any one fiscal year of the Company, such limitation to be applied in a manner consistent with the requirements of, and only
to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Code Section
162(m). The number and class of shares available under the 2018 Plan are subject to adjustment in the event of certain reorganizations,
mergers, combinations, recapitalizations, share splits, share dividends, or other similar events which change the number or kind
of shares outstanding.
Transferability
. Unless otherwise
provided in the 2018 Plan or otherwise determined by the administrator, an award may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during
the lifetime of the participant, only by the participant. However, the administrator may, at or after the grant of an award other
than an ISO, provide that such award may be transferred by the recipient to a “family member” (as defined in the 2018
Plan); provided, however, that any such transfer is without payment of any consideration whatsoever and that no transfer shall
be valid unless first approved by the administrator, acting in its sole discretion, and as required by our Amended and Restated
Articles of Incorporation. If the administrator makes an award transferable, such award will contain such additional terms and
conditions as the administrator deems appropriate.
Termination of, or Amendments to, the
2018 Plan
. The Board may at any time amend, alter, suspend or terminate the 2018 Plan, provided that the Company will obtain
shareholder approval of any 2018 Plan amendment to the extent necessary and desirable to comply with applicable Laws. No amendment,
alteration, suspension or termination of the 2018 Plan will impair the rights of any participant, unless mutually agreed otherwise
between the participant and the administrator, which agreement must be in writing and signed by the participant and the Company.
Termination of the 2018 Plan will not affect the administrator’s ability to exercise the powers granted to it hereunder with
respect to awards granted prior to the date of such termination.
The 2018 Plan will terminate five years
following the date it was adopted by the Board, unless sooner terminated by the Board.
Employment Agreements
Please refer to Item 10 “Additional
Information—C. Material Contracts.”
Our board of directors currently consists
of seven members, Keyan Yan, Lixia Tu, John Sano, Themis Kalapotharakos, Matthew C. Los, Yuet Mei Chan and Zhongmin Zhang.
The Board has established the Audit Committee,
which is comprised entirely of independent directors. From time to time, the Board may establish other committees.
Audit Committee
Our Audit Committee is currently composed
of three members: Yuet Mei Chan, John Sano and Matthew C. Los. Our Board of Directors determined that each member of the Audit
Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership.
Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Matthew C. Los serves as Chair of the Audit
Committee.
Our Board of Directors has determined that
Matthew C. Los is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated
by the SEC and also meets NASDAQ’s financial sophistication requirements.
The Audit Committee oversees our accounting
and financial reporting processes and the audits of the financial statements of our Company. The Audit Committee is responsible
for, among other things:
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●
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the
appointment, compensation, retention and oversight of the work of the independent auditor;
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|
●
|
reviewing
and pre-approving all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed
by the independent auditor;
|
|
●
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reviewing
and approving all proposed related-party transactions;
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|
●
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discussing
the interim and annual financial statements with management and our independent auditors;
|
|
●
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reviewing
and discussing with management and the independent auditor (a) the adequacy and effectiveness of the Company’s internal
controls, (b) the Company’s internal audit procedures, and (c) the adequacy and effectiveness of the Company’s disclosure
controls and procedures, and management reports thereon;
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|
●
|
reviewing
reported violations of the Company’s code of conduct and business ethics; and
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|
●
|
reviewing
and discussing with management and the independent auditor various topics and events that may have significant financial impact
on the Company or that are the subject of discussions between management and the independent auditors.
|
As of December 31, 2018, we employed 370
full-time employees. The following table sets forth the number of our full-time employees by function.
Function
|
|
Number of Employees
|
Management and Administration
|
|
28
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Marketing, Sales and Distribution
|
|
18
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Design and Product Development
|
|
20
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Production
|
|
281
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Procurement, Warehousing and Logistics
|
|
19
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Quality and Assurance
|
|
7
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TOTAL
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|
370
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We believe that we have maintained a satisfactory
working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting
staff for company’s operations. None of company’s employees is represented by a labor union.
Our employees in China participate in a
state pension plan organized by Chinese municipal and provincial governments. The company is required to make monthly contributions
to the plan for each employee at the rate of 23% of his or her average assessable salary. In addition, the company is required
by Chinese law to cover employees in China with various types of social insurance. The company believes that it is in material
compliance with the relevant PRC laws.
The following table sets forth information
regarding beneficial ownership of each class of our voting securities as of April 26, 2019 (i) by each person who is known by us
to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of our
officers and directors as a group.
Name
|
|
Office, If Any
|
|
Title of Class
|
|
Amount
and Nature of Beneficial Ownership
(1)
|
|
|
Percent
of Class
(2)
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
Keyan Yan
(3)
|
|
Chairman, CEO and President
|
|
Common Stock
|
|
|
964,320
|
|
|
|
37.21
|
%
|
Lixia Tu
|
|
Chief Financial Officer and Director
|
|
Common Stock
|
|
|
60,000
|
|
|
|
2.32
|
%
|
Themis Kalapotharakos
|
|
Director
|
|
Common Stock
|
|
|
40,000
|
|
|
|
1.54
|
%
|
John Sano
|
|
Director
|
|
Common Stock
|
|
|
5,000
|
|
|
|
0.19
|
%
|
Matthew C. Los
|
|
Director
|
|
Common Stock
|
|
|
40,000
|
|
|
|
1.54
|
%
|
Zhongmin Zhang
|
|
Director
|
|
Common Stock
|
|
|
10,000
|
|
|
|
0.39
|
%
|
Yuet Mei Chan
|
|
Director
|
|
Common Stock
|
|
|
10,000
|
|
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers and directors as a group (7 persons named above)
|
|
|
|
|
|
|
1,129,320
|
|
|
|
43.58
|
%
|
5% Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Keyan Yan
(3)
|
|
|
|
Common Stock
|
|
|
964,320
|
|
|
|
37.21
|
%
|
Alliance Investment Management Limited
(4)
|
|
|
|
Common Stock
|
|
|
195,488
|
(4)
|
|
|
7.54
|
%
|
|
(1)
|
Beneficial
Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect
to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with
respect to our common stock.
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|
(2)
|
As
of April 26, 2019, a total of 2,591,299 shares of commons stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1).
For each Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the denominator.
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(3)
|
Includes
20,000 shares of common stock owned by Bizhen Chen, Mr. Yan’s wife.
|
|
|
(4)
|
Based solely on Schedule 13D filed with the SEC on August 8, 2018, in which Alliance Investment Management
reported it has sole voting and dispositive power with respect to 195,488 shares of our common stock. The address of the reporting
person is 7 Belmont Road, Kingston, Jamaica.
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None of our existing shareholders has voting rights that differ
from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in our
change in control.
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ITEM 7.
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MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
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Please refer to Item 6 “Directors,
Senior Management and Employees—E. Share Ownership.”
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B.
|
Related Party Transactions
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From time to time, KBS and its subsidiaries borrowed money from our Chairman and Chief Executive Officer,
Mr. Keyan Yan, to pay for Company expenses. These amounts are interest-free, unsecured and repayable on demand. In years 2017 and
2016, Mr. Yan paid all the Company expenses in connection with the Company’s Nasdaq continued listing and SEC reporting out
of his pocket. As of December 31, 2018 and 2017, the balance of these amounts we borrowed from Mr. Yan was $485,302 and $35,483,
respectively.
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C.
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Interests of Experts and Counsel
|
Not applicable.
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ITEM 8.
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FINANCIAL INFORMATION
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|
A.
|
Consolidated Statements and Other Financial Information
|
Financial Statements
We have appended consolidated financial statements filed as
part of this report. See Item 18 “Financial Statements.”
Legal Proceedings
We may be subject to legal proceedings,
investigations and claims incidental to the conduct of our business from time to time. We are currently not party to any legal
or arbitration proceedings, including those relating to bankruptcy, receivership or similar proceedings and those involving any
third party, which may have, or have had in the recent past, significant effects on our financial position or profitability.
Dividend Policy
To date, we have not paid any cash dividends
on our shares. As a Marshall Islands company, we may only declare and pay dividends except when the corporation is insolvent or
would thereby be made insolvent or when the declaration or payment would be contrary to any restrictions contained in our Articles
of Incorporation. Dividends may be declared and paid out of surplus only; but in case there is no surplus, dividends may be declared
or paid out of the net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. We currently
anticipate that we will retain any available funds to finance the growth and operation of our business and we do not anticipate
paying any cash dividends in the foreseeable future. Additionally, our cash held in foreign countries may be subject to certain
control limitations or repatriation requirements, limiting our ability to use this cash to pay dividends.
No significant change has occurred since the date of our consolidated
financial statements filed as part of this annual report.
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ITEM 9.
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THE OFFER AND LISTING
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A.
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Offer and Listing Details
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Our common stock is listed on the NASDAQ
Capital Market and trade under the symbol “KBSF.” Between January 23, 2013 and November 3, 2014, our common stock was
traded on the NASDAQ Capital Market under the symbol “AQU.” Our Warrants and Units are quoted on the OTC Markets under
the symbols “KBSFW” and “KBSFU”, respectively. Prior to November 3, 2014, our Warrants and Units were quoted
on the OTC Markets under the symbols “AQUUF” and “AQUUU”, respectively. Before their quotation on the OTC
Markets, our Units commenced to trade on the Nasdaq Stock Market on October 26, 2012 and our Warrants commenced to trade separately
from its Units on January 23, 2013.
On February 3, 2017, a special shareholder
meeting was held at the Company’s headquarters in China and at the meeting, our shareholders approved a proposal to grant
discretionary authority to the Board of Directors of the Company to effect a reverse stock split of issued and outstanding shares
of common stock at a ratio within the range from one-for-two up to one-for-twenty; and determine whether to pay in cash the fair
value of fractions of a share of common stock as of the time when those entitled to receive such fractions are determined, or to
entitle shareholders to receive, in lieu of any fractional share, the number of shares of common stock rounded up to the next whole
number. On February 3, 2017, after the special shareholder meeting, our Board of Directors approved a one-for-fifteen reverse stock
split of the Company’s issued and outstanding common stock. In addition, in lieu of issuing any fractional share, the Board of
Directors decided that shareholders are entitled to receive the number of shares of common stock rounded up to the next whole number.
Our common stock began trading on the NASDAQ Stock Market on a split-adjusted basis when the market opened on February 9, 2017.
Approximate Number of Holders of Our
Securities
On April 26, 2019, there was 1 holder of
record of our Units, 359 shareholders of record of our common stock and 1 holder of record of our Warrants. Certain of our securities
are held in nominee or street name so the actual number of beneficial owners of our securities is greater than the number of record
holders set forth above.
Not applicable.
See our disclosures above under
“A. Offer and Listing Details.”
Not applicable.
Not applicable.
Not applicable.
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ITEM 10.
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ADDITIONAL INFORMATION
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Our Amended and Restated Articles of Incorporation
authorize the Company to issue up to 155,000,000 shares with a par value of $0.0001, consisting of 150,000,000 shares of common
stock and 5,000,000 shares of preferred stock. As of date of this report, there are 2,591,299 shares of common stock issued and
outstanding. We have never issued any preferred stock.
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●
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As
of date of this report, we have 717 IPO Units outstanding.
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●
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As
of date of this report, we have 393,836 warrants outstanding (including 369,302 IPO Warrants and 24,534 Placement Warrants), each
warrant entitles the holder to purchase one share of common stock at a purchase price of $172.5.
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|
B.
|
Memorandum and Articles of Association
|
The following represents a summary of
certain key provisions of our articles of incorporation and bylaws. The summary does not purport to be a summary of all of the
provisions of our articles of incorporation and bylaws. For more complete information you should read our amended and restated
articles of incorporation and bylaws, each listed as an exhibit to this report.
We were incorporated in the Marshall Islands
on January 26, 2012 under the Marshall Islands Business Corporations Act (“BCA”). The purpose of the Company is to
engage in any lawful act or activity for which corporations may now or hereafter be organized under the BCA. Our amended and restated
articles of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.
Description of Common Stock
Each outstanding
share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Upon our dissolution,
liquidation or winding up of the affairs of the Company, after payment in full of all amounts required to be paid to creditors
and to the holders of preferred stock having liquidation preferences, if any, the holders or our common stock will be entitled
to receive pro rata our remaining assets available for distribution. Holders of common stock do not have conversion, redemption
or preemptive rights to subscribe to any of our securities.
Blank Check Preferred Stock.
Our Board of Directors is authorized, without
any further vote or action by our stockholders, to issue up to 5,000,000 shares of preferred stock in different classes and series
and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including
dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the
powers and rights associated with the common stock, at such times and on such other terms as they think proper. Our Board of Directors
may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the
removal of our management.
Warrants
As of date of this report, we have 393,836
warrants outstanding, among which 369,302 warrants were issued to the public in our IPO (the “IPO Warrants”). Each
of the IPO Warrants entitles the holder to purchase one share of common stock at a price of $172.5 expiring on July 31, 2019, provided
that there is an effective registration statement covering the shares of common stock underlying the IPO Warrants.
The Company may redeem the IPO Warrants
at a price of $0.01 per warrant upon 30 days’ notice, after they become exercisable and prior to their expiration, only in
the event that the last sale price of the shares of common stock is at least $17.50 per share for any 20 trading days within a
30-trading day period (“30-Day Trading Period”) ending three business days prior to the date on which notice of redemption
is given, provided there is a current registration statement in effect with respect to the shares of common stock underlying such
IPO Warrants throughout the 30-day redemption period. The Company is only required to use its best efforts to maintain the effectiveness
of the registration statement covering the underlying common stock of the IPO Warrants. There are no contractual penalties for
failure to deliver securities if a registration statement is not effective at the time of exercise. Additionally, in the event
that a registration statement is not effective at the time of exercise, the holder of such warrant shall not be entitled to exercise
such warrant for cash and in no event (whether in the case of a registration statement not being effective or otherwise) will the
Company be required to net cash settle the warrant exercise.
In addition, Aqua Investments Corp., an
entity controlled by certain founding shareholders of the Company, acquired 24,534 warrants, each entitles the holder to purchase
one share of common stock at a price of $172.50, expiring on July 31, 2019 (the “Placement Warrants”). The Placement
Warrants are identical to the IPO Warrants except that the Placement Warrants (i) may be exercised for cash or on a cashless basis;
(ii) will not be redeemable by the Company and (ii) may be exercised even if there is not an effective registration statement relating
to the shares underlying the warrants, so long as they are held by the initial purchaser or any of its permitted transferees.
As of date of this report, we also have
717 IPO Units outstanding and publicly trading, each including one IPO Warrant and one share of our common stock.
Directors
The business and affairs of the Company
are managed by or under the direction of our Board of Directors.
Our directors are elected by the holders
of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled to
vote generally in the election of directors (“Voting Stock”). Our amended and restated articles of incorporation provide
that cumulative voting shall not be used to elect directors. Each director will be elected to serve until the next annual meeting
of shareholders and until his/her successor shall have been duly elected and qualified, except in the event of his/her death, resignation,
removal or the earlier termination of his/her term of office.
Any director or the entire Board of Directors
may be removed at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the total voting
power of the Voting Stock entitled to vote thereon or with cause by directors constituting at least two-thirds of the entire Board.
Vacancies in the Board of Directors occurring
by death, resignation, the creation of new directorships, the failure of the shareholders to elect the whole board at any annual
election of directors, or, except as herein provided, for any other reason, including removal of directors for cause, may be filled
either by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, at any special
meeting called for that purpose or at any regular meeting of the Board. Vacancies occurring by removal of directors without cause
may be filled only by vote of the shareholders.
Shareholder Meetings
Annual stockholder meetings will be held
at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands.
Under our amended and restated articles
of incorporation, special meetings may be called by the board of directors, or by the secretary of the Company requested by stockholders
representing certain amount of voting power. Our board of directors shall give not less than 15 days and not more than 60 days
prior written notice of a shareholders’ meeting to each shareholder of record entitled to vote thereat and to each shareholder
of record who, by reason of any action proposed at such meeting would be entitled to have his/her shares appraised if such action
were taken, and the notice shall include a statement of that purpose and to that effect.
Our bylaws provide that a meeting of shareholders
is duly constituted if, at the commencement of the meeting, there are shareholders present in person or by proxy representing not
less than a majority of the votes of the shares issued and outstanding and entitled to vote on resolutions of shareholders to be
considered at the meeting.
If a quorum is present, the affirmative
vote of a majority of the shares of stock represented at the meeting will be the act of the shareholders. At any meeting of shareholders,
each shareholder entitled to vote any shares on any manner to be voted upon at such meeting shall be entitled to one vote on such
matter for each such share. Any action required or permitted to be taken at a meeting, may be taken without a meeting if a consent
in writing setting forth the action so taken, is signed by all the shareholders entitled to vote with respect to the subject matter
thereof.
Dissenters’ Rights of Appraisal and Payment.
Under the BCA, our stockholders have the
right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made
in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting
stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation.
In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive
payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must
follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree
on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court
in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the
dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed
appraiser.
Stockholders’ Derivative Actions
Under the BCA, any of our stockholders
may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder
bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction
to which the action relates.
Indemnification of Officers and Directors
The BCA authorizes
corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for
monetary damages for breaches of directors’ fiduciary duties. Our amended and restated articles of incorporation include
a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest
extent permitted by law. We must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly
authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and
offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain
employees for some liabilities.
The limitation
of liability and indemnification provisions in our amended and restated articles of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect
of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent
we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in Item 4 “Information on the Company,”
Item 5 “Operating and Financial Review and Prospects—F. Tabular Disclosure of Contractual Obligations,” Item
7 “Major Shareholders and Related Party Transactions,” or filed (or incorporated by reference) as exhibits to this
annual report or otherwise described or referenced in this annual report.
Marshall Islands Exchange Controls
Under Marshall Islands law, there are currently
no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance
of dividends, interest or other payments to nonresident holders of our shares.
BVI Exchange Controls
There are no material exchange controls
restrictions on payment of dividends, interest or other payments to the holders of our common stock or on the conduct of our operations
in the BVI, where we were incorporated. There are no material BVI laws that impose any material exchange controls on us or that
affect the payment of dividends, interest or other payments to nonresident holders of our common stock. BVI law and our memorandum
and articles of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote
our common stock.
PRC Exchange Controls
Regulations on Foreign Currency Exchange
Under the PRC Foreign Currency Administration
Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations issued by SAFE and other relevant
PRC government authorities, payment of current account items in foreign currencies, such as trade and service payments, payment
of interest and dividends can be made without prior approval from SAFE by following the appropriate procedural requirements. By
contrast, the conversion of RMB into foreign currencies and remittance of the converted foreign currency outside the PRC for the
purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires prior approval
from SAFE or its local office.
On February 13, 2015, SAFE promulgated
the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, effective from June 1, 2015,
which cancels the requirement for obtaining approvals of foreign exchange registration of foreign direct investment and overseas
direct investment from SAFE. The application for the registration of foreign exchange for the purpose of foreign direct investment
and overseas direct investment may be filed with qualified banks, which, under the supervision of SAFE, may review the application
and process the registration.
The Circular of the SAFE on Reforming the
Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or SAFE Circular 19, was promulgated
on March 30, 2015 and became effective on June 1, 2015. According to SAFE Circular 19, a foreign-invested enterprise may, according
to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the
relevant foreign exchange bureau has confirmed monetary contribution rights and interests (or for which the bank has registered
the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to settle 100% of
their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its
own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment
with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic re-investment registration
and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange bureau (bank) at the
place of registration. The Circular of the SAFE on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement
of Capital Accounts, or SAFE Circular 16, was promulgated and became effective on June 9, 2016. According to SAFE Circular 16,
enterprises registered in PRC may also convert their foreign debts from foreign currency into Renminbi on self-discretionary basis.
SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but
not limited to foreign currency capital and foreign debts) on self—discretionary basis, which applies to all enterprises
registered in the PRC. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital
of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments
in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC
unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make loans for related enterprises
unless it is within the business scope or to build or to purchase any real estate that is not for the enterprise own use with the
exception for the real estate enterprise.
On January 26, 2017, SAFE promulgated the
Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification,
or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profits from domestic
entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions
regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic entities
must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to SAFE Circular 3, domestic
entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions, contracts
and other proof as a part of the registration procedure for outbound investment.
Regulations on Foreign Exchange Registration
of Overseas Investment by PRC Residents
SAFE issued 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 became effective in July 2014, to replace the Circular of the State Administration of Foreign Exchange on Issues Concerning
the Regulation of Foreign Exchange in Equity Finance and Roundtrip Investments by Domestic Residents through Offshore Special Purpose
Vehicles, to regulate foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or
entities to seek offshore investment and financing or conduct round trip investment in China. SAFE Circular 37 defines a SPV as
an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore
financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment”
is defined as direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises
to obtain the ownership, control rights and management rights. SAFE Circular 37 stipulates that, prior to making contributions
into an SPV, PRC residents or entities be required to complete foreign exchange registration with SAFE or its local branch. In
addition, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning
Direct Investment in February 2015, which amended SAFE Circular 37 and became effective on June 1, 2015, requiring PRC residents
or entities to register with qualified banks rather than SAFE in connection with their establishment or control of an offshore
entity established for the purpose of overseas investment or financing.
PRC residents or entities who had contributed
legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation
of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the
registration is required if there is a material change with respect to the SPV registered, such as any change of basic information
(including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges
of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent
notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established
through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested
enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer
or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant
PRC residents or entities to penalties under PRC foreign exchange administration regulations. See “Risk Factors—Risks
Related to Doing Business in China—PRC regulations relating to investments in offshore companies by PRC residents may subject
our PRC-resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our
PRC subsidiary or limit our PRC subsidiary’s ability to increase their registered capital or distribute profits.”
Regulations on Stock Incentive Plans
SAFE promulgated the Notice on Issues Concerning
the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed
Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous rules issued by SAFE in March 2007. Pursuant
to the Stock Incentive Plan Notice and other relevant rules and regulations, PRC residents participating in stock incentive plan
in an overseas publicly-listed company are required to register with SAFE or its local branches and follow certain other procedures.
Participants of a stock incentive plan who are PRC residents must conduct the SAFE registration and other procedures with respect
to the stock incentive plan through a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company
or another qualified institution appointed by the PRC subsidiary. In addition, the PRC agent is required to update the relevant
SAFE registration should there be any material change to the stock incentive plan, the PRC agent or other material changes. The
PRC agent must, on behalf of the PRC residents who have the right to exercise the employee stock options, apply to SAFE or its
local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the
employee stock options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive
plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened
by the PRC agents prior to distribution to such PRC residents.
We adopted an equity incentive plan in
2018, under which we have the discretion to award incentives and rewards to eligible participants. We have advised the recipients
of awards under our equity incentive plan to handle relevant foreign exchange matters in accordance with the Stock Incentive Plan
Notice. However, we cannot guarantee that all employee awarded equity-based incentives can successfully register with SAFE in full
compliance with the Stock Incentive Plan Notice. See “Risk Factors—Risks Related to Doing Business in China—Any
failure to comply with PRC regulations regarding employee share incentive plans may subject the PRC plan participants or us to
fines and other legal or administrative sanctions.”
Regulations on Dividend Distribution
Distribution of dividends of foreign investment
enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and amended in 2000 and 2016 respectively,
and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990 and amended in 2001 and 2014 respectively.
Under these regulations, foreign investment enterprises in the PRC may distribute dividends only out of their accumulative profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, no less than 10% of the accumulated
profits of the foreign investment enterprises in the PRC are required to be allocated to fund certain reserve funds each year unless
these reserves have reached 50% of the registered capital of the enterprises. A PRC company is not permitted to distribute any
profits until any losses from previous fiscal years have been offset. Profits retained from prior fiscal years may be distributed
together with distributable profits from the current fiscal year. Under our current corporate structure, our BVI holding company
may rely on dividend payments from IST, which is a wholly foreign-owned enterprise incorporated in China, to fund any cash and
financing requirements we may have. Limitation on the ability of our consolidated VIEs to make remittance to IST and on the ability
of IST to pay dividends to us could limit our ability to access cash generated by the operations of those entities. See “Risk
Factors—Risks Related to Doing Business in China—Restrictions under PRC law on our PRC subsidiaries’ ability
to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions
that could benefit our business, pay dividends to you, and otherwise fund and conduct our business”
The following is a general summary of
the material Marshall Islands, Hong Kong, BVI, PRC and U.S. federal income tax consequences relevant to an investment in our units,
shares of common stock and warrants to acquire our shares of common stock, sometimes referred to collectively in this summary as
our “securities”. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular
prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this prospectus,
all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address
United States state or local tax laws, or tax laws of jurisdictions other than the Marshall Islands, Hong Kong, the BVI, the PRC
and the United States. We recommend that you consult your own tax advisors with respect to the consequences of acquisition, ownership
and disposition of our securities.
Marshall Islands Taxation
The following are the material Marshall
Islands tax consequences of our activities to us and to our stockholders and warrant holders of investing in our Common Stock and
warrants. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding
tax or income tax will be imposed upon payments of dividends by us to our stockholders or proceeds from the disposition of our
common stock and warrants, provided such stockholders or warrant holders, as the case may be, are not residents in the Marshall
Islands. There is no tax treaty between the United States and the Republic of the Marshall Islands.
BVI Taxation
The BVI does not impose a withholding tax
on dividends paid to us by our BVI subsidiary, nor does the BVI levy any capital gains or income taxes on us or our BVI subsidiary.
However, our BVI subsidiary is required to pay the BVI government an annual license fee based on the number of shares it is authorized
to issue.
There is no income tax treaty or convention currently in effect
between the United States and the BVI.
Hong Kong Taxation
Our Hong Kong subsidiaries, under the current laws of Hong Kong,
are subject to profits tax of 16.5%. No provision for Hong Kong profits tax has been made as our Hong Kong subsidiaries have no
taxable income.
PRC Taxation
We are a holding company incorporated in
the Marshall Islands, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation
rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax
rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent,
will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s
jurisdiction of incorporation and China to reduce such rate.
Under the Arrangement between the Mainland
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax
rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the
aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject
to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below.
However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under
the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration
of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding
tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to
be received by us and ultimately by shareholders.
According to the Notice Regarding Interpretation
and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the
right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner”
may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit
company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established
for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country
of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations
as manufacturing, distribution and management. As our Hong Kong holding companies are controlling companies and are not engaged
in substantial business operations, they could be considered as conduit companies by tax authorities and we do not expect them
to be a beneficial owner.
In addition to the changes to the current tax structure, under
the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered
a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term
“de facto management bodies” as “an establishment that exercises, in substance, overall management and control
over the production, business, personnel, accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax
authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently
consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income
would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends
paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax,
have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
U.S. Federal Income Taxation
The following is a discussion of certain
material U.S. federal income tax consequences of the acquisition, ownership and disposition of our securities. It does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation.
The discussion applies only to holders that hold their securities as capital assets (generally property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based on the Code,
income tax regulations promulgated thereunder, judicial positions, published positions of the Internal Revenue Service, or the
IRS, and other applicable authorities, all as in effect as of the date hereof and all of which are subject to change, possibly
with retroactive effect. This discussion is general in nature and is not exhaustive of all possible tax considerations, nor does
the discussion address any state, local or foreign tax considerations or any U.S. tax considerations (e.g., estate or gift tax)
other than U.S. federal income tax considerations, that may be applicable to particular holders.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal
income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
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banks,
insurance companies or other financial institutions;
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persons
subject to the alternative minimum tax;
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tax-exempt
organizations;
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controlled
foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid United States federal
income tax;
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certain
former citizens or long-term residents of the United States;
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dealers
in securities or currencies;
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traders
in securities that elect to use a mark-to-market method of accounting for their securities holdings;
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persons
that own, or are deemed to own, more than five percent of our capital stock;
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holders
who acquired our stock as compensation or pursuant to the exercise of a stock option; or
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persons
who hold our shares as a position in a hedging transaction, “straddle,” or other risk reduction transaction.
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For purposes of this discussion, a U.S.
holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation,
or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the
United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an estate
the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S. court is able
to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control
all substantial decisions of the trust, or (b) it has a valid election in effect under applicable law and regulations to be treated
as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is neither a U.S. holder nor a partnership
or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity
classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally
will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax
advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our shares.
As a result of consummation of the Share
Exchange, (i) we acquired substantially all the properties of KBS International, a U.S. corporation, and (ii) the former shareholders
of KBS International held at least 80 percent of our common stock by reason of having held stock of KBS International. Accordingly,
under Section 7874 of the Code, we are treated for U.S. federal tax purposes as a U.S. corporation and, among other consequences,
are subject to U.S. federal income tax on our worldwide income. This discussion assumes that Section 7874 of the Code continues
to apply to treat us as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal of Section
7874 of the Code), we were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences described
herein could be materially and adversely affected.
U.S. Federal Income Tax Consequences
for U.S. Holders
Distributions
In the event that distributions are paid
on our common stock, the gross amount of such distributions will be included in the gross income of the U.S. holder as dividend
income on the date of receipt to the extent that the distribution is paid out of current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. Such dividends will be eligible for the dividends-received deduction allowed
to corporations in respect of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders,
including individuals, may be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a
foreign tax credit with respect to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules
are complex, and their application in connection with Section 7874 of the Code and the Agreement Between the Government of the
United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the
Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S.
holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit
rules and the U.S.-PRC Tax Treaty.
To the extent that dividends paid on our
common stock exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return
of tax basis on our common stock, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated
as gain from the disposition of those common stock. Because Section 7874 of the Code has applied to treat us as a U.S. corporation
only since consummation of the Share Exchange in 2014, we may not be able to demonstrate to the IRS the extent to which a distribution
on our common stock exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles),
in which case all of such distribution will be treated as a dividend for U.S. federal income tax purposes.
Sale or Other Disposition
U.S. holders of our common stock will recognize
taxable gain or loss on any sale, exchange, or other taxable disposition of common stock equal to the difference between the amount
realized for the common stock and the U.S. holder’s tax basis in the common stock. This gain or loss generally will be capital
gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax rates if the common
stock has been held for more than one year. The deductibility of capital losses is subject to limitations. A U.S. holder may be
eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale or other disposition
of common stock. However, the foreign tax credit rules are complex, and their application in connection with Section 7874 of the
Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect
to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
Unearned Income Medicare
Contribution
Certain U.S. holders who are individuals,
trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains from
the sale or other disposition of shares of stock. U.S. holders should consult their own advisors regarding the effect, if any,
of this rule on their ownership and disposition of our common stock.
U.S. Federal Income Tax Consequences
for Non-U.S. Holders
Distributions
The rules applicable to non-U.S. holders
for determining the extent to which distributions on our common stock, if any, constitute dividends for U.S. federal income tax
purposes are the same as for U.S. holders.
See “–U.S. Federal Income Tax Consequences for U.S. Holders– Distributions.”
Any dividends paid to a non-U.S. holder
by us are treated as income derived from sources within the United States and generally will be subject to U.S. federal income
tax withholding at a rate of 30% of the gross amount of the dividends, or at a lower rate provided by an applicable income tax
treaty if non-U.S. holders provide proper certification of eligibility for the lower rate (usually on IRS Form W-8BEN or W-8BEN-E).
Dividends received by a non-U.S. holder that are effectively connected with such holder’s conduct of a U.S. trade or business
(and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the U.S.)
are exempt from such withholding tax, provided that applicable certification requirements are satisfied. In such case, however,
non-U.S. holders will be subject to U.S. federal income tax on such dividends, net of certain deductions, at the rates applicable
to U.S. persons. In addition, corporate non-U.S. holders may be subject to an additional branch profits tax equal to 30% or such
lower rate as may be specified by an applicable tax treaty on dividends received that are effectively connected with the conduct
of a trade or business in the United States.
If non-U.S. holders are eligible for a
reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, such non-U.S. holders may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale or Other Disposition
Except as described below for a reduced
rate of U.S. withholding tax pursuant to an applicable income tax treaty, any gain realized by a non-U.S. holder upon the sale
or other disposition of our common stock generally will not be subject to U.S. federal income tax unless:
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the
gain is effectively connected with the conduct of a trade or business in the United States by such non- U.S. holder, and, if an
income tax treaty applies, is attributable to a permanent establishment maintained by such non-U.S. holder in the U.S.;
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the
non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition,
and certain other conditions are met; or
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We
are or have been a “U.S. real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any
time during the shorter of the five-year period ending on the date of disposition or the period during which the holder has held
our Common Stock.
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Non-U.S. holders whose gain is described
in the first bullet point above will be subject to U.S. federal income tax on the gain derived from the sale, net of certain deductions,
at the rates applicable to U.S. persons. Corporate non-U.S. holders whose gain is described in the first bullet point above may
also be subject to the branch profits tax described above at a 30% rate or lower rate provided by an applicable income tax treaty.
Individual non-U.S. holders described in the second bullet point above will be subject to a flat 30% U.S. federal income tax rate
on the gain derived from the sale, which may be offset by U.S.-source capital losses, even though such non-U.S. holders are not
considered to be residents of the United States.
A corporation will be a USRPHC if the fair
market value of its U.S. real property interests equals or exceeds 50 percent of the aggregate of its real property interests (U.S.
and non-U.S.) and its assets used or held for use in a trade or business. Because we do not currently own significant U.S. real
property, we believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are
a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets,
there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common
stock are regularly traded on an established securities market, such common stock will be treated as U.S. real property interests
only if a non-U.S. holder actually or constructively holds more than 5% of such regularly traded common stock at any time during
the applicable period that is specified in the Code.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions
of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when applicable, will impose
a U.S. federal withholding tax of 30% on payments of dividends on, and (for dispositions after December 31, 2018) gross proceeds
from dispositions of, our common stock that are held through “foreign financial institutions” (which
is broadly defined for this purpose and in general includes investment vehicles) and certain other non-U.S. entities unless various
U.S. information reporting and due diligence requirements (generally relating to ownership by U.S. persons of certain interests
in or accounts with those entities) have been satisfied or an exemption applies. An intergovernmental agreement between the United
States and an applicable foreign country may modify these requirements. U.S. Holders should consult their tax advisers regarding
the effect, if any, of the FATCA provisions on their particular circumstances.
Information Reporting and
Backup Withholding
Payments of dividends or of proceeds on
the disposition of stock made to a holder of our common stock may be subject to information reporting and backup withholding at
a current rate of 24% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate
withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally
be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar
report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available
to tax authorities in the holder’s country of residence.
Backup withholding is not an additional
tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld.
If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the
required information is furnished to the IRS in a timely manner.
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F.
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Dividends and Paying Agents
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Not applicable.
Not applicable.
We have filed this annual report on Form 20-F with the SEC under
the Exchange Act. Statements made in this report as to the contents of any document referred to are not necessarily complete. With
respect to each such document filed as an exhibit to this report, reference is made to the exhibit for a more complete description
of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange
Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed by us
with the SEC, including this report, may be inspected and copied at the public reference room of the SEC at 100 F Street, N.E.,
Washington D.C. 20549. You can also obtain copies of this report by mail from the Public Reference Section of the SEC, 100 F. Street,
N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s Internet
site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330. In accordance with NASDAQ Stock Market Rule 5250(d),
we will also post this annual report on Form 20-F on our website at www.kbsfashion.com.
As a foreign private issuer, we are exempt from the rules under
the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
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I.
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Subsidiary Information
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Not applicable.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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Interest Rate Risk
We deposit surplus funds with Chinese banks
earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry
fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently
do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions
in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S.
dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially
all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations
may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S.
dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets
and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average
exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in
determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation
(depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $0.93 million based
on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2018. As of December
31, 2018, our accumulated other comprehensive income was -$1.8 million. We have not entered into any hedging transactions in an
effort to reduce our exposure to foreign exchange risk.
The value of RMB against the U.S. dollar
and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July
2005, RMB has not been 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, 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 RMB exchange rate and lessen intervention in the foreign exchange market.
Inflation
Inflationary factors such as increases
in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not applicable.
Not applicable.
Not applicable.
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D.
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American Depositary Shares
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We do not have any American Depositary Shares.
Notes to Financial Statements
On
January 26, 2012, Aquasition Investments Corp (“Company”) was organized as a blank check company pursuant to the laws
of the Republic of the Marshall Islands for the purpose of acquiring through a merger, capital stock exchange, asset acquisition,
stock purchase, or similar acquisition transaction, one or more operating businesses or assets.
On
March 24, 2014, the Company entered into a Share Exchange Agreement and Plan of Liquidation (the “Agreement”) among
KBS International Holdings, Inc. (“KBS”), a Nevada corporation, Hongri International Holdings Ltd (“Hongri”),
a company organized under the laws of the British Virgin Islands, and Cheung So Wa and Chan Sun Keung, the principal shareholders
of KBS.
On
August 1, 2014, the share exchange was completed. In order to align with the brand and operations of the entities acquired pursuant
to the Agreement, the Company changed its name from Aquasition Investments Corp to KBS Fashion Group Limited.
The
Company’s units which are comprised of one share of common stock and one warrant are traded on the NASDAQ Capital Markets.
The Company’s trading symbol is KBSF.
The
acquisition was accounted for as a reverse merger and recapitalization where the Company, the legal acquirer is the accounting
acquiree, and KBS, the legal acquiree, was the accounting acquirer.
Description
of Subsidiaries:
Hongri
International Holdings Limited (the “Hongri”), formerly known as Wah Ying International Investment Inc., was incorporated
in the British Virgin Islands (the “BVI”) on July 8, 2008 as a limited liability company with authorized share capital
of $50,000, divided into 50,000 common shares with $1 par value. Up through December 31, 2010, 10,000 common shares had been issued
at par. On January 27, 2011, the Company issued an additional 10,000 common shares for cash consideration at $77 per share. The
principal activity of the Company is investment holding. Hongri a directly wholly owned subsidiary of the Company.
France
Cock (China) Limited (“France Cock”) was incorporated in Hong Kong on September 21, 2005 as a limited liability company
with authorized capital of HK$10,000, divided into 10,000 common shares with par value of HK$1. The capital has been fully paid
up. The principal activity of France Cock is the holding of intellectual property rights such as trademarks. France Cock owns
the Company’s trademarks, including “KBS” and “Kabiniao”. France Cock is a directly wholly owned subsidiary
of Hongri.
KBS Fashion Group Limited
Notes to Financial Statements
Roller
Rome Limited (“Roller Rome”) was incorporated in the BVI on March 28, 2006 as a limited liability company with authorized
share capital of $50,000, divided into 50,000 common shares with par value of $1. The principal activity of Roller Rome is the
provision of design and development services for sports apparel. Roller Rome is a directly wholly owned subsidiary of Hongri.
Vast
Billion Investment Limited (“Vast Billion”) was incorporated in Hong Kong on November 25, 2010 as a limited liability
company with authorized share capital of HK$10,000 divided into 10,000 ordinary shares with HK$1par value. One ordinary share
has been issued at par. Vast Billion is an investment holding company, and is a directly wholly owned subsidiary of Hongri.
Hongri
(Fujian) Sports Goods Co. Ltd. (“Hongri Fujian”) was established in the People’s Republic of China (the “PRC”)
on November 17, 2005 with a registered and paid up capital of RMB 5,000,000. On March 24, 2011, Hongri Fujian increased registered
capital from RMB 70,000,000 to RMB75,000,000. As of September 30, 2011, the paid up capital was RMB 39,551,860. Hongri Fujian
is engaged in the design, manufacture, marketing, and sale of apparel in the PRC. Hongri Fujian is a directly wholly owned subsidiary
of Vast Billion.
Anhui
Kai Xin Apparel Company Limited (“Anhui Kai Xin”) was established in the PRC on March 16, 2011 with a registered and
paid up capital of RMB 1,000,000. Anhui Kai Xin is a wholly owned subsidiary of Hongri Fujian. Anhui Kai Xin provides contracting
manufacturing services for companies in the sports apparel business.
|
2.
|
GROUP
ORGANIZATION AND BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
|
The
Group structure as at the reporting date is as follows:
KBS Fashion Group Limited
Notes to Financial Statements
|
3.
|
APPLICATION
OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)
|
Except
as described below, for the year ended December 31, 2018 the Company has consistently adopted all the new and revised standards,
amendments and interpretations (collectively IFRSs) issued by the International Accounting Standards Board (“IASB”)
and the IFRS Interpretations Committee (formerly known as “International Financial Reporting Interpretations Committee”
(“IFRIC”)) of the IASB that are effective for financial year beginning on January 1, 2018 in the preparation of the
consolidated financial statements throughout the year.
IFRS
2 (amendments) Classification and Measurement of Share-based Payment Transactions
IAS
40 (amendments) Transfers of Investment Property
Annual
improvements to IFRSs 2014–2016 cycle
Amendments
to IAS 28 Investments in Associates and Joint Ventures
Amendments
to IFRS 11: Accounting for acquisitions of interests in joint operations
IFRIC
22 Foreign Currency Transactions and Advance Consideration
Amendments
to IAS 16 and IAS 38: Clarification of acceptable methods of depreciation and amortization
Amendment
to IAS 27: Equity method in separate financial statements
Amendments
to IFRS 10, IFRS 12 and IAS 28: Investment entities: applying the consolidation exception
Amendments
to IAS 1: Disclosure initiative
Other
than as explained below regarding the impact of IFRS 9 and IFRS 15, the adoption of the above new and revised standards had no
significant financial effect on these financial statements. Other standards, amendments and interpretations which are effective
for the financial year beginning on January 1, 2018 are not material to the Group.
KBS
Fashion Group Limited
Notes
to Financial Statements
IFRS
9, Financial instruments
The Company has initially adopted
IFRS 9, Financial instruments from January 1, 2018. IFRS 9 replaces IAS 39, Financial instruments: recognition and measurement.
It sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell
non-financial items.
Based on the assessment by the Company,
there is no significant cumulative effect of the initial application of IFRS 9 at January 1, 2018 in accordance with the transition
requirement.
Classification
and measurement of financial assets and financial liabilities IFRS 9 contains three principal classification and measurement categories
for financial assets: amortised cost, FVOCI, and fair value through profit or loss (“FVTPL”).
The
classification for debt instruments is determined based on the entity’s business model for managing the financial assets
and the contractual cash flow characteristics of the asset. A debt instrument will be measured at amortised cost if the instrument
is held for the collection of contractual cash flows which represent solely payments of principal and interest. Interest income
from the debt instrument is calculated using the effective interest method.
For
equity instruments, the classification is FVTPL regardless of the entity’s business model. The only exception is if the
equity instrument is not held for trading and the entity irrevocably elects to designate that instrument as FVOCI. If an equity
instrument is designated as FVOCI then only dividend income on that instrument will be recognised in profit or loss. Gains or
losses on that instrument will be recognised in other comprehensive income without recycling through profit or loss.
For an explanation of how the
Group classifies and measures financial assets and recognises related gains and losses under IFRS 9, see note 4, significant accounting
policies.
The measurement categories and
carrying amounts for all financial liabilities at January 1, 2018 have not been impacted by the initial application of IFRS 9.
The Group did not designate or re-designate any financial asset or financial liability at FVTPL at January
1, 2018.
Further, IFRS 9 replaces the “incurred
loss” model in IAS 39 with an ECL model. The ECL model requires an ongoing measurement of credit risk associated with a
financial asset and therefore recognises credit losses earlier than under the “incurred loss” model in IAS 39.
KBS Fashion Group Limited
Notes to Financial Statements
For
further details on the Group’s accounting policy for accounting for credit losses, see note 4, significant accounting policies.
The
Group has concluded that there is no material impact for the initial application of the new impairment requirements.
IFRS 15, Revenue from Contracts
with Customers
IFRS
15 establishes a five-step model comprehensive framework for the recognition of revenue from contracts with customer: (i) identify
the contract; (ii) identify performance obligations; (iii) determine the transaction price; (iv) allocate the transaction price
to the performance obligations; and (v) recognise revenue when (or as) a performance obligation is satisfied, i.e. when “control”
of the goods or services underlying the particular performance obligation is transferred to the customer. IFRS 15 replaced IAS
18 Revenue, IAS 11 Construction Contracts and related interpretations.
IFRS
15 also introduces additional qualitative and quantitative disclosure requirements which aim to enable users of the financial
statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The
Company’s business model is straight forward and its contracts with customers for the sale of goods include only single
performance obligation. The Company has concluded that revenue from sale should be recognised at the point of time when a customer
obtains control of goods. The Company has concluded that the initial application of IFRS 15 does not have a significant impact
on the Company’s revenue recognition.
Under IFRS 15, a contract liability, is recognised when a customer pays consideration, or is contractually
required to pay consideration and the amount is already due, before the Company recognises the related revenue, or when the Company
receives consideration from a customer and expects to refund some or all of that consideration to the customer (i.e. refund liability).
To reflect this change in presentation, contract liabilities, including receipts in advance from customers and refund liabilities
are now separately presented as contract liabilities at December 31, 2018, as a result of the adoption of IFRS 15.
KBS Fashion Group Limited
Notes to Financial Statements
At
the date these consolidated financial statements are authorized for issuance, the IASB has issued the following new and revised
International Accounting Standards (“IASs”), IFRSs, amendments and IFRICs which are not yet effective in respect of
the years. The Company has not early applied the following new and revised standards, amendments or interpretations that have
been issued but are not yet effective:
IFRS
16 Leases
(1)
IFRS
17 Insurance Contracts
(2)
Amendments
to IFRS 9 Prepayment Features with Negative Compensation
(1)
Amendments
to IAS 28 Long-term Interests in Associates and Joint Ventures
(1)
Annual
Improvements to IFRS Standards 2015–2017 Cycle - Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements,
IAS 12 Income Taxes and IAS 23 Borrowing Costs
(1)
Amendments
to IAS 19 Employee Benefits Plan Amendment, Curtailment or Settlement
(1)
IFRS
10 Consolidated Financial Statements and IAS 28 (amendments) Sale or Contribution of Assets between an Investor and its Associate
or Joint Venture
(3)
IFRIC
23 Uncertainty over Income Tax Treatments
(1)
(1)
Effective for
the accounting period beginning on January 1, 2019.
(2)
Effective for
the accounting period beginning on January 1, 2021.
(3)
The effective date of the amendments has yet to be set by the IASB
The
Company will apply the above new standards and amendments to standards when they become effective. The Company is in the process
of making an assessment of the impact of the above new standards and amendments to standards.
In relation to IFRS 16, the
standard will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance
leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals
are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change.
The standard will affect primarily the accounting for Company’s operating leases. As at the reporting date, the Company
has non-cancellable operating lease commitments of 2,450,267, see Note 34. However, the Company has not yet determined to what
extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect
the Group’s profit and classification of cash flows. Some of the commitments may be covered by the exception for short-term
and low value leases and some commitments may relate to arrangements that will not qualify as leases under IFRS 16.
The standard is mandatory for accounting periods commencing on or after January 1, 2019. At this stage,
the Company does not intend to adopt the standard before its effective date.
There
are no other standards and interpretations in issue but not yet adopted that the directors anticipate will have a material effect
on the consolidated financial statements of the Company.
KBS Fashion Group Limited
Notes to Financial Statements
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4.
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SIGNIFCANT
ACCOUNTING POLICIES
|
The
principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been
consistently applied to all the years presented, unless otherwise stated.
Basis
of preparation
The
consolidated financial statements have been prepared on the historical cost basis and in accordance with IFRS as issued by the
IASB. The principal accounting policies are set out below.
Basis
of consolidation
The
consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its
subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities.
Where
necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with
those used by other members of the Group.
All
intra-group transactions, balances, income and expenses are eliminated on consolidation.
Foreign
currencies
Functional
and presentation currency
Items
included in the financial statements are measured using the currency of the primary economic environment in which the entity operates
(the “functional currency”).
The
Group conducts its business predominately in the PRC and hence its functional currency is the Renminbi (RMB).
KBS Fashion Group Limited
Notes to Financial Statements
Translation
from RMB to USD found place at the following rates:
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Period end rates
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Average rates
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|
December 31, 2016
|
|
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USD 1.00= RMB 6.9370
|
|
|
USD 1.00=RMB 6.6528
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|
December 31, 2017
|
|
|
USD 1.00= RMB 6.5924
|
|
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USD 1.00=RMB 6.7423
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|
December 31, 2018
|
|
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USD 1.00= RMB 6.8632
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|
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USD 1.00=RMB 6.6322
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|
Translation
from HKD to USD found place at the following rates:
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|
|
Period end rates
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|
|
Average rates
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|
December 31, 2016
|
|
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USD 1.00= HKD 7.7552
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|
|
USD 1.00=HKD 7.7614
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|
December 31, 2017
|
|
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USD 1.00= HKD 7.8170
|
|
|
USD 1.00=HKD 7.7928
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|
December 31, 2018
|
|
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USD 1.00= HKD 7.8329
|
|
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USD 1.00=HKD 7.8636
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The
results and financial positions in functional currency are translated into the presentation currency, USD, of the Company as follows:
|
(1)
|
Assets
and liabilities for each balance sheet presented are translated at the closing rate at
the date of that balance sheet;
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(2)
|
Income
and expenses for each income statement are translated at average exchange rates (unless
this average is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated
at the dates of the transactions);
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|
(3)
|
Share
equity, share premium and dividends are translated at historical exchange rates; and
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|
(4)
|
All
resulting exchange differences are recognized in foreign currency translation reserve,
a separate component of equity.
|
All
financial information presented in USD has been rounded to the nearest dollar, except when otherwise indicated.
Segment
reporting
Operating
segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information
provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing
the performance of, the Group’s various lines of business and geographical locations.
KBS Fashion Group Limited
Notes to Financial Statements
Individually
material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics
and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers,
the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments
which are not individually material may be aggregated if they share a majority of these criteria. The Group’s three segments
are wholesale, retail and contract manufacturing.
Revenue recognition (applicable
from January 1, 2018)
Revenue from contracts with customers
Revenue from contracts with customers
is recognised when control of goods or services is transferred to the customers at an amount that reflects the consideration to
which the Company expects to be entitled in exchange for those goods or services.
When the consideration in a contract
includes a variable amount, the amount of consideration is estimated to which the Company will be entitled in exchange for transferring
the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is
highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated
uncertainty with the variable consideration is subsequently resolved.
When the contract contains a
financing component which provides the customer a significant benefit of financing the transfer of goods or services to the customer
for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that
would be reflected in a separate financing transaction between the Company and the customer at contract inception. When the contract
contains a financing component which provides the Company a significant financial benefit for more than one year, revenue recognised
under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a
contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or
less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient
in IFRS 15.
Revenue from the sale of goods
is recognised at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods.
Other income
Interest income is recognised
on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts
over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial
asset.
Rental income is recognised on
a time proportion basis over the lease terms.
Dividend income is recognised
when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated
with the dividend will flow to the Company and the amount of the dividend can be measured reliably.
KBS Fashion Group Limited
Notes to Financial Statements
Revenue recognition (applicable
before January 1, 2018)
Revenue
is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods sold in
the normal course of business, net of discounts and sales related taxes.
The
Group’s revenue originates (i) from corporate owned stores, (ii) distributors and (iii) the services performed as an original
design manufacturer. Revenue from all above categories is recognized when all the following conditions are satisfied:
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●
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the
Group has transferred to the buyer the significant risks and rewards of ownership of
the goods;
|
|
●
|
the
Group has fully rendered service to the contract manufacturing customer by shipping the
product to the customer;
|
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●
|
the
Group retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold;
|
|
●
|
the
amount of revenue can be measured reliably;
|
|
●
|
it
is probable that the economic benefits associated with the transaction will flow to the
Group; and the costs incurred or to be incurred in respect of the transaction can be
measured reliably.
|
Specifically, revenue from sale
of goods is recognized when the goods are delivered, and title has passed.
Contract liabilities (applicable
from 1 January 2018)
A contract liability is the obligation
to transfer goods or services to a customer for which the Group has received a consideration (or an amount of consideration that
is due) from the customer. If a customer pays the consideration before the Group transfers goods or services to the customer, a
contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are
recognised as revenue when the Group performs under the contract.
Value
added tax (VAT)
Output VAT is 16% of product
sales and taxable services revenue, according to tax laws. The remaining balance of output VAT, after subtracting the deductible
input VAT of the period, is VAT payable.
KBS Fashion Group Limited
Notes to Financial Statements
Borrowing
costs
Borrowing
costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such
time as the assets are substantially ready for their intended use or sale.
All
other borrowing costs are recognized in profit or loss in the period in which they are incurred.
Retirement
benefit costs
Pursuant
to the relevant regulations of the PRC government, the Group’s subsidiaries located in the PRC participate in a local municipal
government retirement benefits scheme (the “Scheme”), whereby they contribute a prescribed percentage of the basic salaries
of their employees to the Scheme to fund their retirement benefits. Once the Scheme has been funded via contributions by the Group’s
participating subsidiaries, the local municipal government takes responsibility for the retirement benefits obligations of all
existing and future retired employees of those subsidiaries located in the PRC; accordingly, the only obligation of the Group
with respect to the Scheme is to pay the on-going required contributions as long as the employees maintain employment with the
Group. There are no provisions under the Scheme whereby forfeited contributions may be used to reduce future contributions. These
plans are considered defined contribution plans. The Group has no legal or constructive obligations to pay further contributions
after its payment of the fixed contributions into the pension schemes. Contributions to pension schemes are recognized as an expense
in the period in which the related service is performed.
Taxation
The
tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent
that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised
in other comprehensive income or directly in equity, respectively.
The
current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date
in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax
returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions
where appropriate on the basis of amounts expected to be paid to the tax authorities.
KBS Fashion Group Limited
Notes to Financial Statements
Deferred
tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial
statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized
for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to
the extent that it is probable that taxable profits will be available against which those deductible temporary differences can
be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from
the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither
the taxable profit nor the accounting profit.
Deferred
tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the
Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse
in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments
are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the
benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The
carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no
longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred
tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled
or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting
period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner
in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred
income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current
tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority
on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Current
and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive
income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or
directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination,
the tax effect is included in the accounting for the business combination.
KBS Fashion Group Limited
Notes to Financial Statements
Store
pre-opening cost
Store
pre-opening cost was the start-up activity costs incurred prior to opening a new store, mainly including leasing, leasehold improvements,
payroll and supplies. The accounting policies for leasing and leasehold improvements were as below. Other store pre-opening costs
were directly charged to expenses when occurred.
Leasing
Leases
are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership
to the lessee. All other leases are classified as operating leases.
Leasehold
improvements
Leasehold
improvements, principally comprising costs of office buildings and shops renovation, are held for administrative and selling purposes.
Leasehold improvements are initially measured at cost and amortized systematically over its useful life.
Property,
plant and equipment
Property,
plant and equipment (“PPE”) including buildings held for use in the production or supply of goods or services, or for
administrative purposes other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated
impairment losses.
Depreciation
is provided to write off the cost of items of property, plant and equipment other than construction in progress over their estimated
useful lives and after taking into account of their estimated residual value, using the straight-line method.
Construction
in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction
in progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate
category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same
basis as other property assets, commences when the assets are ready for their intended use.
An
item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise
from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between
the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is
de-recognized.
KBS Fashion Group Limited
Notes to Financial Statements
The
Group as lessor
Rental
income from operating leases is recognized in profit or loss on a straight-line basis over the term of the relevant lease.
Land
use rights
Land
use rights are stated at cost less accumulated amortization and accumulated impairment losses. Cost represents consideration paid
for the rights to use the land on which various plants and buildings are situated for periods varying from 20 to 50 years.
Amortization
of land use rights is calculated on a straight-line basis over the period of the land use rights.
Inventories
Inventories
are stated at the lower of cost and net realizable value. Costs of inventories are determined using the weighted average method.
Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary
to make the sale.
Financial instruments –
investments and other financial assets (applicable from January 1, 2018)
Initial recognition and measurement
Financial assets are classified,
at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income, and fair value
through profit or loss.
The classification of financial
assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s
business model for managing them. With the exception of trade receivables that do not contain a significant financing component
or for which the Group has applied the practical expedient of not adjusting the effect of a significant financing component, the
Group initially measures a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit
or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has
applied the practical expedient are measured at the transaction price determined under IFRS 15 in accordance with the policies
set out for “Revenue recognition (applicable from January 1, 2018)” below.
In order for a financial asset
to be classified and measured at amortised cost or fair value through other comprehensive income, it needs to give rise to cash
flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.
The Group’s business model
for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model
determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
All regular way purchases and
sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset.
Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally
established by regulation or convention in the marketplace.
KBS Fashion Group Limited
Notes to Financial Statements
Subsequent measurement
The subsequent measurement of
financial assets depends on their classification as follows:
Financial assets at amortised
cost (debt instruments)
The Group measures financial
assets at amortised cost if both of the following conditions are met:
|
●
|
The financial asset is held within a business model with
the objective to hold financial assets in order to collect contractual cash flows.
|
|
●
|
The contractual terms of the financial asset give rise
on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
|
Financial assets at amortised
cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised
in the income statement when the asset is derecognised, modified or impaired.
Financial assets at fair value
through other comprehensive income (debt instruments)
The Group measures debt instruments
at fair value through other comprehensive income if both of the following conditions are met:
|
●
|
The financial asset is held within a business model with
the objective of both holding to collect contractual cash flows and selling.
|
|
●
|
The contractual terms of the financial asset give rise
on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
|
For debt instruments at fair
value through other comprehensive income, interest income, foreign exchange revaluation and impairment losses or reversals are
recognised in the income statement and computed in the same manner as for financial assets measured at amortised cost. The remaining
fair value changes are recognised in other comprehensive income. Upon derecognition, the cumulative fair value change recognised
in other comprehensive income is recycled to the income statement.
KBS Fashion Group Limited
Notes to Financial Statements
Financial assets at fair value
through other comprehensive income (equity investments)
Upon initial recognition, the Group
can elect to classify irrevocably its equity investments as equity investments designated at fair value through other comprehensive
income when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading.
The classification is determined on an instrument-by-instrument basis.
Gains and losses on these financial
assets are never recycled to the income statement. Dividends are recognised as other income in the income statement when the right
of payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Group
and the amount of the dividend can be measured reliably, except when the Group benefits from such proceeds as a recovery of part
of the cost of the financial asset, in which case, such gains are recorded in other comprehensive income. Equity investments designated
at fair value through other comprehensive income are not subject to impairment assessment.
Financial assets at fair value
through profit or loss
Financial assets at fair value
through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair
value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified
as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated
embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial
assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through
profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised
cost or at fair value through other comprehensive income, as described above, debt instruments may be designated at fair value
through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.
Financial assets at fair value
through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised
in the income statement. This category includes derivative financial instruments and structured bank deposits.
A derivative embedded in a hybrid
contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative
if the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the
embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit
or loss. Embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Reassessment
only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise
be required or a reclassification of a financial asset out of the fair value through profit or loss category.
A derivative embedded within
a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the
embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.
Financial instruments –
impairment of financial assets (applicable from January 1, 2018)
The Group recognises an allowance
for ECLs for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual
cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation
of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other
credit enhancements that are integral to the contractual terms.
General approach
ECLs are recognised in two stages.
For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided
for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit
exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required
for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
KBS Fashion Group Limited
Notes to Financial Statements
At each reporting date, the Group
assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the
assessment, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk
of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable
information that is available without undue cost or effort, including historical and forward-looking information.
The Group considers a financial
asset in default when contractual payments are 120 days past due. However, in certain cases, the Group may also consider a financial
asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual
amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there
is no reasonable expectation of recovering the contractual cash flows.
Debt instruments at fair value
through other comprehensive income and financial assets at amortised cost are subject to impairment under the general approach
and they are classified within the following stages for measurement of ECLs except for trade receivables which apply the simplified
approach as detailed below.
Stage 1 – Financial instruments
for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at
an amount equal to 12-month ECLs
Stage 2 – Financial instruments
for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and
for which the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 – Financial assets
that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss
allowance is measured at an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do
not contain a significant financing component or when the Group applies the practical expedient of not adjusting the effect of
a significant financing component, the Group applies the simplified approach in calculating ECLs. Under the simplified approach,
the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting
date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking
factors specific to the debtors and the economic environment.
For trade receivables that contain
a significant financing component and lease receivables, the Group chooses as its accounting policy to adopt the simplified approach
in calculating ECLs with policies as described above.
Financial instruments –
derecognition of financial assets (applicable from January 1, 2018)
A financial asset (or, where
applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed
from the Group’s consolidated statement of financial position) when:
|
●
|
the rights to receive cash flows from the asset have expired;
or
|
|
●
|
the Group has transferred its rights to receive cash flows
from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under
a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of
the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has
transferred control of the asset.
|
When the Group has transferred
its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent,
it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all
the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognise the transferred asset
to the extent of the Group’s continuing involvement. In that case, the Group also recognises an associated liability. The
transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group
has retained.
Continuing involvement that takes
the form of a guarantee over the transferred asset is measured at the lower of the original amount of the asset and the maximum
amount of consideration that the Group could be required to repay.
Financial instruments –
financial liabilities (applicable from January 1, 2018)
Initial recognition and measurement
All financial liabilities are
recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The
Group’s financial liabilities include trade payables, other payables, financial liabilities included in accruals and interest-bearing
bank borrowings.
KBS Fashion Group Limited
Notes to Financial Statements
Subsequent measurement
After initial recognition, interest-bearing
loans and borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of
discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in the income statement
when the liabilities are derecognised as well as through the effective interest rate amortisation process.
Amortised cost is calculated
by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest
rate. The effective interest rate amortisation is included in finance costs in the income statement.
Financial instruments –
derecognition of financial liabilities (applicable from January 1, 2018)
A financial liability is derecognised
when the obligation under the liability is discharged or cancelled, or expires.
When an existing financial liability
is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability,
and the difference between the respective carrying amounts is recognised in the income statement.
Financial instruments –
offsetting financial instruments (applicable from January 1, 2018)
Financial assets and financial
liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable
legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle
the liabilities simultaneously.
Financial instruments (applicable
before January 1, 2018)
Financial
assets and financial liabilities are recognized on the consolidated statements of financial position when a group entity becomes
a party to the contractual provisions of the instrument.
Financial
assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the
acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial
assets or financial liabilities, as appropriate, on initial recognition.
KBS Fashion Group Limited
Notes to Financial Statements
The
Group’s financial assets are classified as receivables.
Effective
interest method
The
effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income
over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including
all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums
or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount
on initial recognition.
Interest income is recognized on an effective interest basis for debt instruments.
Receivables
Receivables
are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables (including
trade and other receivables, related parties receivables, and cash and cash equivalents) are measured at amortized cost using
the effective interest method, less any impairment (see accounting policy on impairment loss on receivables below).
Impairments
of receivables
Receivables
are assessed for indicators of impairment at the end of the reporting period. Receivables are impaired where there is objective
evidence that, as a result of one or more events that occurred after the initial recognition of the receivables, the estimated
future cash flows of the receivables have been affected.
Objective
evidence of impairment could include:
|
●
|
significant
financial difficulty of the issuer or counterparty;
|
|
●
|
default
or delinquency in interest or principal payments;
|
|
●
|
it
becoming probable that the borrower will enter bankruptcy or financial reorganization.
|
For
certain categories of financial asset, such as trade and other receivables, assets that are assessed not to be impaired individually
are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables
could include the Group’s past experience of collecting payments, and increase in the number of delayed payments in the portfolio
past the average credit period, observable changes in national or local economic conditions that correlate with default on receivables.
An
impairment loss is recognized in profit or loss when there is objective evidence that the asset is impaired, and is measured as
the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at
the original effective interest rate.
KBS Fashion Group Limited
Notes to Financial Statements
The
carrying amount of the receivables is reduced by the impairment loss directly for all financial assets with exception of trade
and other receivables, where the carrying amount is reduced through the use of an allowance account. Changes in carrying amount
of the allowance account are recognized in profit or loss. When a trade and other receivable are considered uncollectible, it
is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or
loss.
If,
in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring
after the impairment losses was recognized, the previously recognized impairment loss is reversed through profit or loss to the
extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would
have been had the impairment not been recognized.
Cash
and cash equivalents
Cash
and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term,
highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk
of changes in value, having been within three months of maturity at acquisition
|
(2)
|
Financial
liabilities and equity
|
Financial
liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements
entered into and the definitions of a financial liability and an equity instrument.
An
equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
Effective
interest method
The
effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense
over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including
all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums
or discounts) through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying
amount on initial recognition.
KBS Fashion Group Limited
Notes to Financial Statements
Interest
expense is recognized on an effective interest basis.
Financial
liabilities
Financial
liabilities including trade and other payables, related parties payables and short-term loans are subsequently measured at amortized
cost, using the effective interest method.
Equity
instruments
Equity
instruments issued by the group entities are recorded at the proceeds received, net of direct issue costs.
Financial
assets are derecognized when the rights to receive cash flows from the assets expire or, the financial assets are transferred
and the Group has transferred substantially all the risks and rewards of ownership of the financial assets. On de-recognition
of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable
is recognized in profit or loss.
Financial
liabilities are derecognized when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference
between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit
or loss.
Capital
and Reserves
Share
capital represents the nominal value of shares that have been issued by the Group. Share capital is determined using the nominal
value of shares that have been issued.
Retained
profits include all current and prior period results as determined in the combined statement of comprehensive income.
Foreign
currency translation reserve arising on the translation are included in the currency translation reserve.
In
accordance with the relevant laws and regulations of PRC, the subsidiaries of the Group established in PRC are required to transfer
10% of its annual statutory net profit (after offsetting any prior years’ losses) to the statutory reserve. When the balance
of such reserve reaches 50% of the subsidiary’s share capital, any further transfer of its annual statutory net profit is
optional. Such reserve may be used to offset accumulated losses or to increase the registered capital of the subsidiary subject
to the approval of the relevant authorities. However, except for offsetting prior years’ losses, such statutory reserve
must be maintained at a minimum of 25% of the share capital after such usage. The statutory reserves are not available for dividend
distribution to the shareholders.
KBS Fashion Group Limited
Notes to Financial Statements
All
transactions with owners of the Group are recorded separately within equity.
Earnings/(loss)
per share
Basic
earnings per share (“EPS”) are computed by dividing income attributable to holders of common shares by the weighted
average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common shares were exercised or converted into common shares. Potential dilutive securities are excluded
from the calculation of diluted EPS in loss periods as their effect would be anti-dilutive.
|
5.
|
SIGNIFICANT
MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING POLICIES
|
The
preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying
the Group’s accounting policies and requires the use of accounting estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and reported
amount of revenue and expenses during the reporting period. The following estimates that have a significant risk of causing a
material adjustment to the carrying amount of assets and liabilities within the next financial year are disclosed below.
Provision for expected credit
losses on trade receivables
The Group estimates the loss
allowances for trade receivables by assessing the ECLs. This requires the use of estimates and judgements. ECLs are based on the
Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, and an assessment of both
the current and forecast general economic conditions at the end of reporting period. Where the estimation is different from the
previous estimate, such difference will affect the carrying amounts of trade receivables and thus the impairment loss in the period
in which such estimate is changed. The Group keeps assessing the expected credit loss of trade receivables during their expected
lives.
Impairment
Losses
Impairment losses are based on an assessment of the investment or long-lived assets’ ability to
generate future cash flows when there is evidence that these assets may be impaired. The calculation of the amount of impairment
loss are based on estimates made by management when applying broad accounting principles governing the accounting for these assets.
The determination of these estimates requires judgment by management. The final outcome may differ from the original estimates
made by management, which may impact the carrying value of the assets which management has determined to be impaired and charged
to the Company’s profit loss during the period.
KBS Fashion Group Limited
Notes to Financial Statements
Income
Tax
The
Group has exposure to income taxes in numerous jurisdictions. Significant judgment is involved in determining the
Group’s provision for income taxes. There are certain transactions and computations for which the ultimate tax
determination is uncertain during the ordinary course of business. The Group recognizes liabilities for expected tax issues
based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from
the amounts that were initially recognized, such differences will impact the income tax and differed tax provisions in the
period in which such determination is made. The carrying amount of the Group’s income tax payable as at December 31,
2018 and 2017 amounted to $nil and $nil, respectively.
|
6.
|
KEY
SOURCES OF ESTIMATION UNCERTAINTY
|
In
the application of the Group’s accounting policies, which are described in Note 4, management is required to make estimates and
assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates
and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results
may differ from these estimates.
The
estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the
period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods
if the revision affects both current and future periods.
The
following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting
period, that have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial
year.
Depreciation
of building, machinery and equipment
As
described in Note 4, the Group reviews the estimated useful lives and residual values of property, plant and equipment at the
end of each reporting period. The cost of building, machinery and equipment is depreciated on a straight-line basis over the assets’
estimated useful lives. Management estimates the useful lives of these buildings, machinery and equipment to be within 5 to 20
years. These are the common life expectancies applied in the same industry. Changes in the expected level of usage and technological
developments could impact the economic useful lives and the residual values of these assets, therefore future depreciation charges
could be revised.
KBS Fashion Group Limited
Notes to Financial Statements
Fair
value of warrants
The
fair value of warrants was determined using a binomial-lattice model. This model requires the input of highly subjective assumptions,
including price volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate
of fair value of the warrants and the Company’s results of operations could be impacted. This model is dependent upon several
variables such as the instrument’s expected term, expected strike price, expected risk-free interest rate over the expected instrument
term, the expected dividend yield rate over the expected instrument term, and the expected volatility of the Company’s stock
price over the expected term. The expected term represents the period of time that the instruments granted are expected to be
outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected
during the term as a result of the down round protection. The risk-free rates are based on U.S. Treasury securities with similar
maturities as the expected terms of the options at the date of valuation. Expected dividend yield is based on historical trends.
The Company measures volatility using the volatility rates of market index.
Impairment
of non-financial assets
Property,
plant and equipment are tested for impairment whenever there is any objective evidence or indication that these assets may be
impaired.
For
the purpose of impairment testing, the recoverable amount (i.e. the higher of the fair value less cost to sell and the value-in-use)
is determined on an individual asset basis unless the asset does not generate cash flows that are largely independent of those
from other assets. If this is the case, the recoverable amount is determined for the cash-generating-unit (“CGU”)
to which the asset belongs.
If
the recoverable amount of the asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset
(or CGU) is reduced to its recoverable amount.
The
difference between the carrying amount and recoverable amount is recognized as an impairment loss in the income statement, unless
the asset is carried at revalued amount, in which case, such impairment loss is treated as a revaluation decrease.
An
impairment loss for an asset other than goodwill is reversed if, and only if, there has been a change in the estimates used to
determine the asset’s recoverable amount since the last impairment loss was recognized. The carrying amount of this asset
is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have
been determined (net of any accumulated amortization or depreciation) had no impairment loss been recognized for the asset in
prior years.
KBS Fashion Group Limited
Notes to Financial Statements
A
reversal of impairment loss for an asset other than goodwill is recognized in the income statement, unless the asset is carried
at revalued amount, in which case, such reversal is treated as a revaluation increase.
During
the years ended December 31, 2018, 2017, and 2016, the Company recognized impairment losses of $nil, $nil, and $4,659,838, respectively,
for its prepayments for acquisition of land use rights. During the years ended December 31, 2018, 2017, and 2016, the Company
recognized impairment losses of $nil, $nil, and $6,989,200, respectively, for its related prepayments for construction on such
land. The impairment reflects the current reduction in the value of the investment as a result of the delay in time to complete
the construction projects and delay in procurement of legal certificates that would lead to the assets being put into service
that would give rise to expected future profitability which at December 31, 2018, has been temporarily postponed beyond the next
operating period. The impairment losses charged to the prepayments has brought the carrying values to their respective recoverable
amount in its fair value less costs to sell.
During
the years ended December 31, 2018, 2017, and 2016, the Company recognized impairment losses of $13,311,557, $nil, and $nil, respectively,
for a part of its factory plant in Anhui that is not currently in use. The impairment reflects the current reduction in the value
of the carrying cost as a result of the company’s evaluation of the recoverability of its investment. The impairment losses
charged to the factory plant has brought the carrying values to their respective recoverable amount in its fair value less costs
to sell.
For
the prepayment for acquisition of land use rights, the Company provided an estimate of its fair value based on the market value
substitution rule. The estimated fair value belongs to Level 2 of the fair value hierarchy because the input is determined through
quoted prices of similar assets without an actively quoted market. Using the market approach, the Company compares the price of
the land use right that the Company intended to acquire with the price of similar land use rights in the same geographical area,
adjusted by factors such as price index, frequency of actual transactions conducted, environmental conditions, etc. Significant
assumptions used in this estimation include the ability to legally obtain such land use rights, the usage of land as industrial
use, the date of transaction at year end, etc. As a result, the Company provided an estimate in the amount of $5,154,034. Finally,
the fair value is reduced by estimated costs to sell which include, but not limited to, legal costs, stamp duty, similar transaction
tax, etc. in the amount of $379,971. The net value is then compared to the carrying value, and the difference is recorded as impairment
loss in the amount of $1,317,295 in 2015. In 2016, since there is no progress in regards to the acquisition of land use rights,
the Company provided further impairment to bring the carrying value down to $0 as management is unable to assert the recoverability
of such asset.
KBS Fashion Group Limited
Notes to Financial Statements
For
the prepayment for construction, the Company provided an estimate of its fair value based on the time value approach. The estimated
fair value belongs to Level 3 of the fair value hierarchy because the input is not easily observable. Using this approach, the
Company calculates the time value of money of the amount prepaid based on the Company’s weighted average cost of capital
(“WACC”) in order to arrive at its fair value. The Company uses this approach to determine its recoverable amount
because such prepayments are not readily resalable, and the ability to realize this amount is contingent upon the Company’s
ability to successfully acquire the land use right as mentioned above. Significant assumptions used in this estimation include
using the WACC, which is comprised of the Company’s metrics of return of equity, return of debt, the relevant weights of
the returns of equity and debt, and tax rate, in determining the fair value. As a result, as at December 31, 2015, the Company
provided an estimate in the amount of $7,160,523. Since this asset is not resalable, the company estimated costs to sell for this
asset in the amount of $0. The net value is then compared to the carrying value, and the difference is recorded as impairment
loss in the amount of $1,248,039 in 2015. In 2017, since there was no progress in regards to the construction, the Company provided
further impairment to bring the carrying value down to $0 as management is unable to assert the recoverability of such asset.
For
the factory plant, the Company provided an estimate of its fair value based on the time value approach. The estimated fair value
belongs to Level 3 of the fair value hierarchy because the input is not easily observable. Using this approach, the Company calculates
the time value of money of the amount recoverable based on the Company’s weighted average cost of capital (“WACC”)
in order to arrive at its fair value. The Company uses this approach to determine its recoverable amount because a part of the
factory plant is not readily resalable. Significant assumptions used in this estimation include using the WACC, which is comprised
of the Company’s metrics of return of equity, return of debt, the relevant weights of the returns of equity and debt, and
tax rate, in determining the fair value. As a result, as at December 31, 2018, the Company recorded as impairment loss in the
amount of $13,311,557 in 2018, which brings the carrying value of the part of the factory plant not in use down to $0 as management
is unable to assert the recoverability of such asset.
KBS Fashion Group Limited
Notes to Financial Statements
Management currently identifies the Group’s
three sales models as operating segments, which are wholesale, retail and contract manufacturing. The segment presentation is in
accordance with management’s expectation of future business developments. These operating segments are monitored and strategic
decisions are made on the basis of segmental gross margins.
|
|
Wholesale
|
|
|
Retail
|
|
|
Subcontracting
|
|
|
Consolidated
|
|
|
|
For the year ended December 31,
|
|
|
For the year ended December 31,
|
|
|
For the year ended December 31,
|
|
|
For the year ended December 31,
|
|
By business
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Sales to external customers
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
|
|
2,574,588
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
18,535,115
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
Segment revenue
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
|
|
2,574,588
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
18,535,115
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
Segment gross margins/(loss)
|
|
|
2,245,944
|
|
|
|
2,277,858
|
|
|
|
6,504,893
|
|
|
|
(5,402,994
|
)
|
|
|
(14,291,680
|
)
|
|
|
(5,668,061
|
)
|
|
|
840,914
|
|
|
|
502,007
|
|
|
|
1,321,441
|
|
|
|
(2,316,137
|
)
|
|
|
(11,511,815
|
)
|
|
|
2,158,273
|
|
Reconciling items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,074,580
|
)
|
|
|
(7,901,842
|
)
|
|
|
(17,787,093
|
)
|
Profit/(loss) before tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,390,717
|
)
|
|
|
(19,413,657
|
)
|
|
|
(15,628,820
|
)
|
Income tax income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,422,119
|
|
|
|
4,598,061
|
|
|
|
3,726,133
|
|
Profit/(loss) for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,968,598
|
)
|
|
|
(14,815,596
|
)
|
|
|
(11,902,687
|
)
|
|
|
As of December 31, 2018
|
|
|
|
Wholesale and Retail
|
|
|
Subcontracting
|
|
|
Unallocated
|
|
|
Consolidated
|
|
Current assets
|
|
27,287,590
|
|
|
6,394,814
|
|
|
17,462
|
|
|
33,699,866
|
|
Non-current assets
|
|
|
7,864,391
|
|
|
|
19,601,749
|
|
|
|
-
|
|
|
|
27,466,140
|
|
Total assets
|
|
|
35,151,981
|
|
|
|
25,996,563
|
|
|
|
17,462
|
|
|
|
61,166,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,417,655
|
|
|
|
1,590,564
|
|
|
|
1,856,467
|
|
|
|
6,864,685
|
|
Total liabilities
|
|
|
3,417,655
|
|
|
|
1,590,564
|
|
|
|
1,856,467
|
|
|
|
6,864,685
|
|
|
|
As of December 31, 2017
|
|
|
|
Wholesale and Retail
|
|
|
Subcontracting
|
|
|
Unallocated
|
|
|
Consolidated
|
|
Current assets
|
|
|
34,036,883
|
|
|
|
6,284,118
|
|
|
|
22,384
|
|
|
|
40,343,385
|
|
Non-current assets
|
|
|
8,987,857
|
|
|
|
31,978,462
|
|
|
|
-
|
|
|
|
40,966,319
|
|
Total assets
|
|
|
43,024,740
|
|
|
|
38,262,580
|
|
|
|
22,384
|
|
|
|
81,309,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,722,277
|
|
|
|
1,995,164
|
|
|
|
1,565,068
|
|
|
|
7,282,509
|
|
Total liabilities
|
|
|
3,722,277
|
|
|
|
1,995,164
|
|
|
|
1,565,068
|
|
|
|
7,282,509
|
|
Geographical information
The Group’s operations
are located in the PRC and all of the Group’s revenue is derived from sales to customers in the PRC. Hence, no analysis by
geographical area of operations is provided.
KBS Fashion Group Limited
Notes to Financial Statements
Information about major customers
Major distributors that make up 10% or more of wholesale
revenue are as below:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Distributor A
|
|
|
1,331,194
|
|
|
|
1,454,862
|
|
|
|
3,782,718
|
|
Other distributors
|
|
|
12,253,560
|
|
|
|
13,579,938
|
|
|
|
28,344,365
|
|
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
Information about major suppliers
Major suppliers that make up 10% or more of purchases
are as below:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Supplier A
|
|
|
3,031,310
|
|
|
|
2,403,309
|
|
|
|
6,655,740
|
|
Supplier B
|
|
|
2,879,110
|
|
|
|
-
|
|
|
|
5,424,342
|
|
Supplier C
|
|
|
-
|
|
|
|
1,530,429
|
|
|
|
4,083,924
|
|
Supplier D
|
|
|
-
|
|
|
|
-
|
|
|
|
3,023,297
|
|
Supplier E
|
|
|
-
|
|
|
|
1,714,468
|
|
|
|
-
|
|
Supplier F
|
|
|
-
|
|
|
|
1,684,743
|
|
|
|
-
|
|
Supplier G
|
|
|
1,684,910
|
|
|
|
-
|
|
|
|
-
|
|
Other suppliers
|
|
|
2,901,982
|
|
|
|
5,065,563
|
|
|
|
6,436,809
|
|
|
|
|
10,497,312
|
|
|
|
12,398,512
|
|
|
|
25,624,112
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Apparel
|
|
|
|
|
|
|
|
|
|
-Wholesale
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
-Retail
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
Subtotal
|
|
|
15,960,527
|
|
|
|
22,018,392
|
|
|
|
37,657,068
|
|
Subcontracting
|
|
|
2,574,588
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
|
18,535,115
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
Revenue is denominated only in USD.
KBS Fashion Group Limited
Notes to Financial Statements
Cost of sales comprises of purchasing
materials, labor costs for personnel employed in production, depreciation of non-current assets used for production purpose, outsourced
manufacturing cost, taxes and surcharges, and water and electricity. The following table shows a breakdown of cost of sales for
the periods presented for each category:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Changes in inventories of finished goods and work in progress
|
|
|
(24,474
|
)
|
|
|
227,132
|
|
|
|
(302,979
|
)
|
Materials consumed in production
|
|
|
29,619
|
|
|
|
41,057
|
|
|
|
120,847
|
|
Purchases of finished goods
|
|
|
19,044,582
|
|
|
|
33,877,598
|
|
|
|
36,567,197
|
|
Labor
|
|
|
1,061,943
|
|
|
|
602,196
|
|
|
|
1,313,120
|
|
Depreciation
|
|
|
352,739
|
|
|
|
370,858
|
|
|
|
236,578
|
|
Rental
|
|
|
452
|
|
|
|
-
|
|
|
|
-
|
|
Taxes and surcharges *
|
|
|
75,736
|
|
|
|
157,314
|
|
|
|
253,039
|
|
Water and electricity
|
|
|
62,027
|
|
|
|
52,796
|
|
|
|
48,557
|
|
Inventory provision
|
|
|
196,124
|
|
|
|
8
|
|
|
|
320
|
|
Others
|
|
|
128,773
|
|
|
|
120,886
|
|
|
|
238,562
|
|
Foreign currency translation difference
|
|
|
(76,269
|
)
|
|
|
(175,493
|
)
|
|
|
566,691
|
|
|
|
|
20,851,252
|
|
|
|
35,274,352
|
|
|
|
39,041,932
|
|
* Tax and surcharges are mainly
Urban Maintenance and Construction Tax (7% of Valued Added Tax payment amount), Extra Charges of Education Fund (3% of Valued Added
Tax payment amount) and Local Surcharge for Education Fund (2% of Valued Added Tax payment amount).
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Government grant
|
|
|
-
|
|
|
|
367,260
|
|
|
|
469,569
|
|
Interest income on bank deposits
|
|
|
71,693
|
|
|
|
81,517
|
|
|
|
85,482
|
|
Other
|
|
|
50,446
|
|
|
|
12,787
|
|
|
|
-
|
|
|
|
|
122,139
|
|
|
|
461,564
|
|
|
|
555,051
|
|
|
11.
|
OTHER GAINS AND (LOSSES)
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Gain on disposals of property, plant and equipment
|
|
|
1,380
|
|
|
|
171
|
|
|
|
10,541
|
|
Foreign exchange gain
|
|
|
(49
|
)
|
|
|
(48
|
)
|
|
|
54
|
|
Provision / reversal of inventory obsolescence
|
|
|
(196,124
|
)
|
|
|
(101,256
|
)
|
|
|
(1,667
|
)
|
Bad debt provision of trade receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
(331,196
|
)
|
Impairment of prepayments in land purchase and related construction
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,649,038
|
)
|
Impairment of property
|
|
|
(13,311,557
|
)
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
(15,950
|
)
|
|
|
(21,110
|
)
|
|
|
847,539
|
|
|
|
|
(13,522,300
|
)
|
|
|
(122,243
|
)
|
|
|
(11,123,767
|
)
|
KBS Fashion Group Limited
Notes to Financial Statements
|
12.
|
DISTRIBUTION AND SELLING EXPENSES
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Rental
|
|
|
16,066
|
|
|
|
21,527
|
|
|
|
30,225
|
|
Depreciation
|
|
|
1,218
|
|
|
|
2,680
|
|
|
|
490,527
|
|
Labor
|
|
|
275,026
|
|
|
|
258,233
|
|
|
|
211,274
|
|
Subsidy to distributors
|
|
|
787,064
|
|
|
|
773,238
|
|
|
|
910,537
|
|
Promotion
|
|
|
15,623
|
|
|
|
32,216
|
|
|
|
137,210
|
|
Advertisement
|
|
|
1,152,176
|
|
|
|
1,591,742
|
|
|
|
1,554,023
|
|
Others
|
|
|
423,782
|
|
|
|
585,744
|
|
|
|
272,214
|
|
|
|
|
2,670,955
|
|
|
|
3,265,380
|
|
|
|
3,606,010
|
|
|
13.
|
ADMINISTRATIVE EXPENSE
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Labor
|
|
|
2,193,120
|
|
|
|
1,600,380
|
|
|
|
1,170,013
|
|
Audit fee
|
|
|
122,908
|
|
|
|
216,281
|
|
|
|
(33,997
|
)
|
Professional fee
|
|
|
69,639
|
|
|
|
77,754
|
|
|
|
75,609
|
|
Design fee
|
|
|
648,632
|
|
|
|
937,478
|
|
|
|
465,120
|
|
Depreciation and amortization charges
|
|
|
1,185,257
|
|
|
|
1,149,455
|
|
|
|
1,163,293
|
|
Bank charges
|
|
|
8,130
|
|
|
|
18,352
|
|
|
|
12,943
|
|
Rental
|
|
|
75,907
|
|
|
|
74,668
|
|
|
|
75,673
|
|
Travelling and entertainment
|
|
|
2,662
|
|
|
|
107,566
|
|
|
|
44,874
|
|
Others
|
|
|
600,765
|
|
|
|
697,463
|
|
|
|
570,465
|
|
|
|
|
4,907,020
|
|
|
|
4,879,397
|
|
|
|
3,543,993
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Interest expenses on bank borrowings
|
|
|
|
|
|
|
|
|
|
wholly repayable within one year
|
|
|
96,444
|
|
|
|
96,385
|
|
|
|
71,783
|
|
Bank borrowings interests are
charged at a rate of 6.09% per annum for the bank loan that was fully repaid in 2018.
Bank borrowings interests are
charged at a rate of 6.09% per annum for the current bank loan.
KBS Fashion Group Limited
Notes to Financial Statements
|
15.
|
INCOME TAX (INCOME)/ EXPENSE
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
PRC enterprises income tax:
|
|
|
|
|
|
|
|
|
|
Current tax
|
|
|
-
|
|
|
|
-
|
|
|
|
53,790
|
|
Deferred tax
|
|
|
(5,422,119
|
)
|
|
|
(4,598,061
|
)
|
|
|
(3,779,923
|
)
|
|
|
|
(5,422,119
|
)
|
|
|
(4,598,061
|
)
|
|
|
(3,726,133
|
)
|
Hongri Fujian and Anhui Kai Xin
subject to the applicable enterprise income tax rate of 25%. As of December 31, 2018, 2017, and 2016, the Company had no unrecognized
tax benefits.
France Cock and Vast Billion
were incorporated in Hong Kong and subject to Hong Kong profits tax at a tax rate of 16.5%. No provision for Hong Kong profits
tax has been made as France Cock and Vast Billion has no taxable income during the reporting period.
Hongri International Holding
Limited and Roller Rome were incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.
KBS Fashion Group Limited was
incorporated in the Marshall Island, and, under the current laws of the Marshall Island, is not subject to income taxes.
The tax charge for the year can
be reconciled to the profit per the consolidated statements of comprehensive income as follows:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(Loss)/profit before tax
|
|
|
(23,390,717
|
)
|
|
|
(19,413,657
|
)
|
|
|
(15,628,820
|
)
|
Tax calculated at domestic tax rates applicable to profits in PRC (2018, 2017, and 2016: 25%)
|
|
|
(5,847,679
|
)
|
|
|
(4,853,414
|
)
|
|
|
(3,907,205
|
)
|
Tax effect of tax loss of tax-exempt entities
|
|
|
425,560
|
|
|
|
255,354
|
|
|
|
181,072
|
|
Tax charge for the year
|
|
|
(5,422,119
|
)
|
|
|
(4,598,061
|
)
|
|
|
(3,726,133
|
)
|
The following is the analysis of the deferred tax balances for
financial reporting purposes:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Temporary difference
|
|
|
Deferred tax assets
|
|
|
Temporary difference
|
|
|
Deferred tax assets
|
|
|
Temporary difference
|
|
|
Deferred tax assets
|
|
Beginning of the year
|
|
|
38,761,131
|
|
|
|
9,924,944
|
|
|
|
20,737,366
|
|
|
|
4,879,652
|
|
|
|
5,617,674
|
|
|
|
1,340,268
|
|
Bad Debt provisions charged to profit or loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
331,196
|
|
|
|
82,799
|
|
Impairment charged to profit or loss
|
|
|
13,507,681
|
|
|
|
3,376,920
|
|
|
|
101,256
|
|
|
|
25,314
|
|
|
|
11,649,038
|
|
|
|
2,912,259
|
|
Tax loss of the year
|
|
|
8,376,918
|
|
|
|
2,094,230
|
|
|
|
17,922,508
|
|
|
|
4,480,627
|
|
|
|
3,139,458
|
|
|
|
784,865
|
|
Effect of translation
|
|
|
-
|
|
|
|
(707,265
|
)
|
|
|
-
|
|
|
|
539,351
|
|
|
|
-
|
|
|
|
(240,539
|
)
|
End of the year
|
|
|
60,645,730
|
|
|
|
14,688,829
|
|
|
|
38,761,130
|
|
|
|
9,924,944
|
|
|
|
20,737,366
|
|
|
|
4,879,652
|
|
KBS Fashion Group Limited
Notes to Financial Statements
Profit for the year has been arrived at after charging:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Cost of inventories recognized as expenses
|
|
|
20,398,829
|
|
|
|
35,094,050
|
|
|
|
38,788,893
|
|
Taxes and surcharges
|
|
|
112,108
|
|
|
|
180,302
|
|
|
|
253,039
|
|
|
|
|
20,510,937
|
|
|
|
35,274,352
|
|
|
|
39,041,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
1,172,809
|
|
|
|
1,137,831
|
|
|
|
1,944,176
|
|
Amortization of land use rights and trademarks
|
|
|
14,545
|
|
|
|
14,307
|
|
|
|
19,009
|
|
Amortization of subsidies prepaid to distributors
|
|
|
-
|
|
|
|
401,259
|
|
|
|
910,537
|
|
Amortization of prepayments and premiums under operating leases
|
|
|
104,206
|
|
|
|
105,340
|
|
|
|
118,783
|
|
Provision (Reversal) of inventory obsolescence
|
|
|
196,124
|
|
|
|
101,256
|
|
|
|
(1,667
|
)
|
Provision of bad debt allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
331,196
|
|
Provision of impairment loss in prepayments
|
|
|
-
|
|
|
|
-
|
|
|
|
11,649,038
|
|
Provision of impairment loss in prepayments
|
|
|
13,311,557
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
14,799,241
|
|
|
|
1,759,993
|
|
|
|
14,971,072
|
|
|
17.
|
EMPLOYEES’ EMOLUMENTS
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Salaries and other short-term benefits
|
|
|
2,637,752
|
|
|
|
2,476,506
|
|
|
|
1,369,524
|
|
Defined contribution benefit schemes
|
|
|
205,499
|
|
|
|
189,621
|
|
|
|
280,594
|
|
Total employee benefits expense (including directors’ emoluments)
|
|
|
2,843,251
|
|
|
|
2,666,127
|
|
|
|
1,650,118
|
|
The employees of the Group’s
PRC subsidiaries are members of state-managed retirement benefit schemes operated by the local government. The subsidiaries are
required to contribute a specified percentage of its payroll costs to the retirement benefit schemes to fund the benefits. The
only obligation of the Group with respect to the retirement benefit schemes is to make the specified contributions.
|
18.
|
DIRECTORS’ EMOLUMENTS
|
The emoluments paid or payable to the directors of
the Company were as follows:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Salaries
|
|
|
|
|
|
|
|
|
|
Yan Keyan
|
|
|
739,350
|
|
|
|
304,050
|
|
|
|
216,342
|
|
Lixia Tu
|
|
|
296,100
|
|
|
|
235,854
|
|
|
|
203,559
|
|
John Sano
|
|
|
23,050
|
|
|
|
43,950
|
|
|
|
39,000
|
|
Themis Kalapotharakos
|
|
|
161,350
|
|
|
|
87,900
|
|
|
|
97,500
|
|
Matthew Los
|
|
|
161,350
|
|
|
|
87,900
|
|
|
|
97,500
|
|
Zhongmin Zhang
|
|
|
23,050
|
|
|
|
43,950
|
|
|
|
-
|
|
Yuet Mei Chan
|
|
|
23,050
|
|
|
|
43,950
|
|
|
|
-
|
|
|
|
|
1,427,300
|
|
|
|
847,554
|
|
|
|
653,901
|
|
Social Welfare
|
|
|
|
|
|
|
|
|
|
|
|
|
Yan Keyan
|
|
|
1,122
|
|
|
|
1,006
|
|
|
|
960
|
|
|
|
|
1,122
|
|
|
|
1,006
|
|
|
|
960
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
19.
|
EARNINGS/ (LOSS) PER SHARE
|
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Basic (Loss)/Earnings Per Share Numerator
|
|
|
|
|
|
|
|
|
|
Profit for the year attributable to owners of the Company
|
|
$
|
(17,968,598
|
)
|
|
$
|
(14,815,596
|
)
|
|
$
|
(11,902,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings Per Share Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit for the year attributable to owners of the Company
|
|
$
|
(17,968,598
|
)
|
|
$
|
(14,815,596
|
)
|
|
$
|
(11,902,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss)/Earnings Per Share Denominator
#
|
|
|
|
|
|
|
|
|
|
|
|
|
Original shares:
|
|
|
1,986,299
|
|
|
|
1,767,821
|
|
|
|
1,694,489
|
|
Additions from actual events:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Issuance of common stock, weighted
|
|
|
288,421
|
|
|
|
93,010
|
|
|
|
55,653
|
|
Basic weighted average shares outstanding
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings Per Share Denominator
#
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
Dilutive shares: Potential additions from dilutive events:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of investor warrants*
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted Weighted Average Shares Outstanding:
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Earnings Per Share
#
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
$
|
(8.06
|
)
|
|
$
|
(7.96
|
)
|
|
$
|
(6.80
|
)
|
- Diluted
|
|
$
|
(8.06
|
)
|
|
$
|
(7.96
|
)
|
|
$
|
(6.80
|
)
|
Weighted Average Shares Outstanding
#
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
- Diluted
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
* There were no potential dilutive additions to diluted weighted
shares outstanding as a result of the outstanding warrants being out-of-the-money during the periods presented.
# The amount of shares and the respective calculations of
earnings/(loss) per share have been adjusted according to reverse split.
KBS Fashion Group Limited
Notes to Financial Statements
|
20.
|
PROPERTIES. PLANT AND EQUIPMENT
|
|
|
Plant
|
|
|
Machinery
|
|
|
Office equipment
|
|
|
Motor vehicles
|
|
|
Furniture and fixtures
|
|
|
Leasehold improvements-factories and offices
|
|
|
Leasehold improvements-shops
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2017
|
|
|
28,531,542
|
|
|
|
859,166
|
|
|
|
134,701
|
|
|
|
122,328
|
|
|
|
145,973
|
|
|
|
843,767
|
|
|
|
253,154
|
|
|
|
30,890,631
|
|
Additions
|
|
|
965,792
|
|
|
|
15,893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
981,685
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,490
|
)
|
|
|
(43,215
|
)
|
|
|
(1,836
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(57,541
|
)
|
Translation adjustment
|
|
|
1,758,824
|
|
|
|
52,963
|
|
|
|
8,304
|
|
|
|
7,541
|
|
|
|
8,999
|
|
|
|
52,014
|
|
|
|
15,606
|
|
|
|
1,904,251
|
|
At December 31, 2017
|
|
|
31,256,158
|
|
|
|
928,022
|
|
|
|
130,515
|
|
|
|
86,654
|
|
|
|
153,136
|
|
|
|
895,781
|
|
|
|
268,760
|
|
|
|
33,719,026
|
|
Additions
|
|
|
-
|
|
|
|
1,767
|
|
|
|
11,544
|
|
|
|
-
|
|
|
|
8,014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,325
|
|
Disposals
|
|
|
-
|
|
|
|
(4,103
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,103
|
)
|
Translation adjustment
|
|
|
(1,498,321
|
)
|
|
|
(44,486
|
)
|
|
|
(6,257
|
)
|
|
|
(4,154
|
)
|
|
|
(7,342
|
)
|
|
|
(42,941
|
)
|
|
|
(12,884
|
)
|
|
|
(1,616,385
|
)
|
At December 31, 2018
|
|
|
29,757,837
|
|
|
|
881,200
|
|
|
|
135,802
|
|
|
|
82,500
|
|
|
|
153,808
|
|
|
|
852,840
|
|
|
|
255,876
|
|
|
|
32,119,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND IMPAIRMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2017
|
|
|
(2,406,532
|
)
|
|
|
(700,123
|
)
|
|
|
(89,920
|
)
|
|
|
(109,891
|
)
|
|
|
(136,626
|
)
|
|
|
(435,636
|
)
|
|
|
(253,154
|
)
|
|
|
(4,131,882
|
)
|
Provided for the year
|
|
|
(1,377,553
|
)
|
|
|
(48,120
|
)
|
|
|
(14,495
|
)
|
|
|
(174
|
)
|
|
|
(3,202
|
)
|
|
|
(114,762
|
)
|
|
|
-
|
|
|
|
(1,558,306
|
)
|
Eliminated upon disposal of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
10,071
|
|
|
|
38,891
|
|
|
|
1,432
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,394
|
|
Translation adjustment
|
|
|
(148,350
|
)
|
|
|
(43,159
|
)
|
|
|
(5,543
|
)
|
|
|
(6,774
|
)
|
|
|
(8,422
|
)
|
|
|
(26,855
|
)
|
|
|
(15,606
|
)
|
|
|
(254,709
|
)
|
At December 31, 2017
|
|
|
(3,932,435
|
)
|
|
|
(791,402
|
)
|
|
|
(99,887
|
)
|
|
|
(77,948
|
)
|
|
|
(146,818
|
)
|
|
|
(577,253
|
)
|
|
|
(268,760
|
)
|
|
|
(5,894,503
|
)
|
Provided for the year
|
|
|
(891,146
|
)
|
|
|
(14,619
|
)
|
|
|
(8,776
|
)
|
|
|
(41
|
)
|
|
|
(2,411
|
)
|
|
|
(109,261
|
)
|
|
|
-
|
|
|
|
(1,026,254
|
)
|
Eliminated upon disposal of assets
|
|
|
-
|
|
|
|
3,693
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,693
|
|
Impairment
|
|
|
(13,311,557
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,311,557
|
)
|
Translation adjustment
|
|
|
188,509
|
|
|
|
37,937
|
|
|
|
4,788
|
|
|
|
3,736
|
|
|
|
7,038
|
|
|
|
27,674
|
|
|
|
12,884
|
|
|
|
282,566
|
|
At December 31, 2018
|
|
|
(17,946,629
|
)
|
|
|
(764,391
|
)
|
|
|
(103,875
|
)
|
|
|
(74,253
|
)
|
|
|
(142,191
|
)
|
|
|
(658,840
|
)
|
|
|
(255,876
|
)
|
|
|
(19,946,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARRYING AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
27,323,723
|
|
|
|
136,620
|
|
|
|
30,628
|
|
|
|
8,706
|
|
|
|
6,318
|
|
|
|
318,528
|
|
|
|
-
|
|
|
|
27,824,523
|
|
At December 31, 2018
|
|
|
11,811,208
|
|
|
|
116,809
|
|
|
|
31,927
|
|
|
|
8,247
|
|
|
|
11,617
|
|
|
|
194,000
|
|
|
|
-
|
|
|
|
12,173,808
|
|
KBS Fashion Group Limited
Notes to Financial Statements
Net exchange differences from
translating the financial statements from functional currency to presentation currency were $(1,333,819) and $1,649,540 as at December
31, 2018 and 2017.
Depreciation expense for the
years ended December 31, 2018, 2017 and 2016 were $1,525,548, $1,137,831, and $1,942,735, respectively. Impairment loss charged
for the years ended December 31, 2018, 2017, and 2016 were $13,311,557, $nil, and $nil, respectively. The detail estimation of
such impairment provision is explained in note 6.
Depreciation is provided on straight-line
basis for all property, plant and equipment over their estimated useful lives of the assets as follows:
|
|
Useful life
|
|
Residual Value
|
|
Plant
|
|
20 years
|
|
10%
|
|
Machinery
|
|
5 years
|
|
10%
|
|
Office equipment
|
|
5 years
|
|
10%
|
|
Motor vehicles
|
|
5 years
|
|
10%
|
|
Furniture and fixtures
|
|
5 years
|
|
10%
|
|
Leasehold improvements-factories and offices
|
|
Shorter of estimated useful life of 5 years or lease term
|
|
10%
|
|
Leasehold improvements-shops
|
|
Shorter of estimated useful life of 5 years or lease term
|
|
Nil
|
|
Distributor shops’ furniture and fixtures
|
|
1.5 years
|
|
Nil
|
|
Plant includes buildings owned by Anhui Kaixin built
on the following land:
Location
|
|
Description
|
|
Gross
area (m
2
)
|
|
Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC
|
|
Dormitory
|
|
|
8,573
|
|
Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC
|
|
Factory
|
|
|
22,292
|
|
The buildings were pledged as
security for the outstanding bank loans as set forth in note 30.
The gross carrying amount of
the fully depreciated property, plant and equipment that is still in use is $123,265 and $38,851 as at December 31, 2018 and 2017,
respectively.
KBS Fashion Group Limited
Notes to Financial Statements
In 2012, the Company performed
a revaluation of certain equipment. The revaluation was performed by an independent appraiser on November 10, 2012 and, as a result
of the revaluation, the Company recognized a revaluation surplus in the amount of 184,272. The amount is classified as revaluation
reserve. Since the surplus has not been realized, the amount recognized is not available for distribution. There was no movement
in the revaluation reserve during 2018 and 2017. The carrying amount that would have been recognized had the assets been carried
under the cost model is as follows:
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery
|
|
|
91,232
|
|
|
|
95,826
|
|
Motor Vehicles
|
|
|
33
|
|
|
|
35
|
|
Office Equipment
|
|
|
2,533
|
|
|
|
2,661
|
|
Furniture and fixtures
|
|
|
703
|
|
|
|
739
|
|
|
|
|
94,502
|
|
|
|
99,260
|
|
|
21.
|
PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES
|
|
|
Amount
|
|
At January 1, 2017
|
|
|
2,570,682
|
|
additions for the year
|
|
|
30,672
|
|
charge for the year
|
|
|
(105,340
|
)
|
translation adjustment
|
|
|
156,092
|
|
At December 31, 2017
|
|
|
2,652,106
|
|
additions for the year
|
|
|
26,899
|
|
charge for the year
|
|
|
(104,206
|
)
|
translation adjustment
|
|
|
(124,532
|
)
|
At December 31, 2018
|
|
|
2,450,267
|
|
Analyzed for reporting purposes as:
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current asset
|
|
|
78,532
|
|
|
|
83,907
|
|
Non-current asset
|
|
|
2,371,735
|
|
|
|
2,568,199
|
|
|
|
|
2,450,267
|
|
|
|
2,652,106
|
|
The amounts represent the prepayment
of rentals for offices situated in the PRC. See Note 35.
|
22.
|
PREPAYMENT FOR CONSTRUCTION OF NEW PLANT
|
On November 20, 2010, Hongri
Fujian entered into an agreement with a third party, Anqing Zhongfang Construction and Installation Co., Ltd., for the construction
of the new plant in Anhui at a consideration of $17,826,251. In 2012, Kaixin Anhui made a prepayment of $6,363,853 for the second
phase of the project. In 2013, Kaixin Anhui made another prepayment of $9,747,897 for the second phase of the project. The amount
of $16,401,778 was recognized in Construction in progress.
KBS Fashion Group Limited
Notes to Financial Statements
In 2014, Kaixin Anhui made another
prepayment of $15,525,413 for the second and third phase of the project, and an amount of $6,537,016 was recognized in construction
in progress.
In 2015, an amount of $110,041
was recognized in construction in progress, which was subsequently recognized as fixed asset along with the completion of the second
phase of the project. The total amount transferred to fixed assets from construction in progress amounted to $22,960,220.
The third phase of the project
is related to the construction of a building. The construction site is located on a piece of land whose land use right was to be
acquired by the Company. Due to reasons as set forth in note 23, the anticipated completion date of the project is expected to
be delayed and, in the worst case, may be terminated. Accordingly, management provided a provision of impairment loss against the
carrying value of such prepayment. The detail of estimation of such provision is explained in note 6.
As at December 31, 2018, the
carrying amount of the prepayment for construction of new plant is as follows:
|
|
As at
December 31,
2018
|
|
Prepaid in 2015
|
|
|
8,469,878
|
|
Recognized as construction in progress
|
|
|
(110,041
|
)
|
|
|
|
8,359,837
|
|
Impairment loss in 2015:
|
|
|
(1,199,314
|
)
|
|
|
|
7,160,523
|
|
Impairment loss in 2016:
|
|
|
(6,989,200
|
)
|
Translation adjustment:
|
|
|
(171,323
|
)
|
|
|
|
-
|
|
|
23.
|
PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT
|
On September 2, 2010, Hongri
Fujian entered into an agreement with a third party, Taihu Weiqi Sports Apparel Co., Ltd., to acquire a land use right in relation
to the development of factories in Anhui Kaixin for a total consideration of $6,340,456. As of December 31, 2015, the transaction
has not been completed yet due to disputes between the original owner of the land and the government regarding the compensation
for vacating the premises. In relation to this dispute, the Company expected that the project would be delayed or, in the worst
case, be terminated. Accordingly, the Company provided a provision of impairment loss against the carrying value for such prepayment.
The detail estimation of such provision is explained in note 6.
KBS Fashion Group Limited
Notes to Financial Statements
As at December 31, 2018, the
carrying amount of the prepayment for acquisition of land use right is as follows:
|
|
As at
December 31,
2018
|
|
Prepaid in 2010
|
|
|
6,039,930
|
|
Impairment loss:
|
|
|
(1,265,867
|
)
|
|
|
|
4,774,063
|
|
Impairment loss in 2016:
|
|
|
(4,659,838
|
)
|
Translation adjustment:
|
|
|
(114,225
|
)
|
|
|
|
-
|
|
|
|
Amount
|
|
COST
|
|
|
|
At January 1, 2017
|
|
|
691,618
|
|
additions for the year
|
|
|
-
|
|
translation adjustment
|
|
|
42,635
|
|
At December 31, 2017
|
|
|
734,253
|
|
additions for the year
|
|
|
-
|
|
translation adjustment
|
|
|
(35,198
|
)
|
At December 31, 2018
|
|
|
699,055
|
|
|
|
|
|
|
AMORTIZATION
|
|
|
|
|
At January 1, 2017
|
|
|
(66,724
|
)
|
charge for the year
|
|
|
(14,307
|
)
|
translation adjustment
|
|
|
(4,569
|
)
|
At December 31, 2017
|
|
|
(85,600
|
)
|
charge for the year
|
|
|
(15,545
|
)
|
translation adjustment
|
|
|
4,593
|
|
At December 31, 2018
|
|
|
(95,552
|
)
|
|
|
|
|
|
CARRYING AMOUNTS
|
|
|
|
|
At December 31, 2017
|
|
|
648,653
|
|
At December 31, 2018
|
|
|
603,503
|
|
The amounts represent the prepayment of rentals for
land use right (industrial use) situated in the PRC. The land use rights have the term of 50 years.
KBS Fashion Group Limited
Notes to Financial Statements
All the land use rights mentioned above were owned
by Anhui Kaixin.
The land use right is comprised of the following:
Location
|
|
Expiry date of tenure
|
|
Land
area (m
2
)
|
|
Longshan Road, Economic development District, Taihu County
|
|
2062-05-23
|
|
|
2,440
|
|
Longshan Road, Economic development District, Taihu County
|
|
2061-11-06
|
|
|
7,405
|
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
|
956,947
|
|
|
|
1,186,467
|
|
Finished goods
|
|
|
478,377
|
|
|
|
726,372
|
|
Provision for obsolete inventories
|
|
|
(189,524
|
)
|
|
|
(106,628
|
)
|
|
|
|
1,245,800
|
|
|
|
1,806,212
|
|
|
26.
|
TRADE RECEIVABLES, OTHER RECEIVABLES AND PREPAYMENTS
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade receivables
|
|
|
9,416,320
|
|
|
|
11,860,798
|
|
Bad debt provision for trade receivables
|
|
|
(1,294,097
|
)
|
|
|
(1,359,255
|
)
|
|
|
|
8,122,223
|
|
|
|
10,510,543
|
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Other receivables
|
|
|
2,617
|
|
|
|
2,849
|
|
Prepayments
|
|
|
852,856
|
|
|
|
1,898,419
|
|
|
|
|
855,473
|
|
|
|
1,901,268
|
|
The fair value of trade and other
receivables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the
consolidated statements of financial position to be reasonable approximation of their fair values.
Prepayments include advances
to suppliers and prepaid income tax.
Before accepting any new customer,
the Group assesses the potential customer’s credit quality and defined credit limits by customer. Limits attributed to customers
are reviewed once a year. The aging analysis of trade receivables is as follows:
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
1,743,555
|
|
|
|
1,791,936
|
|
1 to 3 months
|
|
|
3,546,525
|
|
|
|
2,721,633
|
|
3 months or more
|
|
|
4,126,240
|
|
|
|
7,347,229
|
|
|
|
|
9,416,320
|
|
|
|
11,860,798
|
|
KBS Fashion Group Limited
Notes to Financial Statements
The Group allows an average
credit period of 120 -180 days to its trade customers. For the overdue trade receivable, the Company provided a bad debt
allowance amounting to $1,294,097 and $1,359,255 as of December 31, 2018 and 2017, respectively. The provision for doubtful
debts is recorded using a provision account unless the Group is satisfied that recovery is remote, in which case the
unrecovered loss is written off against trade receivables and the provision for doubtful debts directly. The Group does not
hold any collateral over these balances.
The movement in the provision
for doubtful debts during the year is as follows:
|
|
2018
|
|
|
2017
|
|
As at January 1
|
|
|
1,359,255
|
|
|
|
1,280,330
|
|
Provision provided in the year
|
|
|
-
|
|
|
|
-
|
|
Translation adjustment
|
|
|
(65,158
|
)
|
|
|
78,925
|
|
As at December 31
|
|
|
1,294,097
|
|
|
|
1,359,255
|
|
Among the amounts of trade receivables,
$1,368,183 and $1,723,364 of output VAT was included as of December 31, 2018 and 2017, respectively.
|
27.
|
CASH AND CASH EQUIVALENTS
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash on hand
|
|
|
12,874
|
|
|
|
16,413
|
|
Bank deposits
|
|
|
21,013,228
|
|
|
|
26,034,043
|
|
|
|
|
21,026,103
|
|
|
|
26,050,456
|
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Renminbi
|
|
|
21,021,141
|
|
|
|
26,040,572
|
|
Hong Kong Dollars
|
|
|
1,971
|
|
|
|
8,914
|
|
United States Dollars
|
|
|
2,991
|
|
|
|
970
|
|
|
|
|
21,026,103
|
|
|
|
26,050,456
|
|
Cash and cash equivalents comprise
cash held by the Group and short-term deposits with an original maturity of three months or less. Bank deposits as at December
31, 2018 carry interest at market rates which ranged from 0.35% to 0.50% (2017: 0.35%-0.50%) per annum. Majority of our cash is
deposited with financial institution in the PRC. Remittance of funds out of the PRC is subject to the exchange restrictions imposed
by the PRC government.
KBS Fashion Group Limited
Notes to Financial Statements
|
28.
|
TRADE AND OTHER PAYABLES
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade payables
|
|
|
42,063
|
|
|
|
104,258
|
|
Employee benefits payable
|
|
|
348,028
|
|
|
|
226,210
|
|
Other payables
|
|
|
1,645,271
|
|
|
|
1,648,060
|
|
Subtotal financial liabilities
|
|
|
2,035,362
|
|
|
|
1,978,529
|
|
Other taxes payable
|
|
|
3,243,098
|
|
|
|
3,473,302
|
|
|
|
|
5,278,460
|
|
|
|
5,451,830
|
|
The fair value of trade and other
payables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the consolidated
statements of financial position to be reasonable approximation of their fair values.
Trade payables comprise amounts
outstanding for trade purchase. The average credit period is 30 days from the time when the services are rendered by or goods received
from suppliers. The aging analysis of trade payables is as follows:
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Current
|
|
|
12,456
|
|
|
|
23,587
|
|
1 to 3 months
|
|
|
8,504
|
|
|
|
57,637
|
|
3 months or more
|
|
|
21,104
|
|
|
|
23,034
|
|
|
|
|
42,063
|
|
|
|
104,258
|
|
The Company was granted a credit term of 30 days.
The balances past due were mainly for the Company’s high bargaining power.
|
29.
|
RELATED PARTIES PAYABLE
|
|
(1)
|
Nature of relationship with related parties
|
Name
|
|
Relationship with the Group
|
Yan, Keyan
|
|
Chairman, Director, and CEO
|
Chen, Bizhen
|
|
Wife of Yan, Keyan
|
KBS International
|
|
Ex-shareholder of Hongri
|
Shishi City Lingxiu Hongri Knitwear Factory
|
|
Company owned by Chen, Bizhen
|
KBS Fashion Group Limited
Notes to Financial Statements
|
(2)
|
Significant balances between the Group and the above related parties:
|
|
|
|
|
As at December 31,
|
|
Name
|
|
Nature
|
|
2018
|
|
|
2017
|
|
Yan, Keyan
|
|
Borrowing of funds
|
|
|
445,614
|
|
|
|
154,137
|
|
|
|
|
|
|
445,614
|
|
|
|
154,137
|
|
Related parties payables were
unsecured, non-interest bearing and repayment on demand.
During 2017, Mr. Yan and Ms.
Chen provided personal guarantees for the loans as set forth in Note 30.
*The Company entered into a lease
arrangement for office space with this related party in 2010. The breakdown of the commitment to the lease is disclosed in note
34.
|
30.
|
SHORT-TERM BANK LOANS
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Secured bank borrowings
|
|
|
1,092,783
|
|
|
|
1,606,930
|
|
Carrying amount repayable within 1 year
|
|
|
1,092,783
|
|
|
|
1,606,930
|
|
The borrowings are fixed-rate and denominated in RMB.
Bank loans
|
|
Amount
USD
|
|
|
Period
|
|
Interest rate
|
|
|
Mortgage
|
|
Personal guarantee
|
#1
|
|
|
1,092,785
|
|
|
3/21/2018
|
|
3/21/2019
|
|
|
6.09
|
%
|
|
Land use right and buildings
|
|
Yan, Keyan/ Chen, Bizhen
|
|
|
|
1,092,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBS Fashion Group Limited
Notes to Financial Statements
On November 1, 2012, the Company
sold 5,000,000 Units at an offering price of $10.00 per Unit generating gross proceeds of $50,000,000 in the Public Offering. Each
Unit consisted of one share of common stock of the Company and one warrant to purchase one share of common stock of the Company
(“Redeemable Warrants”). Each Redeemable Warrant entitled the holder to purchase one share of common stock at a price
of $11.50 which would commence on the later of either the completion of an initial Acquisition Transaction or October 24, 2013,
and would expire five years from the completion date of an initial Acquisition Transaction, provided that there is an effective
registration statement covering the shares of common stock underlying the Redeemable Warrants. The Company is entitled to redeem
the Redeemable Warrants at a price of $0.01 per Redeemable Warrant upon providing 30 days’ notice, subject to the last sale
price of the common stock was at a minimum of $17.50 per share for any 20 trading days within a 30-trading day period (“30-Day
Trading Period”) that ended on the third day prior to the date on which notice of redemption is given, provided that there
is a current registration statement in effect with respect to the shares of common stock underlying such Redeemable Warrants commencing
ten days prior to the 30-Day Trading Period and continuing each day thereafter until the date of redemption. The Company is required
to use its best efforts to maintain the effectiveness of the registration statement covering the Redeemable Warrants. However,
there are no contractual penalties for failure to deliver securities if a registration statement is not effective at the time of
exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such
Redeemable Warrant shall not be entitled to exercise such Redeemable Warrant for cash and in no event (whether in the case of a
registration statement not being effective or otherwise) will the Company be required to net cash settle the Redeemable Warrant
exercise.
Simultaneously with the consummation
of the Public Offering, the Company consummated a Private Placement for the sale of 337,750 Placement Units to its Founders at
a price of $10.00 per share, generating total proceeds of $3,377,500. The Placement Units are identical to the Units sold in the
Public Offering except that the warrants included in the Placement Units (i) were not redeemable by the Company and (ii) may be
exercised for cash, or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees.
Additionally, the Placement Units have been placed in escrow and the purchasers have agreed not to transfer, assign or sell any
of the Placement Units, including the underlying securities (except to certain permitted transferees) until 30 days following the
completion of an initial Acquisition Transaction. The securities held in the escrow account will only be released prior to the
end of the escrow period if following the initial Acquisition Transaction, the Company consummates a subsequent transaction that
results in all stockholders having a right to exchange their shares for cash or other consideration.
The Company granted the underwriter
in the Public Offering a 45-day option to purchase up to an additional 750,000 Units solely to cover over-allotments, if any. On
November 7, 2012, the underwriters exercised a portion of their option and the Company sold an additional 550,000 Units at a price
of $10.00 per Unit generating gross proceeds of $5,500,000. In addition, the Company sold an additional 30,250 Private Placement
Units generating gross proceeds of $302,500.
KBS Fashion Group Limited
Notes to Financial Statements
The table below provides a reconciliation
of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs:
Balance – January 26, 2012 (inception)
|
|
|
-
|
|
Correction of an error
|
|
|
3,200,223
|
|
Issuance of warrants as part of Units on November 7, 2012
|
|
|
322,884
|
|
Change in fair value
|
|
|
(45,225
|
)
|
Balance – December 31, 2012
|
|
|
3,477,882
|
|
Change in fair value
|
|
|
(45,442
|
)
|
Balance – December 31, 2013
|
|
|
3,432,440
|
|
Change in fair value
|
|
|
(3,417,053
|
)
|
Balance – December 31, 2014
|
|
|
15,387
|
|
Change in fair value
|
|
|
(11,978
|
)
|
Balance – December 31, 2015
|
|
|
3,409
|
|
Change in fair value
|
|
|
(3,409
|
)
|
Balance – December 31, 2016
|
|
|
-
|
|
Change in fair value
|
|
|
-
|
|
Balance – December 31, 2017
|
|
|
-
|
|
Change in fair value
|
|
|
-
|
|
Balance – December 31, 2018
|
|
|
-
|
|
The fair value of warrants was
determined using a binomial-lattice model. This model requires the input of highly subjective assumptions, including price volatility
of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value of the warrants
and the Company’s results of operations could be impacted. This model is dependent upon several variables such as the instrument’s
expected term, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend
yield rate over the expected instrument term, and the expected volatility of the Company’s stock price over the expected
term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected
strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result
of the down round protection. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected
terms of the options at the date of valuation. Expected dividend yield is based on historical trends. The Company measures volatility
using the volatility rates of market index.
The inputs to the model were
as follows:
|
|
December 31.
2018
|
|
|
December 31,
2017
|
|
Stock price
|
|
$
|
2.96
|
|
|
$
|
4.14
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
Risk-free rate
|
|
|
2.56
|
%
|
|
|
1.89
|
%
|
Expected term (in years)
|
|
|
0.58
|
|
|
|
1.58
|
|
Expected volatility
|
|
|
11.94
|
%
|
|
|
22.3
|
%
|
The quoted price of the warrants on the over-the-counter-markets
(“OTC”) were $0.001 and $0.001 as at December 31, 2018 and 2017, respectively.
At December 31, 2018, there were 393,835 unexpired
warrants outstanding.
KBS Fashion Group Limited
Notes to Financial Statements
|
32.
|
SHARE CAPITAL AND SHARE PREMIUM
|
The details of the Group’s share capital are as follows:
|
|
Number of shares
|
|
|
Share capital
|
|
|
Share premium
|
|
Shares outstanding as December 31, 2017
|
|
|
1,986,299
|
|
|
$
|
198
|
|
|
$
|
6,686,170
|
|
Issuance of shares
|
|
|
285,000
|
|
|
|
29
|
|
|
|
1,314,392
|
|
Shares outstanding as December 31, 2018
|
|
|
2,271,299
|
|
|
$
|
227
|
|
|
$
|
8,000,561
|
|
|
|
Number of shares
|
|
|
Share capital
|
|
|
Share premium
|
|
Authorized Common shares of US$0.0001 as at December 31, 2017
|
|
|
150,000,000
|
|
|
$
|
15,000
|
|
|
$
|
-
|
|
Issue and fully paid common shares of US$0.0001 as at December 31, 2017
|
|
|
1,986,299
|
|
|
$
|
198
|
|
|
$
|
6,686,170
|
|
Issue and fully paid common shares of US$0.0001 as at December 31, 2018
|
|
|
2,271,299
|
|
|
$
|
227
|
|
|
$
|
8,000,561
|
|
Preferred Stock
The Company is authorized to
issue 5,000,000 preferred shares with a par value of $0.0001 per share with such designation, rights and preferences as may be
determined by the Company’s board of directors. No preferred shares are currently issued or outstanding.
Common Stock
The Company is authorized to
issue 150,000,000 shares of common stock with a par value of $0.0001 per share.
On March 29, 2016, the Company
granted 1,100,000 of common stock to its executive officers and directors as compensation of their past services. The shares were
vested immediately. The fair value of the award was calculated on the date of grant using the quoted price of the Company’s
common stock. Total expense recognized in connection with this share-based payment amounted to $429,000.
On January 20, 2017, the Company
granted and issued 57,600 shares to its employees.
On February 6, 2017, the 1-15
reverse stock split took effect and, as a result, the number of issued and outstanding shares of the Company’s Common Stock is
reduced from 26,517,329 shares to approximately 1,767,821 shares. The accompanying financial statements have been retroactively
adjusted to reflect the effects of the reverse stock split that occurred after the date of the most recent financial statements.
On July 10, 2017, the Company
granted, and subsequently issued, 215,000 to its directors.
On February 10, 2018, the Company granted, and subsequently
issued, 285,000 shares to its directors. The shares are for services rendered in 2018. The shares are vested immediately upon granting.
KBS Fashion Group Limited
Notes to Financial Statements
Statutory surplus reserve
As stipulated by the relevant
laws and regulations applicable to China’s foreign investment enterprises, the Company’s PRC subsidiaries are required
to maintain a statutory surplus reserve which is non-distributable. Appropriations to such reserve are made out of net profit after
tax of the statutory financial statements of the PRC subsidiaries at the amounts determined by their respective boards of directors
annually up to 50% of authorized capital, but must not be less than 10% of the net profit after tax.
The statutory surplus reserve
can be used for making up losses of the group entities in Mainland China, if any. The statutory surplus reserve may also be used
to increase capital or to meet unexpected or future losses. The statutory surplus reserve is non-distributable other than upon
liquidation.
The statutory surplus reserve
of the Group amounts to $6,084,836 and $6,084,836 at December 31, 2018 and 2017, respectively. The statutory surplus reserve of
the Group is related to Hongri Fujian and Anhui Kaixin.
Revaluation reserve
Revaluation reserve is comprised
of the surplus or deficit arising from the revaluation of the Company’s fixed assets.
Retained profits
The retained profits comprise
the cumulative net gains and losses recognized in the Company’s income statement.
Foreign currency translation
reserve (other comprehensive income)
Foreign currency translation
reserve represents the foreign currency translation difference arising from the translation of the financial statements of companies
within the Group from their functional currency to the Group’s presentation currency.
KBS Fashion Group Limited
Notes to Financial Statements
|
34.
|
RISK MANAGEMENT AND FAIR VALUES
|
The Group manages its capital
to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to owners through
the optimization of the debt and equity balance. The Group’s overall strategy remains unchanged during the year.
The capital structure of the
Group consisted of borrowings net of bank balances and cash, and equity attributable to owners of the Company comprising issued
share capital and various reserves.
The directors of the Company
review the capital structure regularly. As part of this review, the Group considers the cost of capital and the risks associated
with each class of capital, and will balance its overall capital through the payment of dividends, new share issues as well as
the issue of new debt or the redemption of existing debt.
The Group monitors capital using the Gearing Ratio, which is net debt divided by total equity. Net debt
represents borrowings less cash and cash equivalents. The Company met its objective by reducing borrowing activities.
The Company and its subsidiaries
are not subject to externally imposed capital requirements.
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Total borrowing
|
|
|
1,092,783
|
|
|
|
1,609,930
|
|
Less: cash and cash equivalents
|
|
|
(21,026,103
|
)
|
|
|
(26,050,456
|
)
|
Net debt
|
|
|
(19,933,320
|
)
|
|
|
(24,443,526
|
)
|
Total equity
|
|
|
54,301,321
|
|
|
|
74,027,196
|
|
Total capital
|
|
|
34,368,001
|
|
|
|
49,583,670
|
|
Gearing ratio
|
|
|
(37
|
%)
|
|
|
(33
|
%)
|
Financial risk management objectives
and policies
The Group’s major financial instruments
include trade and other receivables, related parties receivables, cash and cash equivalents, trade and other payables, related
parties payables and short-term loans. Details of these financial instruments are disclosed in the respective notes. The risks
associated with these financial instruments include credit risk, market risk (interest rate risk and currency risk) and liquidity
risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure
appropriate measures are implemented on a timely and effective manner.
KBS Fashion Group Limited
Notes to Financial Statements
|
(i)
|
Foreign currency risk
|
While our reporting currency is the U.S. dollar, substantially all of our consolidated revenues and consolidated
costs and expenses are denominated in RMB. Substantially all of our assets are denominated in RMB. As a result, we are exposed
to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between
the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets
as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the
balance sheet dates and revenue and expenses are translated at the average exchange rates and equity is translated at historical
exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining
other comprehensive income, a component of equity. An average appreciation (depreciation) of the RMB against the U.S. dollar of
5% would increase (decrease) our comprehensive income by $2.8 million based on our outstanding revenues, costs and expenses, assets
and liabilities denominated in RMB as of December 31, 2018. As of December 31, 2018, our accumulated other comprehensive loss was
$(6.1) million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
We deposit surplus funds with
Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments
carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently
do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions
in an effort to reduce our exposure to interest rate risk.
KBS Fashion Group Limited
Notes to Financial Statements
As at December 31, 2018, the Group’s maximum exposure to credit risk which will cause a financial
loss to the Group due to failure to perform an obligation by the counterparties is arising from the carrying amount of the respective
recognised financial assets as stated in the consolidated statement of financial position.
In order to minimize the credit
risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other
monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable
amount of each individual trade debt at the end of each reporting period to ensure that adequate impairment losses are made for
irrecoverable amounts. In this regard, the directors of the Group consider that the Group’s credit risk is significantly
reduced.
The Group has concentration of
credit risk on the Group’s trade receivables. The outstanding balance of the five largest customers represented approximately
52% of the trade receivables of the Group at December 31, 2018 (2017: 26%). In order to minimize the credit risk, management continuously
monitors the level of exposure to ensure that follow-up actions and/or corrective actions are taken promptly to lower the risk
exposure or to recover overdue balances.
In the management of the liquidity
risk, the Group monitors and maintains a level of cash and bank balances deemed adequate by the management to finance the Group’s
operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilization of bank borrowings and
ensures compliance with loan covenants.
Liquidity tables
The following tables detail the
Group’s remaining contractual maturity for its non-derivative financial liabilities as at December 31, 2018 based on agreed
repayment terms. The tables have been drawn up based on undiscounted cash flows of financial liabilities based on the earliest
date on which the Group can be required to pay. The tables include both interest and principal cash flows.
As at December 31, 2018
|
|
Within 1 year
|
|
|
Over 1 year
|
|
|
Total
|
|
Short-term bank loans and related interests
|
|
|
1,092,783
|
|
|
|
-
|
|
|
|
1,092,783
|
|
Trade and other payables
|
|
|
5,278,460
|
|
|
|
-
|
|
|
|
5,278,460
|
|
Related party payables
|
|
|
445,614
|
|
|
|
-
|
|
|
|
445,614
|
|
Total
|
|
|
6,816,857
|
|
|
|
-
|
|
|
|
6,816,857
|
|
KBS Fashion Group Limited
Notes to Financial Statements
As at December 31, 2017
|
|
Within 1 year
|
|
|
Over 1 year
|
|
|
Total
|
|
Short-term bank loans and related interests
|
|
|
1,606,930
|
|
|
|
-
|
|
|
|
1,606,930
|
|
Trade and other payables
|
|
|
5,521,442
|
|
|
|
-
|
|
|
|
5,521,442
|
|
Related parties payables
|
|
|
154,137
|
|
|
|
-
|
|
|
|
154,137
|
|
Total
|
|
|
7,282,509
|
|
|
|
-
|
|
|
|
7,282,509
|
|
The fair value of financial assets
and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.
The following table presents the
fair value of the Group’s financial instruments measured at the end of the reporting period on a recurring basis, categorized
into the three-level fair value hierarchy as defined in IFRS 13, Fair Value Measurement. The level into which a fair value measurement
is classified is determined with reference to the observability and significance of the inputs used in the valuation technique
as follows:
|
-
|
Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices
in active markets for identical assets or liabilities at the measurement date.
|
|
-
|
Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail
to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available.
|
|
-
|
Level 3 valuations: Fair value measured using significant unobservable inputs.
|
|
|
December 31,
2018
Level 2
|
|
|
December 31,
2017
Level 2
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
During the years ended December
31, 2018 and 2017, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3. The Group’s
policy is to recognize transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
KBS Fashion Group Limited
Notes to Financial Statements
Valuation
techniques and inputs used in Level 2 fair value measurements
The fair value of financial assets
in Level 2 is determined by the model as disclosed in note 32.
The directors of the Company consider
that the carrying amounts of financial assets and financial liabilities recorded at amortized cost approximate their fair values.
|
35.
|
COMMITMENTS AND CONTINGENCIES
|
|
(1)
|
The Company had the following capital commitments in respect of the construction of plant and equipment
which were contracted but not provided for in the financial statements:
|
|
|
As at
December 31,
2018
|
|
|
As at
December 31,
2017
|
|
Contracted and authorized, in RMB
|
|
|
439,850,378
|
|
|
|
439,850,378
|
|
Contracted and authorized, in USD
|
|
|
64,088,236
|
|
|
|
67,315,108
|
|
|
(2)
|
As at December 31, 2018, the Company had lease commitments as follows:
|
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Within 1 year
|
|
|
78,532
|
|
|
|
101,660
|
|
2-5 years
|
|
|
220,058
|
|
|
|
231,138
|
|
Thereafter
|
|
|
2,151,677
|
|
|
|
2,337,061
|
|
|
|
|
2,450,267
|
|
|
|
2,669,859
|
|
The amount of $78,532 as of December
31, 2018 represents leases of one office, two units of staff quarters, and one warehouse. There is no contingent rent payable for
all of the leases. All leases are within one year except for one of the offices, which is leased by a related party as disclosed
in note 30. The commitment pertains to this particular lease is as follows:
|
|
As at December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Within 1 year
|
|
|
73,353
|
|
|
|
77,046
|
|
2-5 years
|
|
|
220,058
|
|
|
|
231,138
|
|
Thereafter
|
|
|
2,151,677
|
|
|
|
2,337,061
|
|
|
|
|
2,445,087
|
|
|
|
2,645,245
|
|
The Company has prepaid this
lease in the full amount. The lease commenced on January 1, 2009 and will expire on April 22, 2052. The lease does not specify
the terms of renewal, purchase options, or escalation clauses. The Company may not sublease the office to a third party.
KBS Fashion Group Limited
Notes to Financial Statements
|
36.
|
EVENTS AFTER THE BALANCE SHEET
|
Shares issuance
On March 25, 2019, the Company granted 305,000 shares
to its directors and management. The shares are for services rendered in 2019. The shares are vested immediately upon granting.
On March 29, 2019, the Company granted 15,000 shares
to its service provider. The shares are for services rendered in 2019. The shares are vested immediately upon granting.
* * * * *
F-59