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, 2019, 2018 and 2017, and the selected consolidated statements of financial position data as of December 31,
2019 and 2018 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, 2016 and
2015, and the selected consolidated statements of financial position data as of December 31, 2017, 2016 and 2015 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
16,465,562
|
|
|
$
|
18,535,116
|
|
|
$
|
23,762,536
|
|
|
$
|
41,200,205
|
|
|
$
|
61,343,681
|
|
Total cost of sales
|
|
|
(10,714,519
|
)
|
|
|
(20,851,252
|
)
|
|
|
(35,274,352
|
)
|
|
|
(39,041,932
|
)
|
|
|
(46,511,274
|
)
|
Gross profit
|
|
|
5,751,043
|
|
|
|
(2,316,136
|
)
|
|
|
(11,511,816
|
)
|
|
|
2,158,272
|
|
|
|
14,832,407
|
|
Distribution and selling expenses
|
|
|
(1,094,391
|
)
|
|
|
(2,670,955
|
)
|
|
|
(3,265,380
|
)
|
|
|
(3,606,010
|
)
|
|
|
(6,621,256
|
)
|
Administrative expenses
|
|
|
(3,478,258
|
)
|
|
|
(4,907,020
|
)
|
|
|
(4,879,397
|
)
|
|
|
(3,543,993
|
)
|
|
|
2,798,082
|
|
Profit for the year
|
|
|
1,149,803
|
|
|
|
(17,968,597
|
)
|
|
|
(14,815,596
|
)
|
|
|
(11,902,688
|
)
|
|
|
1,243,670
|
|
Total comprehensive income for the year
|
|
|
(447,473
|
)
|
|
|
(20,040,295
|
)
|
|
|
(10,004,880
|
)
|
|
|
(18,028,121
|
)
|
|
|
(4,801,102
|
)
|
Outstanding shares
|
|
|
2,517,491
|
|
|
|
2,299,915
|
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
|
|
1,694,489
|
|
Earnings per share, basic diluted
|
|
|
0.20
|
|
|
|
-8.06
|
|
|
|
-7.96
|
|
|
|
-6.80
|
|
|
|
0.73
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,620,478
|
|
|
$
|
21,026,103
|
|
|
$
|
26,050,456
|
|
|
$
|
24,576,341
|
|
|
$
|
21,214,080
|
|
Non-current assets
|
|
|
28,151,756
|
|
|
|
29,837,875
|
|
|
|
40,966,319
|
|
|
|
34,754,942
|
|
|
|
47,221,529
|
|
Current assets
|
|
|
33,545,736
|
|
|
|
31,328,131
|
|
|
|
40,343,386
|
|
|
|
56,343,823
|
|
|
|
62,098,951
|
|
Working capital
|
|
|
26,901,342
|
|
|
|
24,463,446
|
|
|
|
33,060,877
|
|
|
|
48,647,185
|
|
|
|
53,598,854
|
|
Total assets
|
|
|
61,697,492
|
|
|
|
61,166,006
|
|
|
|
81,309,705
|
|
|
|
91,098,765
|
|
|
|
109,310,480
|
|
Current liabilities
|
|
|
6,644,394
|
|
|
|
6,864,685
|
|
|
|
7,282,509
|
|
|
|
7,696,638
|
|
|
|
8,500,097
|
|
Total liabilities
|
|
|
6,644,394
|
|
|
|
6,864,685
|
|
|
|
7,282,509
|
|
|
|
7,696,638
|
|
|
|
8,503,506
|
|
Equity
|
|
|
55,053,098
|
|
|
|
54,301,321
|
|
|
|
74,027,196
|
|
|
|
83,402,127
|
|
|
|
100,816,974
|
|
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
Our
business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19).
An
outbreak of respiratory illness caused by COVID-19 emerged in late 2019 and has spread within the PRC and globally. The coronavirus
is considered to be highly contagious and poses a serious public health threat. The World Health Organization labeled the coronavirus
a pandemic on March 11, 2020, given its threat beyond a public health emergency of international concern the organization had
declared on January 30, 2020.
Any
outbreak of health epidemics in the PRC or elsewhere in the world may materially and adversely affect the global economy, our
markets and business. During the first quarter of 2020, we scaled back operations, as our employees worked remotely or at premises
in shifts for limited periods of time in response to nationwide lockdowns and quarantines due to COVID-19. We only resumed full
operations since late March. The pandemic has also depressed customers’ demand for our products and services, since during
the past few months, businesses across China largely suspended or reduced operations. As a provider of casual menswear in China,
we are sensitive to the overall business environment and vulnerable to any market downturns.
With
the coronavirus epidemic expanding globally, the world economy is suffering a noticeable slowdown. Commercial activities throughout
the world have been curtailed with decreased consumer spending, business operation disruptions, interrupted supply chain, difficulties
in travel, and reduced workforces. The duration and intensity of disruptions resulting from the coronavirus outbreak is uncertain.
It is unclear as to when the outbreak will be successfully contained, and we also cannot predict if the impact will be short-lived
or long-lasting. The extent to which the coronavirus impacts our financial results will depend on its future developments. If
the pandemic is not effectively controlled in a short period of time, our business operation and financial condition may be materially
and adversely affected as a result of slowdown in economic growth, operation disruptions or other factors that we cannot predict.
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 30 as of December 31, 2019.
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.
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, net sales further decreased 22% to $18.53 million in 2018, and decreased 11%
to $16.47 million in 2019. The decrease in sales in 2017, 2018 and 2019 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 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 roll out 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 2019, we typically expect and receive payment within 30-191
days of product delivery. 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, 2018
and 2019, distributors accounted for approximately 67%, 73% and 41.7% of our total sales, respectively, and our top five distributors
accounted for approximately 23.8%, 34.8% and 24.4 % 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 is 100% outsourced to PRC-based third party OEM contract manufacturers. In the years ended
December 31, 2019, 2018 and 2017, we had 4, 4 and 6 OEM contract manufacturers, respectively. Purchases from our OEM contract
manufacturers accounted for approximately 74.6%, 72.7% and 88.6% of our total purchases for the years ended December 31, 2019,
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. Although we are not heavily reliant on any single
OEM contract supplier, 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.
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
do not use chemicals in our manufacturing operations. However, as part of our operations involves contract manufacturing for other
brands, 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, emerging growth company or smaller reporting
company 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. As a result, 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. 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. 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, lack of effective internal controls over financial accounting, inadequate corporate governance
policies or lack 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.
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 the our industries;
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customer
demand for our products;
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investor
perceptions of the 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 37.21% 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.
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, we are permitted to adopt certain home country practices in relation to corporate governance matters that
differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to stockholders
than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.
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 also 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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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.
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, 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, 2019, our total capital expenditures and divestitures were $28,746. For the years ended December 31,
2018 and 2017, our total capital expenditures and divestitures were -$52,932 and $849,199, respectively. Such expenditures were
primarily used in 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 4,678
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 11 of China’s 32 provinces and centrally administered municipalities.
As of December 31, 2019, this network was comprised of 1 corporate store owned and operated by the company and 29 franchised stores
operated by 11 third party distributors or their sub-distributors. Some wholesale distributors sold our products to multi-branded
stores and online stores. The number of franchised stores has grown from 7 as of December 31, 2006 to 29 as of December 31, 2019.
In the years ended December 31, 2019, 2018 and 2017, sales through our corporate store accounted for 3.5%, 13% and 29.4% of our
total revenues respectively, and sales through distributors and whole sellers accounted for 62.6%, 73 % and 66.5% of our revenues,
respectively. Total revenue from the corporate store sales for fiscal year 2019 was $0.56 million for 2019, compared to $2.37
million for 2018 and $7.0 million for 2017.
From 2009 through 2019, total net sales decreased
from $28.1 million to $16.47 million while the net profit decreased from $9.0 million to $-0.1 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. 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 2019 National Economic and Social Development Statistical Bulletin,
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 12 employees as of May 31, 2020. 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, 2019, we had 1 KBS branded corporate store and 29 franchised stores across 9 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, 2019, we had 11 distributors operating 29 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. 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. In 2019, we had generated revenue of
approximately RMB 17 million and 68 million from two major current customers: Hangzhou Zhi Yin Apparel Clothes Co., Ltd. and Hangzhou
Yiyuan Apparel Co., Ltd. Although the sales so far of 2020 have been negatively impacted by COVID-19, we expect our business to
recover and continue to grow after the pandemic.
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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 2019, the suggested retail prices of our products ranged from RMB299 to RMB1,599 (approximately $42 to $237)
for our apparel products and RMB29 to RMB899 (approximately $4.14 to $129) for our accessory products. Since 2006, we have launched
4,678 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, 2019, our design and product development team consisted of 12 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 original design manufacturers, or 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 11 of China’s
32 provinces and centrally administered municipalities.
Corporate
Stores
As
of December 31, 2019, 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, 2019, 2018 and 2017, sales through our corporate stores accounted for 3.5%, 13% and 29.4%
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, 2019, we had 11 franchised distributors
who operated 29 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 80 square meters as of December 2019. 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 2,417 square meters as of December 31, 2019. In the years ended December 31, 2019, 2018 and
2017, sales through our distributors accounted for 62.6%, 73% and 63.3% of our revenues, respectively.
During
each of the fiscal years ended December 31, 2017, 2018 and 2019, we had no customer exceeding 10% of our net sales.
Sales
generated by our five best-performing franchised distributors accounted for approximately 26.4%, 29.3%, and 23.8% of our revenues
in the years ended December 31, 2019, 2018 and 2017, 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, 2019:
Location
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As of December 31, 2019
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Fujian
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5
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Guangdong
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2
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Guangxi
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2
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Jiangsu
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3
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Anhui
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2
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Chongqing
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4
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Tianjin
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3
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Hebei
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4
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Sichuan
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4
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Total
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29
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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. In 2017, 2018 and 2019, we produced about 0.30
million, 0.49 million and 1.02 million units at the operating capacity of 15%, 25% and 51%.
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, 2019, we had 3
ODM contract manufacturers and 4 OEM contract manufacturers. 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 $5.38 million,
$8.38 million and $10.94 million for years ended December 31, 2019, 2018 and 2017, respectively, accounting for approximately
50.2%, 27.3% and 31% of our total cost of sales in the respective periods.
As
of December 31, 2019, our principal ODM and OEM contract suppliers included the following:
No.
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1
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Bai
Tian Ni (Fujian) Clothing fabric Co. Ltd
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2
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Shishi
Hua Lai Shi Clothing Co. Ltd
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3
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Jinjiang
City Hongtawanheng trading Co. Ltd
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4
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Fujian
Gumaite Clothing Technology Co. Ltd
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5
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Shishi
Rongpeng Clothing Co. Ltd
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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, 2019, 2018 and 2017, our total advertising and promotional expenses amounted to approximately $0.29
million, $1.21 million and $1.59 million, respectively, which accounted for approximately 1.9%, 6.6% and 7.5% 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 believe 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
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KBS
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4342760
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Jan 1, 2019 - August 28, 2028
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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 2019, the Ministry of Commerce and the National Development and Reform Commission promulgated the Special Management Measures
(Negative List) for the Access of Foreign Investment, or the Negative List, effective July 30, 2019. On March 15, 2019, the Standing
Committee of the National People’s Congress passed the Foreign Investment Law of PRC, which took effect on January 1, 2020.
The Law of the People’s Republic of China on China-Foreign Equity Joint Ventures, the Law of the People’s Republic
of China on Wholly Foreign-Owned Enterprises, and the Law of the People’s Republic of China on China-Foreign Contractual
Joint Ventures were replaced at the same time. On December 26, 2019, the Regulation on the Implementation of the Foreign Investment
Law of the PRC, was issued by the State Council and came into force on January 1, 2020. The Foreign Investment Law of PRC adopts
the management system of the negative list for foreign investment. A foreign investor may not invest in a field which is prohibited
by the foreign investment access negative list from investment. To invest in a field restricted by the foreign investment access
negative list from investment, a foreign investor shall meet the investment conditions set out in the negative list.
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 2019, 2018 and 2017. 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 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.
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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 11 of China’s 32 provinces and centrally administered
municipalities. As of December 31, 2019, this network was comprised of one corporate store owned and operated by us and 29 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.
As
of December 31, 2019, we leased the premises for our sole remaining corporate store. We have undertaken various measures to verify
the lessors’ 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 RMB 720,000 as annual rent for the existing corporate store during each of the fiscal
years 2017, 2018 and 2019. The total area of this 1 corporate store is 120 square meters. The sales of the store for the most
recent three fiscal years are shown below:
Area
|
|
Sales in fiscal year 2017(USD)
|
|
|
Sales in fiscal year 2018(USD)
|
|
|
Sales in fiscal year 2019(USD)
|
|
Shishi Corporate Store
|
|
|
772,299
|
|
|
|
691,431
|
|
|
|
561,391
|
|
Total:
|
|
|
772,299
|
|
|
|
691,431
|
|
|
|
561,391
|
|
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 2019,
the suggested retail prices of KBS’s products ranged from RMB299 to RMB1,599 (approximately $42 to $237) for its apparel
products and RMB29 to RMB899 (approximately $4.14 to $129)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 4,678 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, currently covering 11 of China’s 32 provinces and centrally administered
municipalities. As of December 31, 2019, this network was comprised of 1 corporate store owned and operated by us and 29 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. With the softening of economic growing in China and
fierce competition from our competitors, our network only has 1 corporate store and 29 franchised stores as of December 31, 2019.
KBS
also acts as an original design manufacturer, or ODM, upon request. Income from such services accounted for 33.9%, 14% and 7.3%
of revenue for the years ended December 31, 2019, 2018 and 2017, 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
companies including Hangzhou Zhi Yin Apparel Clothes Co., Ltd and Hangzhou Yiyuan Apparel Co., Ltd. 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.
Recent
Developments
The
ongoing coronavirus pandemic that first surfaced in China and is spreading globally has had a material adverse effect on our business.
All of our operating subsidiaries and employees are located in China. During the first quarter of 2020, we scaled back operations,
as our employees worked remotely or at premises in shifts for limited periods of time in response to nationwide lockdowns and
quarantines. We only resumed full operations since late March. The pandemic has also depressed customers’ demand for our
products and services, since during the past few months, businesses across China largely suspended or reduced operations. The
outbreak has been evolving rapidly. We will continue to monitor and mitigate developments affecting our workforce, our customers,
and the public at large. See “Risk Factors—Risks Related to Our Business—Our business operations have been and
may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19).”
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, 2019, 2018 and 2017
The
following table sets forth key components of our results of operations, for the years ended December 31, 2019, 2018 and 2017,
both in U.S. dollars and as a percentage of or revenue.
|
|
Year ended
December 31, 2019
|
|
|
Year ended
December 31, 2018
|
|
|
Year ended
December 31, 2017
|
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
16,465,562
|
|
|
|
|
|
|
|
18,535,116
|
|
|
|
|
|
|
|
23,762,536
|
|
|
|
|
|
Cost of sales
|
|
|
-10,714,519
|
|
|
|
-65
|
%
|
|
|
-20,851,252
|
|
|
|
-112
|
%
|
|
|
-35,274,352
|
|
|
|
-148
|
%
|
Gross profit
|
|
|
5,757,043
|
|
|
|
35
|
%
|
|
|
-2,316,137
|
|
|
|
-12
|
%
|
|
|
-11,511,816
|
|
|
|
-48
|
%
|
Operating expenses
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution and selling expenses
|
|
|
1,094,391
|
|
|
|
-7
|
%
|
|
|
-2,670,955
|
|
|
|
-14
|
%
|
|
|
-3,265,380
|
|
|
|
-14
|
%
|
Administrative expenses
|
|
|
-3,478,258
|
|
|
|
-21
|
%
|
|
|
-4,907,020
|
|
|
|
-26
|
%
|
|
|
-4,879,397
|
|
|
|
-21
|
%
|
Total operating expenses
|
|
|
-4,572,649
|
|
|
|
-28
|
%
|
|
|
-7,577,975
|
|
|
|
-41
|
%
|
|
|
-8,144,776
|
|
|
|
-34
|
%
|
Other income
|
|
|
291,582
|
|
|
|
2
|
%
|
|
|
122,139
|
|
|
|
1
|
%
|
|
|
461,564
|
|
|
|
2
|
%
|
Other gains and losses
|
|
|
-1,064,588
|
|
|
|
-6
|
%
|
|
|
-13,522,300
|
|
|
|
-73
|
%
|
|
|
-122,244
|
|
|
|
-1
|
%
|
Profit from operations
|
|
|
405,388
|
|
|
|
2
|
%
|
|
|
-23,294,273
|
|
|
|
-126
|
%
|
|
|
-19,317,272
|
|
|
|
-81
|
%
|
Finance costs
|
|
|
-67,203
|
|
|
|
0
|
%
|
|
|
-96,444
|
|
|
|
1
|
%
|
|
|
-96,385
|
|
|
|
0
|
%
|
Change in fair value of warrant liabilities
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
Profit before tax
|
|
|
338,185
|
|
|
|
2
|
%
|
|
|
-23,390,717
|
|
|
|
-126
|
%
|
|
|
-19,413,657
|
|
|
|
-82
|
%
|
Income tax
|
|
|
-442,590
|
|
|
|
-3
|
%
|
|
|
5,422,119
|
|
|
|
29
|
%
|
|
|
4,598,061
|
|
|
|
19
|
%
|
Loss for the year
|
|
|
-104,405
|
|
|
|
-1
|
%
|
|
|
-17,968,591
|
|
|
|
-97
|
%
|
|
|
-14,815,596
|
|
|
|
-62
|
%
|
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,
2019
|
|
|
Year
ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
|
Year
ended December 31,
2019
|
|
|
Year
ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
|
Year
ended December 31,
2019
|
|
|
Year
ended December 31,
2018
|
|
|
Year
ended December 31,
2017
|
|
Year
ended December 31,
2019
|
|
Year
ended December 31,
2018
|
|
Year
ended December 31,
2017
|
|
Sales
to external customers
|
|
10,308,309
|
|
|
13,584,754
|
|
|
15,034,800
|
|
|
571,403
|
|
|
2,375,773
|
|
|
6,983,592
|
|
|
5,585,850
|
|
|
2,574,589
|
|
|
1,744,144
|
|
|
16,465,562
|
|
|
18,535,116
|
|
|
23,762,536
|
|
Segment
|
|
10,308,309
|
|
|
13,584,754
|
|
|
15,034,800
|
|
|
571,403
|
|
|
2,375,773
|
|
|
6,983,592
|
|
|
5,585,850
|
|
|
2,574,589
|
|
|
1,744,144
|
|
|
16,465,562
|
|
|
18,535,116
|
|
|
23,762,536
|
|
% of Sales
|
|
63
|
%
|
|
73
|
%
|
|
63
|
%
|
|
3
|
%
|
|
13
|
%
|
|
29
|
%
|
|
34
|
%
|
|
14
|
%
|
|
7
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Segments gross margins
|
|
3,268,945
|
|
|
2,245,944
|
|
|
2,277,858
|
|
|
319,706
|
|
|
-5,402,994
|
|
|
-14,291,680
|
|
|
2,162,393
|
|
|
845,700
|
|
|
502,007
|
|
|
5,751,043.33
|
|
|
-2,316,136
|
|
|
-11,511,816
|
|
Gross margin rate
|
|
32
|
%
|
|
17
|
%
|
|
15
|
%
|
|
56
|
%
|
|
-227
|
%
|
|
-205
|
%
|
|
39
|
%
|
|
33
|
%
|
|
29
|
%
|
|
35
|
%
|
|
-12
|
%
|
|
-48
|
%
|
Segment
sales
For
the year ended December 31, 2019, total revenue decreased by 11% to $16.45 million from $18.5 million in 2018. Our total revenue
of 2018 decreased by 22% to $18.5 million from $23.8 million in 2017. 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 2019 decreased by 24% to $10 million from $13
million in 2018 primarily due to decrease of sales volume. There was a decrease of revenue from the Company’s distributor
network in year 2018 by 10% to $13 million from $15 million in year 2017 primarily due to a decrease in sales volume as well.
The distributor segment accounted for 63% of the total revenue in 2019, compared to 73% and 63% during years 2018 and 2017, respectively.
In
year 2019, gross profit margin for the company’s distributor network increased to 32% from 17% for year 2018 due to: 1)
higher profit margin from newly designed products; 2) lower production cost benefitted from scale of economies and less expenses;
3) company strategy change to higher profit oriented from market share oriented; and 4) profit margin improvement benefited from
value add tax decrease from 17% to 13%. 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 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.
The
Company’s distributor network currently consists of 14 distributors in 11 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, 2019, distributors operated a total of 29 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 2019 was $0.54 million, compared to $2.37 million for
year 2018. In 2019, sales from corporate store decreased as compared to 2018 because there were no promotion sales of repurchased
inventory from certain distributors which are unable to pay off the debts owed to us.
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.
As
of December 31, 2019, we operated 1 corporate store which was located in Fujian. Total revenue from corporate store sales of 2019
decreased as compared to 2018 because of not more promotion sales of repurchased inventory.
The
corporate store segment contributed 3% of total revenue in 2019, compared to 14% of 2018 and 29% of 2017. Gross profit margin
for the Company’s corporate store was 56% in 2019, compared to -232% in 2018 and-205% in 2017. The margin increase from
2017 to 2019 is primarily because there were no more sales of repurchased inventory from certain distributors which were sold
at big discounted price in year 2017 and year 2018 and there is not more price reduction for stimulate sales.
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 $3.01 million to $5.59 million for year ended December 31, 2019, compared to $2.57 million for year ended
December 31, 2018. Gross profit margin increased to 39% from 33% of year 2018. Revenue from the OEM segment decreased 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. Our revenues from sales of OEM represented 34%, 14% and 9%, respectively, of our
total revenues for years ended December 31, 2019, 2018 and 2017.
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 $21 million in year 2018 to $11 million in year 2019. The decrease was mainly due to the decrease
in total sales in year 2019 compare to 2019.
The
gross profit rate increased from -12% in year 2018 to 35% in year 2019 due to 1) the higher price of new products and improvement
of the quality this year; 2) lower production cost of larger scale of economy production; 3) lower fixed unit cost benefited from
the increase amount of OEM orders; and 4) profit margin improvement benefited from value add tax decrease from 17% to 13%.
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; and 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.
Administrative
expenses
Administrative
expenses decreased by $1.43 million or 29% to $3.4 million for year 2019 from $4.9 million for 2018. The change was mainly due
to decrease in design staff expenses and less depreciation cost from lower fixed asset value after impairment of property in year
2018.
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.
Distribution
and selling expenses
The
selling and distribution expenses decreased by $1.58 million or 59% to $1.1 million for the year ended December 31, 2019 from
$ 2.7 million in 2018, primarily due to the decrease of advertisement expenses, products promotion expenses and entertainment
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 expenses, products promotion expenses and entertainment
expenses.
The
advertisement expenses of 2018, 2017 and 2016 are relatively even and selling expenses accounted for 1.9%, 6.6% and 7.5% for 2019,
2018 and 2017, respectively.
Other
gains and losses
Other gains and losses increased by $12.5
million, or 92%, to -$1.1 million for the year ended December 31, 2019 from -$13.5 million for year 2018. The increase was mainly
due to the impairment on Anhui property as a result of the decrease of its fair value in year 2018.
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 as a result of the decrease of its fair value.
Profit
for the year
We had a loss of $0.10 million in 2019 as
compared to a loss of $18 million for 2018, representing an increase of profit of $17.86 million or 99%. Net margin was -1% for
the year ended December 31, 2019, compared to -97% for the year ended December 31, 2018.
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.
Profit
for the year increased from 2018 to 2019 mainly due to the following reasons: (1) the significant decrease in administrative expenses
and distributions and selling expenses as compared with year 2018; and (2) the higher selling price of new products after improvement;
3) lower production cost benefited from scale of economies production; and 4) lower unit cost from bigger OEM orders.
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 decrease in revenues compared to year ended December 31, 2017; and (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.
B.
|
Liquidity
and Capital Resources
|
As
of December 31, 2019, we had cash and cash equivalents of $20,620,478. 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
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(558,804
|
)
|
|
$
|
(3,703,354
|
)
|
|
$
|
1,922,252
|
|
Net cash provided by (used in) investing activities
|
|
|
332,513
|
|
|
|
52,932
|
|
|
|
(865,365
|
)
|
Net cash provided by (used in) financing activities
|
|
|
57,089
|
|
|
|
(256,870
|
)
|
|
|
(1,095,910
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(169,200
|
)
|
|
|
(3,907,291
|
)
|
|
|
(39,024
|
)
|
Effects of exchange rate change in cash
|
|
|
(236,423
|
)
|
|
|
(1,117,062
|
)
|
|
|
1,513,138
|
|
Cash and cash equivalents at beginning of the period
|
|
|
21,026,103
|
|
|
|
26,050,456
|
|
|
|
24,576,341
|
|
Cash and cash equivalent at end of the period
|
|
$
|
20,620,478
|
|
|
$
|
21,026,103
|
|
|
$
|
26,050,456
|
|
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 2019 was $0.56 million, compared with cash used by operating activities of $3.7
million in the year ended December 31, 2018. The change is mainly due to cash inflow from increase of account receivables.
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.
Investing
Activities
Net
cash used in investing activities in fiscal year 2019 was $0.33 million, compared with $0.05 million net cash provided by investing
activities in 2018. The net cash used in investing activities in 2017 was to sell some antiquated production facilities.
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.
Financing
Activities
Net
cash used in financing activities in fiscal year 2019 was $0.057 million, compared with $0.26 million net cash provided by financing
activities in 2018. It mainly consisted of some advances from related parties.
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.
Loans,
Other Commitments, Contingencies
As of December 31, 2019, we had an
outstanding bank loan from Anhui Taihu Rural Commercial Bank Co. Ltd. in an amount of $1,075,084. Currently, the loan has a
one-year term from April 26, 2020 to April 26, 2021 with an annual interest rate 50% higher than the benchmark interest rate
of People’s Bank of China and is renewable annually. The loan has been guaranteed by Taihu County Financing Guaranty
Co., Ltd. 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, 2019 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, 2019.
|
|
Payments Due by Period
|
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Obligations
|
|
$
|
63,193,611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating Lease Obligations
|
|
$
|
80,049
|
|
|
|
144,329
|
|
|
|
2,116,824
|
|
|
|
-
|
|
Total
|
|
$
|
63,270,660
|
|
|
|
144,329
|
|
|
|
2,116,824
|
|
|
|
-
|
|
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 timely budget on every phase. The majority of funds for construction
expenses came from the cash balance on the account as of December 31, 2019 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 was 16% of product sales and taxable services revenue before 2019, the tax laws announced it change to 13% in year 2019. 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:
|
●
|
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.
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:
|
●
|
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.
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:
|
●
|
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.
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.”
ITEM
6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
Directors
and Senior Management
|
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
|
|
AGE
|
|
POSITION
|
Keyan
Yan
|
|
48
|
|
Chairman
and Chief Executive Officer
|
Themis
Kalapotharakos
|
|
45
|
|
Executive
Director
|
Lixia
Tu
|
|
38
|
|
Chief
Financial Officer and Director
|
John
Sano
|
|
50
|
|
Independent
Director
|
Matthew
C. Los
|
|
55
|
|
Independent
Director
|
Zhongmin
Zhang
|
|
77
|
|
Independent
Director
|
Yuet
Mei Chan
|
|
39
|
|
Independent
Director
|
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.
Mr.
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
2019, we paid an aggregate of approximately $1,396,943 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
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, 2019, we have granted 305,000 shares of common stock 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:
|
●
|
the
appointment, compensation, retention and oversight of the work of the independent auditor;
|
|
●
|
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;
|
|
●
|
reviewing
and approving all proposed related-party transactions;
|
|
●
|
discussing
the interim and annual financial statements with management and our independent auditors;
|
|
●
|
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;
|
|
●
|
reviewing
reported violations of the Company’s code of conduct and business ethics; and
|
|
●
|
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, 2019, we employed 195 full-time employees. The following table sets forth the number of our full-time employees
by function.
Function
|
|
Number
of Employees
|
Management
and Administration
|
|
25
|
Marketing,
Sales and Distribution
|
|
12
|
Design
and Product Development
|
|
12
|
Production
|
|
118
|
Procurement,
Warehousing and Logistics
|
|
15
|
Quality
and Assurance
|
|
13
|
TOTAL
|
|
195
|
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. In addition, the company is required by Chinese law to
cover employees in China with various types of social insurance. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China— Our failure to fully comply with PRC laws relating to social insurance and housing accumulation
fund may expose it to potential administrative penalties.”
The
following table sets forth information regarding beneficial ownership of each class of our voting securities as of May 31, 2020
(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
|
|
|
-
|
|
|
|
*
|
|
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)
|
|
|
|
|
|
|
1,124,320
|
|
|
|
43.38
|
%
|
5% Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Keyan Yan (3)
|
|
|
|
Common Stock
|
|
|
964,320
|
|
|
|
37.21
|
%
|
Alliance Investment Management Limited(4)
|
|
|
|
Common Stock
|
|
|
195,488
|
(4)
|
|
|
7.54
|
%
|
*
Less than 1%
(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.
|
(2)
|
As of May 31, 2020, 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.
|
(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.
|
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.
ITEM
7.
|
MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please
refer to Item 6 “Directors, Senior Management and Employees—E. Share Ownership.”
B.
|
Related
Party Transactions
|
From
time to time, KBS and its all 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 2019 and 2018, 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, 2019, 2018 and 2017, the balance of the amounts we borrowed from Mr. Yan was $560,165, $485,302 and $35,483,
respectively.
C.
|
Interests
of Experts and Counsel
|
Not
applicable.
ITEM
8.
|
FINANCIAL
INFORMATION
|
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.
ITEM
9.
|
THE
OFFER AND LISTING
|
A.
|
Offer
and Listing Details
|
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.”
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
May 31, 2020, there were 352 shareholders of record of our common stock. 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.
ITEM
10.
|
ADDITIONAL
INFORMATION
|
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.
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.
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 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 of investing in our
Common Stock. 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, provided such stockholders 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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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.
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.
I.
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Subsidiary
Information
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Not
applicable.
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 $0.18 million based on our outstanding revenues, costs and expenses, assets and liabilities
denominated in RMB as of December 31, 2019. As of December 31, 2019, our accumulated other comprehensive income was $4.02 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.
ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not
applicable.
Not
applicable.
Not
applicable.
D.
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American
Depositary Shares
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We
do not have any American Depositary Shares.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
(Stated in U.S. Dollars)
The accompanying notes are an integral part of these consolidated
financial statements.
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.
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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2.
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GROUP ORGANIZATION AND BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
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The Group structure as at the reporting date is as
follows:
KBS Fashion Group Limited
Notes to Financial Statements
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3.
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APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)
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For
the year ended December 31, 2019 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, 2019 in the preparation of the consolidated financial statements throughout
the year.
For the year ended December 31,
2019, the following new and revised standards, amendments or interpretations that have become effective during the reporting period.
IFRS 16 Lease
Amendment to IAS 19 Employee
Benefits
Amendments to IFRS 3 Business
Combinations and IFRS 11 Joint Operations
Amendment to IFRS 9 Financial
Instruments
Amendment to IAS 12 Income Taxes
Amendment
to IAS 23 Borrowing Costs
The adoption of the above new
and revised standards had no significant financial effect on these financial statements.
KBS Fashion Group Limited
Notes to Financial Statements
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4.
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SIGNIFCANT ACCOUNTING POLICIES
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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).
Translation from RMB to USD found
place at the following rates:
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Period end rates
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Average rates
|
December 31, 2017
|
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USD 1.00= RMB 6.5924
|
|
USD 1.00=RMB 6.7423
|
December 31, 2018
|
|
USD 1.00= RMB 6.8632
|
|
USD 1.00=RMB 6.6322
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December 31, 2019
|
|
USD 1.00= RMB 6.9762
|
|
USD 1.00=RMB 6.8944
|
KBS Fashion Group Limited
Notes to Financial Statements
Translation from HKD to USD found
place at the following rates:
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|
Period end rates
|
|
Average rates
|
December 31, 2017
|
|
USD 1.00= HKD 7.8170
|
|
USD 1.00=HKD 7.7928
|
December 31, 2018
|
|
USD 1.00= HKD 7.8329
|
|
USD 1.00=HKD 7.8636
|
December 31, 2019
|
|
USD 1.00= HKD 7.7877
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USD 1.00=HKD 7.8342
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The results and financial positions
in functional currency are translated into the presentation currency, USD, of the Company as follows:
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(1)
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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)
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Share equity, share premium and dividends are translated
at historical exchange rates; and
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(4)
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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.
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.
KBS Fashion Group Limited
Notes to Financial Statements
Revenue recognition
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.
-
revenue from sale of goods is recognized when the goods are delivered
and title has passed.
-
the risks of obsolescence and loss have been transferred to the
customer
-
there is no unfulfilled obligation that could affect the customer’s
acceptance of the products
-
Delivery occurs when the products have been shipped to the customer,
and either the customer has accepted the products in accordance with the sales contract, any potential acceptance provisions have
lapsed, or the group has objective evidence that all potential criteria for acceptance have been satisfied.
A receivable is recognised when the goods are delivered as this
is the point in time that the consideration is unconditional because only the passage of time is required before the payment is
due
Value added tax (VAT)
Current standard Output VAT in
effect is 13% of product sales and taxable services revenue, according to existing tax laws. The remaining balance of output VAT,
after subtracting the deductible input VAT of the period, is VAT payable.
Period
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Standard VAT rate in effect
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April 1, 2019 - Current
|
|
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13
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%
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May 1, 2018 – March 31, 2019
|
|
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16
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%
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Earlier
|
|
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17
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%
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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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
KBS Fashion Group Limited
Notes to Financial Statements
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
IFRS 16 Leases requires lessees
to recognise assets and liabilities for most leases based on a ‘right-of-use model’ which reflects that, at the commencement
date, a lessee has a financial obligation to make lease payments to the lessor for its right to use the underlying asset during
the lease term. The lessor conveys that right to use the underlying asset at lease commencement, which is the time when it makes
the underlying asset available for use by the lessee.
IFRS 16 defines a lease term
as the noncancellable period for which the lessee has the right to use an underlying asset including optional periods when an entity
is reasonably certain to exercise an option to extend (or not to terminate) a lease.
Under IFRS 16 lessees may also
elect not to recognise assets and liabilities for leases with a lease term of 12 months or less. In such cases a lessee recognises
the lease payments in profit or loss on a straight-line basis over the lease term. The exemption is required to be applied by class
of underlying assets. Lessees can also make an election for leases for which the underlying asset is of low value. This election
can be made on a lease-by-lease basis. For leases where the Group is the lessee, the lease term is either cancelable or no longer
than 12 months, so the Group has elected not to record the leased assets.
Lessor accounting under IFRS
16 is substantially unchanged from IAS 17. Lessors continue to classify leases as either operating or finance leases using similar
principles as in IAS 17. IFRS 16 did not have any significant impact on leases where the Group is the lessor.
KBS Fashion Group Limited
Notes to Financial Statements
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.
Investment properties
Investment properties are land
and buildings which are owned or held under a leasehold interest to earn rental income and/or for capital appreciation. These include
land and buildings held for a currently undetermined future use. Such properties are stated at cost less accumulated depreciation
and any impairment losses.
Any gains or losses on the retirement
or disposal of an investment property are recognised in the income statement in the year of the retirement or disposal.
Depreciation is calculated on
the straight-line basis to depreciate the cost of each item of investment properties over the estimated useful life of 20 years.
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.
KBS Fashion Group Limited
Notes to Financial Statements
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
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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.
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.
|
5.
|
SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING POLICIES
|
Allowance for Bad and Doubtful
debts
Allowances for bad and doubtful
debts are based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other
receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of bad
and doubtful debts requires the use of judgment and estimates, where the expected outcome is different from the original estimate,
such difference will impact carrying value of trade and other receivables and doubtful debt expenses in the period in which such
estimate has been charged.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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, 2019 and 2018 amounted to $ 256,808 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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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, 2019, 2018, and 2017, the Company recognized impairment losses of $nil, $nil, and $nil, respectively, for its prepayments for
acquisition of land use rights. During the years ended December 31, 2019, 2018, and 2017, the Company recognized impairment losses
of $nil, $nil, and $nil, 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, 2019, 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, 2019, 2018, and 2017, the Company recognized impairment losses of $nil, $13,311,557, 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 was 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.
By
business
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Sales
to external customers
|
|
|
10,308,309
|
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
571,403
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,585,850
|
|
|
|
2,574,589
|
|
|
|
1,744,144
|
|
|
|
16,465,562
|
|
|
|
18,535,116
|
|
|
|
23,762,536
|
|
Segment
revenue
|
|
|
10,308,309
|
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
|
|
571,403
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
|
|
5,585,850
|
|
|
|
2,574,589
|
|
|
|
1,744,144
|
|
|
|
16,465,562
|
|
|
|
18,535,116
|
|
|
|
23,762,536
|
|
Segment
gross margins/(loss)
|
|
|
3,268,945
|
|
|
|
2,245,944
|
|
|
|
2,277,858
|
|
|
|
319,706
|
|
|
|
(5,402,994
|
)
|
|
|
(14,291,680
|
)
|
|
|
2,162,393
|
|
|
|
840,913
|
|
|
|
502,007
|
|
|
|
5,751,043
|
|
|
|
(2,316,136
|
)
|
|
|
(11,511,815
|
)
|
Reconciling
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,412,858
|
)
|
|
|
(21,074,581
|
)
|
|
|
(7,901,842
|
)
|
Profit/(loss)
before tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338,185
|
|
|
|
(23,390,717
|
)
|
|
|
(19,413,657
|
)
|
Income
tax income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442,590
|
)
|
|
|
5,422,119
|
|
|
|
4,598,061
|
|
Profit/(loss)
for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104,405)
|
|
|
|
(17,968,598
|
)
|
|
|
(14,815,596
|
)
|
|
|
As of December 31, 2019
|
|
|
|
Wholesale and Retail
|
|
|
Subcontracting
|
|
|
Unallocated
|
|
|
Consolidated
|
|
Current assets
|
|
|
24,741,115
|
|
|
|
7,979,513
|
|
|
|
13,492
|
|
|
|
32,734,120
|
|
Non-current assets
|
|
|
10,047,963
|
|
|
|
18,306,697
|
|
|
|
|
|
|
|
28,354,660
|
|
Total assets
|
|
|
34,789,078
|
|
|
|
26,286,610
|
|
|
|
13,492
|
|
|
|
61,088,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,066,041
|
|
|
|
1,483,891
|
|
|
|
2,094,462
|
|
|
|
6,644,394
|
|
Total liabilities
|
|
|
3,066,041
|
|
|
|
1,483,891
|
|
|
|
2,094,462
|
|
|
|
6,644,394
|
|
|
|
As of December 31, 2018
|
|
|
|
Wholesale and Retail
|
|
|
Subcontracting
|
|
|
Unallocated
|
|
|
Consolidated
|
|
Current assets
|
|
|
24,915,855
|
|
|
|
6,394,814
|
|
|
|
17,462
|
|
|
|
31,328,131
|
|
Non-current assets
|
|
|
10,236,126
|
|
|
|
19,601,749
|
|
|
|
-
|
|
|
|
29,837,875
|
|
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
|
|
KBS Fashion Group Limited
Notes to Financial Statements
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.
Information about major customers
Major distributors that make up 10% or more of wholesale
revenue are as below:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Distributor A
|
|
|
1,019,139
|
|
|
|
1,331,194
|
|
|
|
1,454,862
|
|
Other distributors
|
|
|
9,289,170
|
|
|
|
12,253,560
|
|
|
|
13,579,938
|
|
|
|
|
10,308,309
|
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
Information about major suppliers
Major suppliers that make up 10% or more of purchases
are as below:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Supplier A
|
|
|
1,270,597
|
|
|
|
3,031,310
|
|
|
|
2,403,309
|
|
Supplier B
|
|
|
2,325,926
|
|
|
|
2,879,110
|
|
|
|
-
|
|
Supplier C
|
|
|
504,779
|
|
|
|
-
|
|
|
|
1,530,429
|
|
Supplier D
|
|
|
1,212,778
|
|
|
|
-
|
|
|
|
1,714,468
|
|
Supplier E
|
|
|
869,365
|
|
|
|
-
|
|
|
|
1,684,743
|
|
Supplier F
|
|
|
1,222,864
|
|
|
|
1,684,910
|
|
|
|
-
|
|
Other suppliers
|
|
|
62,948
|
|
|
|
2,901,982
|
|
|
|
5,065,563
|
|
|
|
|
7,469,257
|
|
|
|
10,497,311
|
|
|
|
12,398,512
|
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Apparel
|
|
|
|
|
|
|
|
|
|
-Wholesale
|
|
|
10,308,309
|
|
|
|
13,584,754
|
|
|
|
15,034,800
|
|
-Retail
|
|
|
571,403
|
|
|
|
2,375,773
|
|
|
|
6,983,592
|
|
Subtotal
|
|
|
10,879,712
|
|
|
|
15,960,527
|
|
|
|
22,018,392
|
|
Subcontracting
|
|
|
5,585,850
|
|
|
|
2,574,589
|
|
|
|
1,744,144
|
|
|
|
|
16,465,562
|
|
|
|
18,535,116
|
|
|
|
23,762,536
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Changes in inventories of finished goods and work in progress
|
|
|
76,800
|
|
|
|
(24,475
|
)
|
|
|
227,132
|
|
Materials consumed in production
|
|
|
43,443
|
|
|
|
29,619
|
|
|
|
41,057
|
|
Purchases of finished goods
|
|
|
7,053,841
|
|
|
|
19,044,582
|
|
|
|
33,877,598
|
|
Labor
|
|
|
2,887,199
|
|
|
|
1,061,943
|
|
|
|
602,196
|
|
Depreciation
|
|
|
142,278
|
|
|
|
352,739
|
|
|
|
370,858
|
|
Rental
|
|
|
-
|
|
|
|
452
|
|
|
|
-
|
|
Outsourced manufacturing cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Taxes and surcharges *
|
|
|
130,728
|
|
|
|
75,736
|
|
|
|
157,314
|
|
Water and electricity
|
|
|
63,969
|
|
|
|
62,027
|
|
|
|
52,796
|
|
Inventory provision
|
|
|
42,919
|
|
|
|
196,124
|
|
|
|
8
|
|
Others
|
|
|
237,561
|
|
|
|
128,773
|
|
|
|
120,886
|
|
Foreign currency translation difference
|
|
|
35,780
|
|
|
|
(76,269
|
)
|
|
|
(175,493
|
)
|
|
|
|
10,714,519
|
|
|
|
20,851,252
|
|
|
|
35,274,352
|
|
* 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
|
6,179
|
|
|
|
-
|
|
|
|
367,260
|
|
Interest income on bank deposits
|
|
|
62,538
|
|
|
|
71,693
|
|
|
|
81,517
|
|
Other
|
|
|
222,865
|
|
|
|
50,446
|
|
|
|
12,787
|
|
|
|
|
291,582
|
|
|
|
122,139
|
|
|
|
461,564
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
11.
|
OTHER GAINS AND (LOSSES)
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Gain on disposals of property, plant and equipment
|
|
|
2,124
|
|
|
|
1,380
|
|
|
|
171
|
|
Foreign exchange gain
|
|
|
13
|
|
|
|
(49
|
)
|
|
|
(48
|
)
|
Provision / reversal of inventory obsolescence
|
|
|
-
|
|
|
|
(196,124
|
)
|
|
|
(101,256
|
)
|
Bad debt provision of trade receivables
|
|
|
(1,028,972
|
)
|
|
|
-
|
|
|
|
-
|
|
Impairment of property
|
|
|
-
|
|
|
|
(13,311,557
|
)
|
|
|
-
|
|
Others
|
|
|
(37,753
|
)
|
|
|
(15,950
|
)
|
|
|
(21,110
|
)
|
|
|
|
(1,064,588
|
)
|
|
|
(13,522,300
|
)
|
|
|
(122,243
|
)
|
|
12.
|
DISTRIBUTION AND SELLING EXPENSES
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Rental
|
|
|
9,573
|
|
|
|
16,067
|
|
|
|
21,527
|
|
Depreciation
|
|
|
-
|
|
|
|
1,218
|
|
|
|
2,680
|
|
Labor
|
|
|
170,771
|
|
|
|
275,026
|
|
|
|
258,233
|
|
Subsidy to distributors
|
|
|
477,779
|
|
|
|
787,064
|
|
|
|
773.238
|
|
Promotion
|
|
|
-
|
|
|
|
15,623
|
|
|
|
32,216
|
|
Advertisement
|
|
|
287,354
|
|
|
|
1,152,176
|
|
|
|
1,591,742
|
|
Others
|
|
|
148,914
|
|
|
|
423,782
|
|
|
|
585,744
|
|
|
|
|
1,094,391
|
|
|
|
2,670,955
|
|
|
|
3,265,380
|
|
|
13.
|
ADMINISTRATIVE EXPENSE
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Labor
|
|
|
1,690,420
|
|
|
|
2,193,120
|
|
|
|
1,600,380
|
|
Audit fee
|
|
|
138,870
|
|
|
|
122,908
|
|
|
|
216,281
|
|
Professional fee
|
|
|
18,517
|
|
|
|
69,639
|
|
|
|
77,754
|
|
Design fee
|
|
|
372,192
|
|
|
|
648,632
|
|
|
|
937,478
|
|
Depreciation and amortization charges
|
|
|
685,253
|
|
|
|
1,185,257
|
|
|
|
1,149,455
|
|
Bank charges
|
|
|
2,815
|
|
|
|
8,130
|
|
|
|
18,352
|
|
Rental
|
|
|
73,021
|
|
|
|
75,907
|
|
|
|
74,668
|
|
Travelling and entertainment
|
|
|
17,439
|
|
|
|
2,662
|
|
|
|
107,566
|
|
Others
|
|
|
479,731
|
|
|
|
600,765
|
|
|
|
697,463
|
|
|
|
|
3,478,258
|
|
|
|
4,907,020
|
|
|
|
4,879,397
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Interest expenses on bank borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
wholly repayable within one year
|
|
|
67,203
|
|
|
|
96,444
|
|
|
|
96,385
|
|
Bank borrowings interests are
charged at a rate of 6.09% per annum for the bank loan that was fully repaid in 2019.
|
15.
|
INCOME TAX (INCOME)/ EXPENSE
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
PRC enterprises income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax
|
|
|
256,808
|
|
|
|
-
|
|
|
|
-
|
|
Deferred tax
|
|
|
185,787
|
|
|
|
(5,422,119
|
)
|
|
|
(4,598,061
|
)
|
|
|
|
442,595
|
|
|
|
(5,422,119
|
)
|
|
|
(4,598,061
|
)
|
Hongri Fujian and Anhui Kai Xin
subject to the applicable enterprise income tax rate of 25%. As of December 31, 2019, 2018, and 2017, 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
(Loss)/profit before tax
|
|
|
338,185
|
|
|
|
(23,390,716
|
)
|
|
|
(19,413,657
|
)
|
Tax calculated at domestic tax rates applicable to profits in PRC (2019, 2018, and 2017: 25%)
|
|
|
84,546
|
|
|
|
(5,847,679
|
)
|
|
|
(4,853,414
|
)
|
Tax effect of tax loss of tax exempt entities
|
|
|
358,049
|
|
|
|
425,560
|
|
|
|
255,354
|
|
Tax charge for the year
|
|
|
442,595
|
|
|
|
(5,422,119
|
)
|
|
|
(4,598,061
|
)
|
KBS Fashion Group Limited
Notes to Financial Statements
The following is the analysis of the deferred tax balances for
financial reporting purposes:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
Temporary difference
|
|
|
Deferred tax assets
|
|
|
Temporary difference
|
|
|
Deferred tax assets
|
|
|
Temporary difference
|
|
|
Deferred tax assets
|
|
Beginning of the year
|
|
|
60,645,730
|
|
|
|
14,688,829
|
|
|
|
38,761,131
|
|
|
|
9,924,944
|
|
|
|
20,737,366
|
|
|
|
4,879,652
|
|
Bad Debt provisions charged to profit or loss
|
|
|
(1,028,972
|
)
|
|
|
(257,243
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment charged to profit or loss
|
|
|
|
|
|
|
|
|
|
|
13,507,681
|
|
|
|
3,376,920
|
|
|
|
101,256
|
|
|
|
25,314
|
|
Tax loss carried forward
|
|
|
|
|
|
|
|
|
|
|
8,376,919
|
|
|
|
2,094,230
|
|
|
|
17,922,508
|
|
|
|
4,480,627
|
|
Effect of translation
|
|
|
|
|
|
|
(304,207
|
)
|
|
|
-
|
|
|
|
(707,265
|
)
|
|
|
-
|
|
|
|
539,351
|
|
End of the year
|
|
|
59,616,758
|
|
|
|
14,127,559
|
|
|
|
60,645,730
|
|
|
|
14,688,829
|
|
|
|
38,761,131
|
|
|
|
9,924,944
|
|
Profit for the year has been arrived at after charging:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of inventories recognized as expenses
|
|
|
10,583,791
|
|
|
|
20,398,829
|
|
|
|
35,094,050
|
|
Taxes and surcharges
|
|
|
130,728
|
|
|
|
112,108
|
|
|
|
180,302
|
|
|
|
|
10,714,519
|
|
|
|
20,510,936
|
|
|
|
35,274,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
671,262
|
|
|
|
1,172,809
|
|
|
|
1,137,831
|
|
Amortization of land use rights and trademarks
|
|
|
13,992
|
|
|
|
14,545
|
|
|
|
14,307
|
|
Amortization of subsidies prepaid to distributors
|
|
|
|
|
|
|
-
|
|
|
|
401,259
|
|
Amortization of prepayments and premiums under operating leases
|
|
|
96,743
|
|
|
|
104,206
|
|
|
|
105,340
|
|
Provision (Reversal) of inventory obsolescence
|
|
|
(145,747
|
)
|
|
|
196,124
|
|
|
|
101,256
|
|
Provision of bad debt allowance
|
|
|
1,028,972
|
|
|
|
-
|
|
|
|
-
|
|
Provision of impairment loss in property
|
|
|
|
|
|
|
13,311,557
|
|
|
|
-
|
|
|
|
|
1,665,222
|
|
|
|
14,799,241
|
|
|
|
1,759,993
|
|
|
17.
|
EMPLOYEES’ EMOLUMENTS
|
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other short-term benefits
|
|
|
2,086,041
|
|
|
|
2,637,752
|
|
|
|
2,476,506
|
|
Defined contribution benefit schemes
|
|
|
290,414
|
|
|
|
205,499
|
|
|
|
189,621
|
|
Total employee benefits expense (including directors’ emoluments)
|
|
|
2,376,454
|
|
|
|
2,843,251
|
|
|
|
2,666,127
|
|
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.
KBS Fashion Group Limited
Notes to Financial Statements
|
18.
|
DIRECTORS’ EMOLUMENTS
|
The emoluments paid or payable to the directors of
the Company were as follows:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Salaries
|
|
|
|
|
|
|
|
|
|
Yan Keyan
|
|
|
389,826
|
|
|
|
739,350
|
|
|
|
304,050
|
|
Lixia Tu
|
|
|
232,144
|
|
|
|
296,100
|
|
|
|
233,854
|
|
John Sano
|
|
|
18,600
|
|
|
|
23,050
|
|
|
|
43,950
|
|
Themis Kalapotharakos
|
|
|
148,800
|
|
|
|
161,350
|
|
|
|
87,900
|
|
Matthew Los
|
|
|
148,800
|
|
|
|
161,350
|
|
|
|
87,900
|
|
Zhongmin Zhang
|
|
|
18,600
|
|
|
|
23,020
|
|
|
|
43,950
|
|
Yuet Mei Chan
|
|
|
18,600
|
|
|
|
23,050
|
|
|
|
43,950
|
|
|
|
|
975,370
|
|
|
|
1,427,300
|
|
|
|
847,554
|
|
Social Welfare
|
|
|
|
|
|
|
|
|
|
|
|
|
Yan Keyan
|
|
|
1,055
|
|
|
|
1,122
|
|
|
|
1,006
|
|
|
|
|
1,055
|
|
|
|
1,122
|
|
|
|
1,006
|
|
|
19.
|
EARNINGS/ (LOSS) PER SHARE
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Basic (Loss)/Earnings Per Share Numerator
|
|
|
|
|
|
|
|
|
|
Profit for the year attributable to owners of the Company
|
|
$
|
(104,405
|
)
|
|
$
|
(17,968,598
|
)
|
|
$
|
(14,815,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings Per Share Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit for the year attributable to owners of the Company
|
|
$
|
(104,405
|
)
|
|
$
|
(17,968,598
|
)
|
|
$
|
(14,815,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (Loss)/Earnings Per Share Denominator#
|
|
|
|
|
|
|
|
|
|
|
|
|
Original shares:
|
|
|
2,271,299
|
|
|
|
1,986,299
|
|
|
|
1,767,821
|
|
Additions from actual events:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Issuance of common stock, weighted
|
|
|
246,192
|
|
|
|
288,421
|
|
|
|
93,010
|
|
Basic weighted average shares outstanding
|
|
|
2,517,491
|
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (Loss)/Earnings Per Share Denominator#
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
2,517,491
|
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
Dilutive shares: Potential additions from dilutive events:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of investor warrants*
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Diluted Weighted Average Shares Outstanding:
|
|
|
2,517,491
|
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/Earnings Per Share#
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
$
|
(0.00
|
)
|
|
$
|
(8,06
|
)
|
|
$
|
(7.96
|
)
|
- Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(8.06
|
)
|
|
$
|
(7.96
|
)
|
Weighted Average Shares Outstanding#
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
2,517,491
|
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
- Diluted
|
|
|
2,517,491
|
|
|
|
2,229,915
|
|
|
|
1,860,831
|
|
|
*
|
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.
|
PROPERTY, PLANT AND EQUIPMENT
|
Owner-occupied Property
|
|
Plant
|
|
|
Machinery
|
|
|
Office
equipment
|
|
|
Motor
vehicles
|
|
|
Furniture
and
fixtures
|
|
|
Leasehold
improvements
-factories and
offices
|
|
|
Leasehold
improvements-
shops
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2018
|
|
|
31,256,157
|
|
|
|
928,022
|
|
|
|
130,515
|
|
|
|
86,654
|
|
|
|
153,135
|
|
|
|
895,781
|
|
|
|
268,759
|
|
|
|
33,719,025
|
|
Additions
|
|
|
-
|
|
|
|
1,767
|
|
|
|
11,544
|
|
|
|
-
|
|
|
|
8,014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,324
|
|
Disposals
|
|
|
-
|
|
|
|
(4,103
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,103
|
)
|
Translation adjustment
|
|
|
(1,498,321
|
)
|
|
|
(44,486
|
)
|
|
|
(6,257
|
)
|
|
|
(4,154
|
)
|
|
|
(7,341
|
)
|
|
|
(42,941
|
)
|
|
|
(12,883
|
)
|
|
|
(1,616,383
|
)
|
At December 31, 2018
|
|
|
29,757,837
|
|
|
|
881,199
|
|
|
|
135,802
|
|
|
|
82,500
|
|
|
|
153,808
|
|
|
|
852,840
|
|
|
|
255,876
|
|
|
|
32,119,863
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
Disposals
|
|
|
-
|
|
|
|
(266,304
|
)
|
|
|
(280
|
)
|
|
|
(387
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(266,971
|
)
|
Reclassification to investment property
|
|
|
(12,291,058
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,291,058
|
)
|
Translation adjustment
|
|
|
(482,015
|
)
|
|
|
(14,274
|
)
|
|
|
(2,200
|
)
|
|
|
(1,336
|
)
|
|
|
(2,491
|
)
|
|
|
(13,814
|
)
|
|
|
(4,145
|
)
|
|
|
(520,275
|
)
|
At December 31, 2019
|
|
|
16,984,763
|
|
|
|
600,620
|
|
|
|
133,486
|
|
|
|
80,777
|
|
|
|
151,317
|
|
|
|
839,026
|
|
|
|
251,731
|
|
|
|
19,041,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND IMPAIRMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2018
|
|
|
(3,932,436
|
)
|
|
|
(791,401
|
)
|
|
|
(99,887
|
)
|
|
|
(77,945
|
)
|
|
|
(146,818
|
)
|
|
|
(577,253
|
)
|
|
|
(268,759
|
)
|
|
|
(5,894,501
|
)
|
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
|
|
|
|
27,672
|
|
|
|
12,883
|
|
|
|
282,564
|
|
At December 31, 2018
|
|
|
(17,946,631
|
)
|
|
|
(764,389
|
)
|
|
|
(103,875
|
)
|
|
|
(74,250
|
)
|
|
|
(142,191
|
)
|
|
|
(658,843
|
)
|
|
|
(255,876
|
)
|
|
|
(19,946,054
|
)
|
Provided for the year
|
|
|
(832,476
|
)
|
|
|
(13,733
|
)
|
|
|
(7,279
|
)
|
|
|
-
|
|
|
|
(1,857
|
)
|
|
|
(73,239
|
)
|
|
|
-
|
|
|
|
(928,584
|
)
|
Eliminated upon disposal of assets
|
|
|
161,645
|
|
|
|
234,901
|
|
|
|
252
|
|
|
|
5,122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
401,919
|
|
Depreciation reclassified to investment property
|
|
|
2,708,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,708,200
|
|
Impairment reclassified to investment property
|
|
|
4,483,680
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,483,680
|
|
Translation adjustment
|
|
|
290,698
|
|
|
|
12,382
|
|
|
|
1,683
|
|
|
|
1,203
|
|
|
|
2,303
|
|
|
|
10,672
|
|
|
|
4,145
|
|
|
|
323,085
|
|
At December 31, 2019
|
|
|
(11,134,883
|
)
|
|
|
(530,840
|
)
|
|
|
(109,220
|
)
|
|
|
(67,925
|
)
|
|
|
(141,745
|
)
|
|
|
(721,410
|
)
|
|
|
(251,731
|
)
|
|
|
(12,957,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARRYING AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2018
|
|
|
11,811,206
|
|
|
|
116,809
|
|
|
|
31,928
|
|
|
|
8,250
|
|
|
|
11,617
|
|
|
|
193,997
|
|
|
|
-
|
|
|
|
12,173,808
|
|
At December 31, 2019
|
|
|
5,849,880
|
|
|
|
69,780
|
|
|
|
24,266
|
|
|
|
12,852
|
|
|
|
9,572
|
|
|
|
117,616
|
|
|
|
-
|
|
|
|
6,083,966
|
|
KBS Fashion Group Limited
Notes to Financial Statements
Net exchange differences from
translating the financial statements from functional currency to presentation currency were $(197,910) and $(1,333,819) as at December
31, 2019 and 2018.
Depreciation expense for the
years ended December 31, 2019, 2018 and 2017 were $939,601, $1,525,548, and $1,137,831, respectively. Impairment loss charged for
the years ended December 31, 2019, 2018, and 2017 were $nil, $13,311,557, 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 (m2)
|
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 $93,701 and $123,265 as at December 31, 2019 and 2018,
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 2019 and 2018. The carrying amount that would have been recognized had the assets been carried
under the cost model is as follows:
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Machinery
|
|
|
89,755
|
|
|
|
91,232
|
|
Motor Vehicles
|
|
|
33
|
|
|
|
33
|
|
Office Equipment
|
|
|
2,492
|
|
|
|
2,533
|
|
Furniture and fixtures
|
|
|
692
|
|
|
|
703
|
|
|
|
|
92,971
|
|
|
|
94,502
|
|
Investment Properties
As at December 31, 2019, fair value approximated carry amounts,
being the initial cost to acquire these investment properties.
COST
|
|
2019
|
|
|
2018
|
|
Opening balance at 1 January
|
|
|
-
|
|
|
|
|
|
Acquisitions
|
|
|
-
|
|
|
|
|
|
Capitalised subsequent expenditure
|
|
|
-
|
|
|
|
|
|
Classified as held for sale or disposals
|
|
|
-
|
|
|
|
|
|
Transfer (to)/from inventories and owner-occupied property
|
|
|
12,291,058
|
|
|
|
|
|
Closing balance at 31 December
|
|
|
12,291,058
|
|
|
|
|
|
DEPRECIATION AND IMPAIRMENT
|
|
2019
|
|
|
2018
|
|
Opening balance at 1 January
|
|
|
-
|
|
|
|
|
|
Provided for the year
|
|
|
-
|
|
|
|
|
|
Eliminated upon disposal of assets
|
|
|
-
|
|
|
|
|
|
Impairment for the year
|
|
|
-
|
|
|
|
|
|
Transfer to/(from) inventories and owner-occupied property
|
|
|
(7,191,880
|
)
|
|
|
|
|
Closing balance at 31 December
|
|
|
(7,191,880
|
)
|
|
|
|
|
CARRYING AMOUNT
|
|
2019
|
|
|
2018
|
|
Closing balance at 31 December
|
|
|
5,099,178
|
|
|
|
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
21.
|
PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES
|
|
|
Amount
|
|
At January 1, 2018
|
|
|
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
|
|
additions for the year
|
|
|
21,757
|
|
charge for the year
|
|
|
(96,743
|
)
|
translation adjustment
|
|
|
(38,810
|
)
|
At December 31, 2019
|
|
|
2,336,471
|
|
Analyzed for reporting purposes as:
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current asset
|
|
|
75,318
|
|
|
|
78,532
|
|
Non-current asset
|
|
|
2,261,153
|
|
|
|
2,371,735
|
|
|
|
|
2,336,471
|
|
|
|
2,450,267
|
|
|
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.
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.
KBS Fashion Group Limited
Notes to Financial Statements
As at December 31, 2019, the
carrying amount of the prepayment for construction of new plant is as follows:
|
|
As at December 31, 2019
|
|
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.
As at December 31, 2019, the
carrying amount of the prepayment for acquisition of land use right is as follows:
|
|
As at December 31, 2019
|
|
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
|
)
|
|
|
|
-
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
|
Amount
|
|
COST
|
|
|
|
At January 1, 2018
|
|
|
734,253
|
|
additions for the year
|
|
|
-
|
|
translation adjustment
|
|
|
(35,198
|
)
|
At December 31, 2018
|
|
|
699,055
|
|
additions for the year
|
|
|
|
|
translation adjustment
|
|
|
(11,323
|
)
|
At December 31, 2019
|
|
|
687,732
|
|
|
|
|
|
|
AMORTIZATION
|
|
|
|
|
At January 1, 2018
|
|
|
(85,600
|
)
|
charge for the year
|
|
|
(15,545
|
)
|
translation adjustment
|
|
|
4,593
|
|
At December 31, 2018
|
|
|
(95,552
|
)
|
charge for the year
|
|
|
(13,992
|
)
|
translation adjustment
|
|
|
1,712
|
|
At December 31, 2019
|
|
|
(107,832
|
)
|
|
|
|
|
|
CARRYING AMOUNTS
|
|
|
|
|
At December 31, 2018
|
|
|
603,503
|
|
At December 31, 2019
|
|
|
579,900
|
|
|
|
|
|
|
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.
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 (m2)
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
|
1,047,532
|
|
|
|
956,947
|
|
Finished goods
|
|
|
437,144
|
|
|
|
478,377
|
|
Provision for obsolete inventories
|
|
|
(42,416
|
)
|
|
|
(189,524
|
)
|
|
|
|
1,442,260
|
|
|
|
1,245,800
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
26.
|
TRADE RECEIVABLES, OTHER RECEIVABLES AND PREPAYMENTS
|
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Trade receivables
|
|
|
12,775,324
|
|
|
|
9,416,320
|
|
Bad debt provision for trade receivables
|
|
|
(2,299,558
|
)
|
|
|
(1,294,097
|
)
|
|
|
|
10,475,766
|
|
|
|
8,122,223
|
|
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Other receivables
|
|
|
3,387
|
|
|
|
2,617
|
|
Prepayments
|
|
|
116,911
|
|
|
|
852,856
|
|
|
|
|
120,298
|
|
|
|
855,473
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
778,047
|
|
|
|
1,743,556
|
|
Past due for less than 4 months
|
|
|
2,458,705
|
|
|
|
3,546,525
|
|
Past due for more than 4 months
|
|
|
9,538,573
|
|
|
|
4,126,240
|
|
|
|
|
12,755,324
|
|
|
|
9,416,320
|
|
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 $2,299,558 and $1,294,097
as of December 31, 2019 and 2018, 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:
|
|
2019
|
|
|
2018
|
|
As at January 1
|
|
|
1,294,097
|
|
|
|
1,359,255
|
|
Provision provided in the year
|
|
|
1,028,972
|
|
|
|
-
|
|
Translation adjustment
|
|
|
(23,481
|
)
|
|
|
(65,158
|
)
|
As at December 31
|
|
|
2,299,558
|
|
|
|
1,294,097
|
|
Among the amounts of trade receivables,
$1,509,839 and $1,368,183 of output VAT was included as of December 31, 2019 and 2018, respectively.
KBS Fashion Group Limited
Notes to Financial Statements
|
27.
|
CASH AND CASH EQUIVALENTS
|
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash on hand
|
|
|
8,692
|
|
|
|
12,874
|
|
Bank deposits
|
|
|
20,611,786
|
|
|
|
21,013,228
|
|
|
|
|
20,620,478
|
|
|
|
21,026,103
|
|
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Renminbi
|
|
|
20,618,675
|
|
|
|
21,021,141
|
|
Hong Kong Dollars
|
|
|
983
|
|
|
|
1,971
|
|
United States Dollars
|
|
|
820
|
|
|
|
2,991
|
|
|
|
|
20,620,478
|
|
|
|
21,026,103
|
|
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, 2019 carry interest at market rates which ranged from 0.30% to 0.40% (2018: 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.
|
28.
|
TRADE AND OTHER PAYABLES
|
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Trade payables
|
|
|
63,550
|
|
|
|
42,063
|
|
Employee benefits payable
|
|
|
182,386
|
|
|
|
348,028
|
|
Other payables
|
|
|
1,761,358
|
|
|
|
1,645,271
|
|
Subtotal financial liabilities
|
|
|
2,007,294
|
|
|
|
2,035,362
|
|
Other taxes payable
|
|
|
2,571,125
|
|
|
|
3,243,098
|
|
|
|
|
4,578,419
|
|
|
|
5,278,460
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Current
|
|
|
52,632
|
|
|
|
12,456
|
|
Past due for less than 4 months
|
|
|
3,959
|
|
|
|
8,504
|
|
Past due for over 4 months
|
|
|
6,959
|
|
|
|
21,104
|
|
|
|
|
63,550
|
|
|
|
42,063
|
|
The Company was granted a credit term of 30 days.
The balances past due were mainly for the Company’s high bargaining power.
KBS Fashion Group Limited
Notes to Financial Statements
|
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
|
|
|
|
|
(2)
|
Significant balances between the Group and the above related parties:
|
|
|
|
|
As at December 31,
|
|
Name
|
|
Nature
|
|
2019
|
|
|
2018
|
|
Yan, Keyan
|
|
Borrowing of funds
|
|
|
560,165
|
|
|
|
445,614
|
|
|
|
|
|
|
560,165
|
|
|
|
445,614
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Secured bank borrowings
|
|
|
1,075,084
|
|
|
|
1,092,785
|
|
Carrying amount repayable within 1 year
|
|
|
1,075,084
|
|
|
|
1,092,785
|
|
The borrowings are fixed-rate and denominated in RMB.
Bank loans
|
|
Amount
USD
|
|
|
Period
|
|
Interest rate
|
|
|
Mortgage
|
|
Personal guarantee
|
#1
|
|
|
1,075,084
|
|
|
3/21/2019
|
|
3/21/2020
|
|
|
6.09
|
%
|
|
Land use right and buildings
|
|
Yan, Keyan/
Chen, Bizhen
|
|
|
|
1,075,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
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
|
|
|
-
|
|
Change in fair value
|
|
|
-
|
|
Balance – December 31, 2019
|
|
|
-
|
|
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.
KBS Fashion Group Limited
Notes to Financial Statements
The inputs to the model were
as follows:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Stock price
|
|
|
N/A
|
|
|
|
2.96
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
Risk-free rate
|
|
|
N/A
|
|
|
|
2.56
|
%
|
Expected term (in years)
|
|
|
N/A
|
|
|
|
0.58
|
|
Expected volatility
|
|
|
N/A
|
|
|
|
11.94
|
%
|
The quoted price of the warrants
on the over-the-counter-markets (“OTC”) were no longer listed and $0.001 as at December 31, 2019 and 2018, respectively.
At December 31, 2019, there were no unexpired warrants
outstanding.
|
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
|
|
Issuance of shares
|
|
|
320,000
|
|
|
|
32
|
|
|
|
1,199,218
|
|
Shares outstanding as December 31, 2019
|
|
|
2,591,299
|
|
|
|
259
|
|
|
|
9,199,779
|
|
|
|
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
|
|
Issue and fully paid common shares of US$0.0001 as at December 31, 2019
|
|
|
2,591,299
|
|
|
$
|
259
|
|
|
$
|
9,199,779
|
|
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.
KBS Fashion Group Limited
Notes to Financial Statements
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.
On March 25, 2019, the Company
granted an aggregate of 305,000 registered shares of common stock pursuant to the 2018 Equity Incentive Plan to the executive officers,
directors and certain employees as compensations for their services
On March 29, 2019, the board
of directors approved the issuance of 15,000 shares of common stock to the Investor Relationship firm as compensation for their
services.
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.
KBS Fashion Group Limited
Notes to Financial Statements
The statutory surplus reserve
of the Group amounts to $6,084,836 and $6,084,836 at December 31, 2019 and 2018, 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.
|
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 minoring borrowing activities.
KBS Fashion Group Limited
Notes to Financial Statements
The Company and its subsidiaries
are not subject to externally imposed capital requirements.
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Total borrowing
|
|
|
1,075,084
|
|
|
|
1,092,783
|
|
Less: cash and cash equivalents
|
|
|
(20,620,478
|
)
|
|
|
(21,026,103
|
)
|
Net debt
|
|
|
(19,545,394
|
)
|
|
|
(19,933,320
|
)
|
Total equity
|
|
|
55,053,098
|
|
|
|
54,301,321
|
|
Total capital
|
|
|
35,507,704
|
|
|
|
34,368,001
|
|
Gearing ratio
|
|
|
(36
|
)%
|
|
|
(37)
|
%
|
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.
|
(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 $2.7
million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2019.
As of December 31, 2019, our accumulated other comprehensive loss was $(7.1) million. We have not entered into any hedging transactions
in an effort to reduce our exposure to foreign exchange risk.
KBS Fashion Group Limited
Notes to Financial Statements
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.
As at December 31, 2019, 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’s exposure to credit
risk on trade receivables in influenced mainly by the individual characteristics of each customer therefore concentrations of
credit risk primarily arise when the Group has significant exposure to individual customers. At the end of the reporting period,
the outstanding balance of the five largest customers represented approximately 38% of the trade receivables of the Group at December
31, 2019 (2018: 52%). 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.
KBS Fashion Group Limited
Notes to Financial Statements
Liquidity tables
The following tables detail the
Group’s remaining contractual maturity for its non-derivative financial liabilities as at December 31, 2019 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, 2019
|
|
Within 1 year
|
|
|
Over 1 year
|
|
|
Total
|
|
Short-term bank loans and related interests
|
|
|
1,075,084
|
|
|
|
-
|
|
|
|
1,075,084
|
|
Trade and other payables
|
|
|
4,578,419
|
|
|
|
-
|
|
|
|
4,578,419
|
|
Related parties payables
|
|
|
560,165
|
|
|
|
-
|
|
|
|
560,165
|
|
Total
|
|
|
6,213,668
|
|
|
|
-
|
|
|
|
6,213,668
|
|
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 parties payables
|
|
|
445,614
|
|
|
|
-
|
|
|
|
445,614
|
|
Total
|
|
|
6,816,857
|
|
|
|
-
|
|
|
|
6,816,857
|
|
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, 2019
Level 2
|
|
|
December 31, 2018
Level 2
|
|
Recurring far value measurements
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
KBS Fashion Group Limited
Notes to Financial Statements
During the years ended December
31, 2019 and 2018, 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.
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,
2019
|
|
|
As at December 31,
2018
|
|
Contracted and authorized, in RMB
|
|
|
440,851,273
|
|
|
|
439,850,378
|
|
Contracted and authorized, in USD
|
|
|
63,193,611
|
|
|
|
64,088,236
|
|
|
(2)
|
As at December 31, 2019, the Company had lease commitments as follows:
|
|
|
As at December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Within 1 year
|
|
|
80,049
|
|
|
|
78,532
|
|
2-5 years
|
|
|
216,493
|
|
|
|
220,058
|
|
Thereafter
|
|
|
2,044,660
|
|
|
|
2,151,677
|
|
|
|
|
2,341,202
|
|
|
|
2,450,267
|
|
KBS Fashion Group Limited
Notes to Financial Statements
The amount of $80,049 as of December
31, 2019 represents leases of one office 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,
|
|
|
|
2019
|
|
|
2018
|
|
Within 1 year
|
|
|
72,164
|
|
|
|
73,353
|
|
2-5 years
|
|
|
216,493
|
|
|
|
220,058
|
|
Thereafter
|
|
|
2,044,660
|
|
|
|
2,151,677
|
|
|
|
|
2,333,318
|
|
|
|
2,445,087
|
|
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. As it is a practically cancellable lease,
the requirement of recognisation of ROU asset is not applicable.
|
36.
|
EVENTS AFTER THE BALANCE SHEET
|
The outbreak of novel coronavirus
(Covid-19) in Mainland China in early 2020 has certain impact on the Company’s business operations and even the overall economy.
In the opinion of the directors, the industry and the financial performance of the Company will inevitably be affected in the first
half of 2020 and probably afterwards, and it is not practicable to provide a quantitative estimate of the potential impact of this
outbreak on the Company’s financial statements by the date of the report.
* * * * *
F - 50