We intend to mine, process, produce and
sell direct reduced iron (“DRI”) feed stock for companies engaged in the steel industry in the People’s
Republic of China (“PRC”) using advanced reduction rotary kiln technology through our variable interest entity, Zhuolu
Jinxin Mining Co., Ltd., a Chinese limited company (“China Jinxin”), and our subsidiary, Haixing Huaxin Mining Industry
Co., Ltd. (“China Huaxin”). The Company’s DRI facilities are projected to produce DRI with an iron grade of over
92%.
‘Reduced iron’ derives its name
from the chemical change that iron ore undergoes when it is heated in a furnace at high temperatures in the presence of hydrocarbon-rich
gasses. ‘Direct reduction’ refers to processes which reduce iron oxides to metallic iron below the melting point of
iron. The product of such solid state processes are called direct reduced iron (DRI).
We seek to profit by participating in various
aspects of the Chinese steel making industry including the mining and processing of iron ore and other forms of iron, which can
be used to produce iron concentrate, fines, pellets or sinter. Our China Jinxin production facility also has engaged in iron ore
processing and the production of iron ore.
We have converted the existing coal-gas
station systems at our production facilities to liquefied natural gas (“LNG”) station systems in response to environmental
initiatives by governmental authorities in China. The conversion to LNG systems will reduce pollutants and produce higher quality
DRIs with less impurities. Our operations were curtailed while these improvements were being implemented. Trial production has
resumed at each of these facilities and commercial production is expected to resume in the second quarter of 2017.
DRI Processing (Haixing Huaxin Mining Industry Co., Ltd.)
China Huaxin intends to produce Direct Reduced
Iron (DRI) using advanced reduction rotary kiln technology with iron sand as the principal raw material. China Huaxin
intends to import iron sands from New Zealand, Australia, Indonesia and the Philippines. The total amount expended to construct
the DRI Facility, inclusive of both hard and soft costs, was approximately 244,270,000 RMB or US $39 million.
China Huaxin completed trial production
and anticipated commencing commercial production in May 2015. However, due to environmental initiatives by government authorities
in China, starting in June 2015, China Huaxin commenced upgrading the DRI facilities by converting the existing coal-gas station
systems to liquefied natural gas (“LNG”) station systems. China Huaxin expects to commence commercial
production in the second quarter of 2017.
China Huaxin’s DRI Facility occupies
an area of 200,000 m2 The DRI Facility occupies 60,000 m2, of land and there is a raw material storage area of
14,000 m2 with a 100,000 ton storage capacity, a workshop area of 4500 m2, a water storage pool of 4000 m3 to supplement water
supplies, and an office building of 2,400 m2. The plant design is intended to permit the processing of 2,000,000 tons of iron sand
per annum with an annual output capacity of 1,000,000 tons of DRI.
The
equipment installed in the DRI Facility includes 2 sets of Rotary Kilns that are 36m each in length and capable of processing 6000
tons of raw material per day, and 3 sets of Gas Furnaces to produce carbon monoxide for use in the reduction process. The equipment
also includes 6 sets of Grinding Equipment and 3 sets of Wet Magnetic Separation Machineries with processing capacity of 7200 tons
per day. In addition there are 30 sets of Hydraulic Machines with a capacity of 5,000 tons per day to press block the finished
product.
Iron Ore (ZhuoluJinxin Mining Co., Ltd.)
China Jinxin is engaged in iron ore processing
and the production of iron ore concentrate. China Jinxin has an iron ore concentrate production line with an annual capacity of
300,000 tons and associated plant and office buildings located in Zhuolu County, Zhangjiakou City, Hebei Province, China. Construction
of the production facilities commenced in May 2007 and was completed in February 2010. In December 2011, the Company
halted production due to its inability to agree upon the price of its product with its principal customer and to implement certain
design changes to upgrade the production lines at the facility to improve iron ore refinement and increase the iron ore concentration
rate and, subsequently, add the ability to produce DRI. China Jinxin expects to commence commercial production in the second
quarter of 2017.
Temporary manufacturing licenses for the
production facilities were obtained from Zhangjiakou City on March 22, 2009, March 23, 2010, January 1, December 30, 2011 and December
27, 2014, respectively. The Company is currently in the process of applying for a new license; however, there can be
no assurance we will be able to obtain a new license on a timely basis, if at all.
China Jinxin has entered into a 10 year
contract with Handan Steel Group Company (“HSG”), a subsidiary of Hebei Steel and Iron Company, a state owned enterprise,
which expires in January 2019, whereby China Jinxin agreed to sell and HSG agreed to purchase all of the output from our production
facility. The price we receive for our output is determined by HSG in light of market prices and the quality of our product and
is to result in a reasonable profit margin to us. If China Jinxin is not satisfied with the price set by HSG it can
attempt to renegotiate the price. China Jinxin has withheld deliveries from HSG since the end of 2011 because of its dissatisfaction
with the price offered by HSG. If this dispute should continue, we will not be able to generate revenue from our production
of iron ore which would have a materially adverse effect on our operations.
China Jinxin was established in December
2006 in Zhuolu County, Hebei Province, Northern China. China Jinxin has registered capital of RMB 36 million ($5.7 million). When
formed, China Jinxin had registered capital of RMB 6 million ($909,000).
We operate China Jinxin as a variable interest
entity through a series of contractual agreements with China Tongda, our WFOE, which gives us effective control of the management
and operations of China Jinxin (the “VIE Agreements”), As compensation for its services China Tongda is entitled
to receive each month an amount equal to the pre-tax profits of China Jinxin. Through the VIE Agreements, we are irrevocably given
the right to control the operations of China Jinxin and to exercise the rights of its shareholders and Board of Directors (“BOD”). The
rights we were granted include the right to make all decisions implicating the operational management, financial management, capital
management, asset management, human resource management and daily operations of China Jinxin. Pursuant to the VIE Agreements, we
also assume all the operational risks associated with China Jinxin and are responsible for any loss incurred by China Jinxin. For
a more detailed description of the VIE Agreements, see “Item 13. Certain Relationships And Related Transactions, And Director
Independence – Transactions with Related Persons –VIE Agreements.”
The PRC government continues to exercise
substantial control over many sectors of the Chinese economy. Part of this control is through regulations. Among
these are regulations on foreign ownership of certain companies and regulations on the ability of Chinese citizens to shift ownership
of domestic Chinese companies to offshore enterprises. In August 2006, the Ministry of Commerce, or MOFCOM, the China
Securities Regulatory Commission, or CSRC, the State-owned Assets Supervision and Administration Commission, the State Administration
of Taxation, or SAT, the State Administration of Industry and Commerce and the State Administration of Foreign Exchange, or SAFE,
jointly promulgated the “Rules on the Mergers and Acquisition of Domestic Enterprises by Foreign Investors,” which
became effective in September 2006, and were amended on June 22, 2009. These rules are referred to herein as the “M&A
Rules.” The M&A Rules confirmed that MOFCOM is a key regulator for mergers and acquisitions in China and require MOFCOM
approval of a broad range of mergers, acquisitions and investment transactions. Among other things, the M&A Rules
include provisions that purport to require that an offshore special purpose vehicle, or SPV, controlled directly or indirectly
by PRC companies or individuals, formed for the purpose of offering their equity interests in domestic companies they control,
must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published
on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval
of their overseas listings. However, the application of these regulations remains unclear with no consensus currently existing
among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement to various types of transactions,
including those which involve the use of VIE agreements.
At the time of the acquisition of Real Fortune
BVI by Target, the shareholders of China Jinxin desired to access the capital markets outside of China to expand its operations. These
shareholders believed that prior consent of the CSRC would be required if they were to cause the shares of China Jinxin to be owned
by a foreign entity but that consent would not be required if they and China Jinxin entered into the VIE Agreements with China
Tongda, even if China Tongda was owned by a foreign entity. Through these contractual arrangements or VIE Agreements, acting through
China Tongda, we have the ability to substantially influence China Jinxin’s daily operations and financial affairs, appoint
its senior executives and approve all matters requiring stockholder approval. As a result of these contractual arrangements pursuant
to generally accepted accounting principles in the United States (“US GAAP”), we are considered the primary beneficiary
of China Jinxin. The shareholders further believed that there was no need to obtain the approval of the CSRC pursuant to the M&A
Rules given that:
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Our Company and its offshore subsidiaries did not acquire an equity interest in any PRC company.
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China Tongda was incorporated as a wholly foreign-owned enterprise by means of direct investment rather than by merger or acquisition by our Company of the equity interests or assets of any “domestic company” as defined under the M&A Rules, and no provision in the M&A Rules classifies the contractual arrangements between China Jinxin and China Tongda as a type of acquisition transaction falling under the M&A Rules.
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Although we believe there are no justifiable
grounds for the PRC government to terminate or amend the VIE Agreements, the PRC government has taken actions to assert control
over businesses regardless of whether or not there was clear authority or precedent for it to do so. Further, on August
25, 2011, MOFCOM issued Announcement No. 53 “Measures on the Security Review System of Foreign Investors Merging and
Acquiring Domestic Enterprises” which came into effect on September 1, 2011, and to implement Circular 6, the “Notice
on Establishing a Security Review System for Acquisition of Domestic Enterprises by Foreign Investors.” Circular
6 gives the PRC Government authority to determine what transactions affect national security interests and to change the terms
of a transaction or cancel it to mitigate national security risks. Announcement No. 53 makes it clear that use of a
VIE structure does not exempt a transaction from review pursuant to Circular 6. The list of industries which may be deemed to implicate
national security interests is broad and may be increased by the PRC authorities. The grant of such broad authority
and the absence of relevant guidelines and precedent creates the risk that the PRC authorities, for reasons not known to us, could
determine that the VIE Agreements need to be canceled or amended.
Corporate History
Adamant DRI Processing and Minerals Group,
a Nevada corporation, is the successor by domicile merger effected on August 29, 2014, to UHF Incorporated, a Delaware corporation
(“UHF”), which was the successor by domicile merger effected on December 29, 2011 to UHF Incorporated, a Michigan corporation
(“UHF-Michigan”). UHF –Michigan was incorporated on March 13, 1964 under the name State Die & Manufacturing
Company. On March 4, 1992 its name was changed to UHF Incorporated.
In 1991, UHF-Michigan became a holding company
by transferring its assets to a newly-formed, wholly-owned corporation and by purchasing the outstanding stock of two closely held
corporations. These three subsidiaries sold their businesses in 1994, and UHF-Michigan paid its debts.
From 1994 until the consummation of a reverse
acquisition with Target Acquisitions I, Inc. (“Target”) on June 30, 2014, we were inactive and had no assets or employees,
and were a “shell company,” as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
On July 2, 2014, we merged Target, our then
wholly-owned subsidiary, into our company.
The chart below presents our corporate structure:
Our Industry:
Introduction to iron ore
Iron ore is the main source of iron for
the world’s iron and steel industries. It is an essential component used in the production of steel. Approximately 98% of
the global supply of iron ore is used in steelmaking. Iron ore refers to rock that contains a sufficient level of iron minerals
that can be mined economically. Iron ore is mainly composed of compounds of iron and oxygen (iron oxides) mixed with gangue, or
impurities that are not generally utilized commercially. The most common types of iron ore are magnetite and hematite. Other iron
ore types that naturally occur include limonite, siderite geothite, pyrite, chamosite and greenalite. When heated in the presence
of a reductant, iron ore will yield metallic iron (Fe). Iron ore is graded according to size as “lumps” or “fines”
based on whether the individual particles have a diameter of more or less than six millimeters. Iron concentrate is the valuable
fines that are separated commercially from iron ore in the form of rock with gangue by crushing, grinding, and beneficiation and
can be agglomerated before being used in an iron making blast furnace or a direct reduction furnace. Iron ore is used directly
as lump ore, or as concentrate or fines converted into pellets or sinter.
Our Iron Ore Production Facilities
China Jinxin
China Jinxin has an iron ore concentrate production line with
an annual capacity of 300,000 tons and associated plant and office buildings (hereinafter collectively referred to as "production
facilities") in Zhangjiakou, Hebei Province (coordinates of N 40°16’-40°17’, E 115°16’~117°17’).
The production facilities include a crushing line, a magnetic separation facility, a tailing disposal line and electric transformers. China
Jinxin started building these facilities in May 2007 and started production in March 2010. During the six months of
2010 during which our plant was in operation and the seven months of 2011 during which we processed iron ore, we processed 397,860
tons and 326,293 tons, respectively, of crude iron ore from which we recovered 110,569 tons and 70,440 tons, respectively, of iron
ore concentrate. In December 2011, the Company halted production due to a pricing dispute with its principal customer and to implement
certain design changes to upgrade the production lines at the facility to improve iron ore refinement and increase the iron ore
concentration rate and later to add the capacity to produce DRI.. China Jinxin’s production facilities were constructed
on the surface of a portion of the Zhuolu Mine. The Zhuolu Mine is currently state-owned. The local Zhuolu county government
is in the process of registering the Zhuolu Mine with the State Department of Land and Resources of Hebei Province and once such
process is completed, the rights to explore the mine will be granted by the Province to the Zhuolu County government and then it
will be in a position to grant mining rights to a mining and exploration company through public bidding.
The production facilities were granted a
Record-keeping Certificate of Fixed Assets Investment by the development and reform commission of the county-level government in
July 2007. The evaluation report of the environmental effects of the project was approved by the city-level environmental protection
authorities in July 2007. In connection with the development of these facilities China Jinxin acquired the necessary water permit
which was originally valid through December 2011 and which was extended until April 13, 2016. The Company is currently
applying for a new water permit.
China Jinxin successively obtained temporary
manufacturing licenses for metallurgical mineral production from Zhangjiakou City on March 22, 2009, March 23, 2010, January 1,
December 30, 2011 and December 27, 2014, respectively. The Company is currently in the process of applying for a new
license; however, there can be no assurance we will be able to obtain a new license on a timely basis, if at all. The
licenses permit China Jinxin to produce only metallic iron and no other metals. The right to grant manufacturing licenses is held
by Zhangjiakou City and if the Company receives the mining rights on Zhuolu Mine, it intends to apply for a permanent manufacturing
license, which, if granted, will have a term of three years.
China Jinxin’s production facility
includes a crushing line which can process up to 8,000 tons of crude iron ore per day. It has 45 crushing machines, six ball mills,
three belt conveyors. The facility also includes 24 magnetic separation machines and 16 mechanical flotation machines.
The magnetic separators can process up to 8,000 tons of crude iron ore per day. Ore is generally run through the magnetic separators
three times before it moves to the next stage of processing.
The facility’s tailing disposal line
can process up to 5,000 cubic meters of water per day. In addition, there is an impounding reservoir on the mine which
has a capacity of 50 million cubic meter of water for use in processing iron ore.
The facility will utilize both iron ore
produced at the facility and iron sands as the raw material to produce DRI. The DRI equipment at the China Jinxin facility
is substantially identical to the equipment in China Huaxin's facility and includes 2 sets of Rotary Kiln with 36m in length and
processing 6000 tons raw material per day and 3 sets of Gas Furnace to produce carbon monoxide for reducing. The facility also
has 6 sets of Grinding Equipment and 3 sets of Wet Magnetic Separation Machinery with processing capacity 7200 tons per day. The
finished products use 30 sets Hydraulic Machine to press block with 5,000 tons designed production capacity.
China Huaxin
China Huaxin has constructed a DRI production
facility (the “DRI Facility”) in Haixing County, Hebei Province, about 50 km from the nearest port. The total amount
expended to construct the DRI Facility, inclusive of both hard and soft costs, was approximately 244,270,000 RMB or US $39
million. This DRI Facility will produce direct reduced iron using advanced reduction rotary kiln technology with iron
sand as the principal raw material. China Huaxin intends to import iron sands from New Zealand, Australia, Indonesia
and the Philippines.
The Company’s DRI Facility occupies
an area of 200,000 m2 The DRI Facility occupies 60,000 m2, of land and there is a raw material storage area
of 14,000 m2 with a 100,000 ton storage capacity, a workshop area of 4500 m2, a water storage pool of 4000m3 to supplement water
supplies, and an office building of 2,400 m2. The plant design is intended to permit the processing of 2,000,000 tons of iron sand
per annum with an annual output capacity of 1,000,000 tons of DRI.
The equipment installed in the DRI Facility
includes 2 sets of Rotary Kilns that are 36m each in length and capable of processing 6000 tons of raw material per day, and 3
sets of Gas Furnaces to produce carbon monoxide for use in the reduction process. The equipment also includes 6 sets of Grinding
Equipment and 3 sets of Wet Magnetic Separation Machineries with processing capacity of 7200 tons per day. In addition there are
30 sets of Hydraulic Machines with a capacity of 5,000 tons per day to press block the finished product.
DRI Production Process
A DRI kiln is a cylindrical vessel, inclined
slightly to the horizontal, which is rotated slowly around its axis. The material to be processed is fed into the upper end of
the cylinder. As the kiln rotates, the materials gradually move down towards the lower end, and may undergo a certain amount of
stirring and mixing. Hot gases pass along the kiln sometimes in the same direction as the process material (co-current), but usually
in the opposite direction (counter-current). The hot gases may be generated in an external furnace, or may be generated by a flame
inside the kiln. Such a flame is projected from a burner-pipe (or 'firing pipe') which acts like a large burner. The fuel may be
gas, oil or pulverized coal.
As illustrated below, the production process consists of the
following steps:
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Blending iron sand and reducing agent together,
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Placing the mixed raw material into ball press machinery,
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Transferring the globular raw material to a rotary kiln for high-temperature drying,
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Transferring the dry material to a secondary rotary kiln and reaction with carbon oxide generated from coal-gas furnaces to produce low grade directly reduced iron (DRI),
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Cooling the DRI and subjecting it to a crushing, milling and beneficiation (CMB) circuit to get high grade DRI; and
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Press blocking the DRI to get the finished product.
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Our Products
To date we have produced iron ore concentrate
from iron ore extracted from the state-owned Zhuolu Mine. The concentrate we produced has had a number of commercially attractive
characteristics, including high iron content and relatively low levels of impurities, such as sulphur, phosphorus, silicon and
titanium, the presence of which is generally undesirable for steel production. As a result, we have been able to efficiently produce
high quality iron ore concentrate through simple, low-cost magnetic processing methods. Our iron concentrate has been graded at
66%, sufficient for the production of crude steel which generally requires concentrated iron graded at 63.5%~66%.
We have mined and processed iron ore from
the Zhuolu Mine. In connection with the construction of our facilities we were granted the right to process ore displaced during
the course of construction. However, the ore from the Zhuolu Mine we mined and processed exceeds what we were permitted
to mine, and we have not been granted mining rights by the Department of Land and Resources of Hebei.
Pursuant
to the Mineral Resources Law of PRC, promulgated on March 19, 1986, effective on October 1, 1986 and amended on August 29, 1996,
and the related implementation rules promulgated on March 26, 1994 (collectively, the “Mineral Resources Law”), any
entity which mines without a mining permit shall be ordered to cease mining and compensate for the losses caused; any mineral products
and unlawful proceeds it realized shall be confiscated; and it also should receive fines of up to 50% of its unlawful proceeds.
If we were sanctioned in accordance with these rules, all of the net income from our mining activities could be confiscated,
and we could be subject to fines of up to 50% of the total net income. In such event, our results of operation and financial condition
would be materially and adversely affected.
Although we have ceased mining while we
upgrade our facilities, the authorities in Hebei know we have mined iron ore in excess of what we were permitted to mine when
constructing our facilities and have taken no action to halt our activities. In any event we will seek to acquire iron
ore from third parties due to the uncertainty over our ability to extract ore from the Zhuolu Mine. The failure to obtain
iron ore reserves for processing at all or on reasonably acceptable terms would have a material adverse impact on our business
and financial results.
Raw Material- Iron Sand
Iron sand is a type of sand with heavy concentrations
of iron. It is typically dark grey or blackish in color. It comprises mainly magnetite, Fe3O4, and also contains small amounts
of titanium, silica, manganese, calcium and vanadium. New Zealand, Australia, Indonesia and the Philippines have significant quantities
of iron sand.
Huaxin plans to import iron sand from New
Zealand and Australia. The management is negotiating with two companies in terms of price, quantity, grade and contract terms.
As the designed production capacity releases, Huaxin will also consider importing from other regions to satisfy expansion requirements.
Customers
China Jinxin
To date, one customer, Handan Steel Group
Company (“HSG”), a subsidiary of Hebei Steel and Iron Company, a state owned enterprise, has accounted for nearly 100%
of our sales. China Jinxin has entered into a 10 years contract with HSG expiring in January 2019 whereby China Jinxin
agreed to sell and HSG agreed to purchase all of the output from our production facility. The price we receive for our output is
determined by HSG in light of market prices and the quality of our product and is to result in a proper profit margin to us. If
China Jinxin is not satisfied with the price set by HSG it can attempt to renegotiate the price. China Jinxin has withheld
deliveries from HSG since the end of 2011 because of its dissatisfaction with the price offered by HSG. There is no
assurance as to what recourse China Jinxin would have if the prices set by HSG were unacceptable.
China Huaxin
China Huaxin plans to sell its DRI to companies
located in the southern provinces of China, including Shanghai, Jiangsu and Zhejiang province.
Suppliers
Our major suppliers include suppliers of
machinery and equipment, spare parts, diesel fuel, electricity and water. Our operations use electricity supplied by the local
power grid. We use water sourced from nearby rivers at our processing plants. We also recycle and reuse water from our tailings
ponds.
We obtain gas and diesel fuel from local
gas stations and incurred costs of $0 for 2016 and $0 for 2015 due to no production. We did not have any specific major
suppliers for 2016 and 2015 since we had no material production activities.
The energy produced in parts of China is
not yet sufficient to satisfy the needs of all businesses seeking to obtain power. Consequently, there are occasional power outages
and brownouts. We ceased production from September 2010 to March 2011 due to the implementation by the local government
of an “Energy Saving and Emission Reduction Plan.” To reduce power consumption for a certain period the
local government adopted this plan whereby nearly all construction and processing plants in Zhuolu County were required to halt
production for a specified period. In an effort to insulate ourselves from this problem, we have installed an Electricity
Converting Station which can convert high voltage electricity to low voltage electricity, and it can also use diesel to generate
power when there’s no electricity. This should enable us to maintain full production should we once again be cut off
from electricity generated by the local power company. Nevertheless, management believes that the Energy Saving and
Emission Reduction Plan enacted by the local government which forced all iron ore producers in the area of our plant to shut down
was a one-time event and disruptions to our access to energy will not have material impact on our production in the future.
Huaxin plans to import iron sand from New
Zealand and Australia. We are negotiating supply contracts with two companies in terms of price, quantity and grade.
Mining Rights
Iron ore mining enterprises in China must
obtain a mining permit and a production safety permit for each mine prior to conducting mining operations. In connection
with the construction of our facilities at the Zhuolu Mine we were granted the right to process ore displaced during the course
of construction. However, the ore from the Zhuolu Mine we have mined and processed since August 2011, exceeds what we
were permitted to mine, and we have not been granted mining rights by the Department of Land and Resources of Hebei or by any other
mining authority We have, however, obtained a temporary manufacturing license for metallurgical mineral production, which
enables us to process iron ore. Pursuant to the Mineral Resources Law, any entity which mines without a mining permit
shall be ordered to cease mining and compensate for the losses caused; any mineral products and unlawful proceeds it realized shall
be confiscated; and it also should receive fines of up to 50% of its unlawful proceeds. If we were sanctioned in accordance with
these rules, all of the net income from our mining activities will be confiscated, and we will be subject to fines of up to 50%
of the total net income. In such event, our results of operation and financial condition would be materially and adversely affected.
So far, we have not received any penalty notice from any relevant authorities.
If we do not obtain mining rights to the
Zhuolu Mine in the foreseeable future, we will seek to acquire iron ore from third parties. The failure to obtain iron
ore reserves for processing at all or on reasonably acceptable terms would have a material adverse impact on our business and financial
results. The Company is currently in the process of applying for mining rights, and expects to be granted such rights,
though there is no assurance that such rights will be obtained.
The Zhuolu county government engaged the
Hebei Province Institute of Geological Survey (“the Institute”), an independent state-owned authorized geological survey
entity, to carry out a geological survey on the Zhuolu Mine. The Institute obtained survey approval from the State Department of
Land and Resources of Hebei Province and conducted the survey. In May 2011, the Institute issued its Geological Evaluation Report
(“the Report”) and submitted the Report to Department of Land and Resources of Hebei. The Zhuolu county
government has applied to the State Department of Land and Resources of Hebei for mining permit for the Zhuolu Mine (“Mining
Rights”) and expects to receive the rights within one year. Once the Mining Rights are granted by the Province, the Zhuolu
county government will assign the Mining Rights to outside mining and exploration companies through public bidding.
To accelerate the process whereby China
Jinxin might obtain a mining permit, China Jinxin entered an agreement dated April 11, 2011, with the Zhuolu county government
regarding the geological survey of the Zhuolu Mine. Pursuant to this agreement, China Jinxin prepaid all the fees related to the
geological survey for the Zhuolu county government, RMB1.98 million ($313,000). The Zhuolu county government agreed
that if China Jinxin obtains the Mining Rights through public bidding, the amount paid for the survey by China Jinxin will be credited
against the price of the Mining Rights and if China Jinxin does not obtain the Mining Rights, the Zhuolu county government will
reimburse the geological survey fees to China Jinxin. The county government also agreed that if China Jinxin were not
to obtain the mining rights it would cause the winning bidder to give China Jinxin priority to purchase the crude iron ores extracted
from the Zhuolu Mine.
Research and Development
We had no research and development expenses
in 2015 or 2016. We currently have no plans for any research and development activities and do not anticipate any material research
and development costs.
Our Growth Strategy
Chinese demand for iron or steel products
has increased rapidly in recent years until the slowdown which began in 2008. We believe demand for high quality iron ore
concentrate will resume growing domestically and globally, thus affording us an opportunity to grow and expand our business operations. We
intend to seek to grow our business through the acquisition of mines and other production facilities, in particular, by acquiring
the right to mine in the areas surrounding our current production facilities.
We anticipate some of our acquisitions will
be of existing mines and some of undeveloped properties. In all cases, they will be properties with established reserves. Our
five-year goal is to control 50 million tons of reserves and to produce up to 1.1 million tons of iron ore concentrate per
year. Our primary criteria for selecting target mines are as follows:
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the resources, reserves and mining operations of the target mines;
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the grade, mining costs and sustainability of the target resources and reserves;
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exploration potential;
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the financial costs and benefits of the acquisition;
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valid land use rights and property ownership and no material legal risks; and
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the contributions of the acquisition towards the overall sustainability of our business.
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We will finance our acquisitions, as well
as the improvements necessary to existing mines and the development of mines on undeveloped properties, by using internally generated
cash, if available, as well as cash raised by issuing equity securities and debt financing.
We anticipate all of our acquisitions will
be in China. We also expect that our customer base will increase as we gain access to additional steel manufacturers.
Government Regulation
Regulations Relating to Exploitation and Mineral Rights
The PRC government maintains a Catalogue
for the Guidance of Foreign Investment Industries (“Catalogue”), which was promulgated and is amended from time to
time by the Ministry of Commerce (“MOFCOM”) and the National Development and Reform Commission (“NDRC”).
The Catalogue divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue
are generally open to foreign investment unless specifically restricted by other PRC regulations. According to the Catalogue as
revised on October 31, 2007, iron ore exploration, mining and mineral processing projects belong to the category of Encouraged
Foreign Investment Industries. Despite the fact that iron ore exploration, mining and mineral processing projects belong
to Category of Encouraged Foreign Investment Industries, the shareholders of China Jinxin elected to utilize the VIE structure
in their efforts to raise capital because this structure has been accepted by investors in the United States and the shareholders
believed that because it did not involve an acquisition of a domestic Chinese company it reduced the filings required to be made
with and the permissions to be obtained from Chinese regulatory authorities relating to what could be deemed to be the transfer
of their ownership interests outside of China.
Mining activities in the PRC are subject
to the PRC Mineral Resources Law (“Mineral Resources Law”), promulgated by the PRC Government on March 19,
1986 and amended on August 29, 1996. The Mineral Resources Law regulates matters relating to the planning or engaging in the
exploration, exploitation and mining of mineral resources. According to the Mineral Resources Law all mineral resources, including
iron ore, are owned by the State. Except under limited circumstances, any enterprise planning to engage in the exploration, exploitation
and mining of mineral resources must first apply for and obtain exploration rights and mining rights before commencing the relevant
activities. The Mineral Resources Law prohibits the transfer of exploration and exploitation rights in general unless the transfer
falls within certain specified circumstances. China Jinxin currently does not own any mines or hold any mining rights.
Pursuant
to the Mineral Resources Law, any entity which mines without a mining permit shall be ordered to cease mining and compensate for
the losses caused; any mineral products and unlawful proceeds it realized shall be confiscated; and it also should receive fines
of up to 50% of it unlawful proceeds.
Although we have extracted iron ore from the Zhuolu Mine, we do not have the
right to do so. If we were sanctioned in accordance with the rules promulgated under the Mineral Resources Law, we could
be required to cease operations at the mining site, all of the net income from our mining activities could be confiscated, and
we could be subject to fines of up to 50% of the total net income. In such event, our results of operation and financial
condition would be materially and adversely affected. So far, we have not received any penalty notice from any relevant authorities.
If we do not obtain mining rights to the Zhuolu Mine in the future, we will seek to acquire iron ore from third parties. The
failure to obtain iron ore reserves for processing at all or on reasonably acceptable terms would have a material adverse impact
on our business and financial results.
Exploration, exploitation and mining operations
must comply with the relevant provisions of the Mineral Resources Law and other relevant regulations, and are under the supervision
of the Ministry of Land and Resources. Exploration and exploitation of mineral resources also are subject to examination and approval
by the Ministry of Land and Resources and relevant local authorities. Upon approval, a mining permit is issued by the relevant
administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdictions.
The holders of mining rights are required to file annual reports with the relevant administrative authorities.
Mineral products illegally extracted and
incomes derived from such activities may be confiscated and may result in fines, revocation of the mining permit and, in serious
circumstances, criminal liability.
Regulations Relating to Metallurgical Mineral Production
License
The Hebei Provincial Government implemented
a production license system for metallurgical mineral products. On November 1, 2006, the Hebei Provincial Government promulgated
Regulations on Supervision and Administration of Production and Operation of Metallurgical Mineral Products, and on January 28,
2011, issued its implementation regulations. According to these regulations, any company that engages in metallurgical mineral
production must acquire a metallurgical mineral production license with a valid period of three years from the Hebei Provincial
Government. If the business license, mining right or non-coal mine safety production license of the company is revoked or withdrawn,
the metallurgical mineral production license will lapse.
China Jinxin obtained and then renewed its
annual basis temporary metallurgical mineral production licenses issued by Zhangjiakou Metallurgical and Mineral Industrial Administration
Agency. The current temporary license expired on February 26, 2015. We have filed an application to have the license
renewed and expect our renewal application to be granted in the second quarter of 2017. China Jinxin intends to apply to the Hebei
Provincial Government for a formal metallurgical mineral production license after obtaining its mining rights. There can be no
assurance China Jinxin will be able to obtain a formal metallurgical production license. The failure to obtain
the licenses necessary to continue to operate would have a material adverse effect on our operations and financial results.
Regulation Relating to Investment Projects
According to the Decision of the State Council
on Reforming the Investment System promulgated on July 6, 2004, with the exception of iron ore projects with proved industrial
reserves equal or above 50 million tons and iron making, steel making and steel rolling projects increasing production capacity,
which shall be verified and approved by the investment administration authority of the State Council; all other iron ore development
projects must be verified and approved by the investment administration authorities of provincial governments. China Jinxin’s
iron ore concentration projects with annual production capacity of 300,000 tons was verified and approved by the Hebei Development
and Reform Commission on January 22, 2007.
Regulations on Environmental Protection
The major environmental regulations applicable
to us include the Environmental Protection Law of the PRC, the Water Pollution Prevention Law of the PRC, the Atmospheric Pollution
Prevention Law of the PRC, the Environmental Impact Assessment Law of the PRC and the Law of the PRC on the Prevention and Control
of Environmental Pollution by Solid Waste and the Regulations Governing Environmental Protection in Construction Projects. Also,
general environmental regulations relating to noise and the treatment of industrial waste are applicable to our operations.
All phases of our operations are subject
to environmental regulations and discharge standards promulgated by governmental agencies in China. Before we may begin project
development and production, we must comply with environmental regulations and standards. Environmental regulations set forth limits
and prohibitions on spills, releases or emissions of various substances produced in association with certain processing and manufacturing
operations. A breach of any regulations may result in imposition of fines and penalties and even curtailment or suspension of our
operations. Furthermore, future changes in environmental laws and regulations could result in stricter standards and enforcement,
larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse
effect on our financial condition or results of operations.
China Jinxin entrusted the Environmental
Protection and Research Institute of Zhangjiakou city to conduct the environmental impact assessment of its iron ore mining and
selecting project, and the Environmental Impact Report was issued in May 2007. Based on this report, Zhangjiakou Environmental
Protection Department approved constructing and upgrading China Jinxin's production facility on July 26, 2007.
Regulations on Water Drawing
Pursuant to the Regulation on the Administration
of the License for Water Drawing and the Levy of Water Resource Fees promulgated on February 21, 2006, effective on April 15, 2006,
any entity or individual that draws water resources shall, except for the circumstances prescribed in the Regulation, apply for
a license certificate for water drawing, and pay water resource fees. The valid term of a license certificate for water drawing
is generally five years, and may not exceed 10 years. If, at expiry of the valid term, the license certificate needs to be renewed,
the water drawing entity or individual shall file an application with the organization, which granted the certificate within 45
days prior to the expiry of the term. The organization shall, prior to the expiry of the term, decide whether or not to approve
the renewal.
China Jinxin received a License for Water
Drawing from the local water bureau with yearly water drawing of 20,000 cubic meters of water on December 7, 2006. In
April 2011, China Jinxin renewed the License and the current water license expired on April 13, 2016, with yearly water drawing
of 15,000 cubic meters of water per annum. We have applied for a new water license.
Regulations on Annual Inspection
In accordance with relevant PRC laws, all
types of enterprises incorporated under PRC laws are required to conduct annual inspections with the State Administration for Industry
and Commerce of the PRC or its local branches. In addition, foreign-invested enterprises are subject to annual inspections conducted
by other applicable PRC governmental authorities. In order to reduce enterprises’ burden of submitting inspection documentation
to different governmental authorities, the Measures on Implementing Joint Annual Inspection on Foreign-invested Enterprises issued
in 1998 by SAFE, together with six other ministries, stipulated that foreign-invested enterprises must participate in an annual
inspection jointly conducted by all relevant PRC governmental authorities.
Regulation Relating to Mining Safety
Pursuant to the Work Safety Law of the PRC
promulgated on June 29, 2002 and effective on November 1, 2002 and the Law of the PRC on Safety in Mines and its related implementation
rules promulgated on November 7, 1992 and October 30, 1996 and effective on May 1, 1993 and October 30, 1996, respectively, (a)
safety facilities in mine construction projects must be designed, constructed and put into operation at the same time as the commencement
of the principal parts of the project; (b) the design of a mine shall comply with the safety rules and technological standards
of the mining industry and shall be approved by the relevant authorities; and (c) such mines may start production or operations
only after they have passed the safety check and approval process as required by the relevant PRC laws and administrative regulations.
The Regulation on Work Safety Licenses was
promulgated and became effective on January 13, 2004. Pursuant to the regulation, (a) the work safety licensing system is applicable
to any enterprise engaging in mining and such enterprise may not produce any products without obtaining a work safety license;
(b) prior to producing any products, the mining enterprise shall apply for a work safety license, which is valid for three years;
and (c) if a work safety license is required to be extended, the enterprise must apply for an extension with the administrative
authority who issued the original license within three months prior to the expiration of the original license.
In addition, the Implementation Measures
for non-coal mining enterprises work safety licenses was promulgated and became effective on June 8, 2009. Under this legislation,
non-coal mining enterprises, i.e., metal and non-metal mine enterprises, and also tailings ponds, geological exploration units,
mining engineering corporations, oil and natural gas enterprises need to obtain a safety production permit before any productive
activities can commence. Every independent productive system of a metal and nonmetal mine enterprise needs to obtain a separate
safety production permit. The licenses last for three years, and can be extended if the non-coal mining enterprise applies to the
administrative authority three months before its expiration date.
Pursuant to the Provisional Regulations
on the Installation, Use, Monitoring and Inspection of the ‘‘Six Major Systems’’ for Safety and Refuge
in Underground Metal and Non-metal Mines promulgated on October 9, 2010 by the State Administration of Work Safety, underground
metal and non-metal mines should install the ‘‘six major systems’’ for safety and refuge, namely monitoring
and control systems, underground workers positioning system, emergency refuge system, pressurizing self-rescue system, water supply
rescue system and communications system according to the time limit set down by the regulations, and should also have in place
specially designated staff for the management and maintenance of these systems. The safety production permits shall be withheld
by safety production regulation authorities above the county level from enterprises operating on underground mines which have failed
to comply with the requirements to complete the construction of such ‘‘six major systems’’ for safety and
refuge within the time limit. Further, a delinquent enterprise shall be ordered to make rectifications within a specified time
and if it fails to complete the rectifications, the local government is entitled to shut down its operations.
Pursuant to the Provisional Regulations
on Requirements for Management Members of Metal and Non-metal Mining Enterprises to Accompany Workers in Descending and Ascending
Underground Mines and the Monitoring and Inspection of Compliance Therewith in effect from November 15, 2010, mining enterprises
must ensure there is at least one responsible person (person-in-charge, member of the management or deputy chief engineer) for
each group to carry out on-site underground mining operations and that he shall accompany workers in descending and ascending the
underground mines. Where mining enterprises have failed to establish a complete and sound or any system for management members
to lead workers in underground mining operations in accordance with the regulations, such enterprises shall be given warnings and
shall be fined RMB 30,000 ($4,800); the persons-in-charge shall also be warned and fined RMB 10,000 ($1,600); where the contravention
is serious, the safety production permit shall be withheld and the operation shall be suspended for rectifications in accordance
with the law.
Pursuant to the Law Of The PRC On Safety
In Mines adopted on November 7, 1992, and Implementing Rules on the Law Of The PRC On Safety In Mines of Hebei Province effective
in September 1995, as amended in December 1997, the designs of safety facilities in mine construction projects must be examined
by the administration department of mining enterprises together with the participation of the competent department of labor administration;
and upon completion, the safety facilities in mine construction projects shall be subject to inspection for acceptance by the authorities
in charge of mining enterprises, with participation of the competent department of labor administration; those failing to comply
with the safety rules and technological standards for mining industry may not pass inspection for acceptance, and may not be put
into operation; managers of mines must prove, through examination, to have special knowledge of safety and the capability of leading
safe production and dealing with accidents in mines; personnel in charge of safety work in mining enterprises must possess necessary
specialized knowledge of safety and experience in safety work in mines; special operators in charge of safe production in mining
enterprises must receive special training; they may take up a post of such duty only after they have obtained a certificate of
operation qualification after passing due examination and verification. The law also provides for the conditions for safe production,
the requirements to implement safety rules and industry technical specifications, and to prepare and implement operational procedures.
In March 2009 China Jinxin received its
first temporary production license pursuant to which it began production in March 2010. Because China Jinxin has not
been granted a mining license, as opposed to a production license, it is not required to obtain the production safety licenses
described above. If China Jinxin was to obtain mining rights, it would apply for the required production safety licenses.
Currently, China Jinxin is recruiting mining managers with experience in obtaining the required safety certificates.
Pursuant to the Regulation on the Safety
Administration of Explosives for Civilian Use adopted on April 26, 2006, the State applies a licensing system to the production,
sale, purchase, transport and blasting operation of explosives for civilian use. As a mining company, China Jinxin needs to obtain
the Purchase Permit of Explosives for Civil Use and a Blasting Operation Permit to purchase and use explosives
legally. China Jinxin is currently applying for the two permits.
Regulations on Work Safety
The Work Safety Law of PRC (the “Work
Safety Law”) was promulgated as of June 29, 2002. It regulates the work safety of entities that engage in production and
business operation activities within the territory of the PRC (hereinafter referred to as “production and business operation
entities”). All production and business operation entities must observe the Work Safety Law and any other relevant laws or
regulations concerning work safety, strengthen the administration of work safety, establish and perfect the system of responsibility
for work safety, perfect the conditions for safe production, and ensure safety during production. The production and business operation
entities must provide conditions for safe production as provided in the Work Safety Law and other relevant laws, administrative
regulations, national standards and industrial standards.
Any entity that does not maintain the conditions
for safe production may not engage in production and business operation activities.
The Department of the State Council in charge
of the supervision and administration of work safety is required to implement comprehensive supervision and administration of work
safety in the PRC. The relevant governmental authorities superior to the county level and in charge of the supervision and administration
of work safety are required to implement comprehensive supervision and administration of work safety within their respective administrative
jurisdictions according to the Work Safety Law.
In case of a violation of the Work Safety
Law, the relevant authorities can order the decision-making department or key person-in-charge of any production and business operation
entity to correct the violation, suspend production or business and can take other administrative measures. If a work safety accident
has resulted and a crime has been committed, the key person-in-charge may face criminal liabilities according to the relevant provisions
of the Criminal Law.
Regulations on Foreign Currency Exchange
Pursuant to the Foreign Currency Administration
Rules promulgated in 1996 and amended in 2008 and various regulations issued by the State Administration of Industry and Commerce
and the State Administration of Foreign Exchange (“SAFE”) and other relevant PRC governmental authorities, Renminbi
are freely convertible only to the extent of current account items, such as trade related receipts and payments, interest and dividends.
Capital account items, such as direct equity investments, loans and repatriation of investment, require prior approval from SAFE
or its local counterpart for conversion of Renminbi into a foreign currency, such as US dollars, and remittance of the foreign
currency outside the PRC.
Payments for transactions that take place
within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies must repatriate foreign currency payments received
from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject
to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign
currency receipts into Renminbi.
On August 29, 2008, SAFE promulgated a circular
regulating the conversion by a foreign-invested company of its registered capital in foreign currency into Renminbi by restricting
how the converted Renminbi may be used. This circular stipulates that the registered capital of a foreign-invested company settled
in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable
governmental authority and may not be used for equity investments within China. Violations of this circular can result in severe
penalties, including monetary fines.
In addition, any foreign loans to an operating
subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between its respective
approved total investment amount and its respective approved registered capital amount.
Regulation on Foreign Exchange in Certain Onshore and
Offshore Transactions
In October 2005, SAFE issued Circular 75,
which regulates foreign exchange matters in relation to the use of a “special purpose vehicle” by PRC residents to
seek offshore equity financing and conduct “return investment” in China. Under Circular 75, a “special purpose
vehicle” refers to an offshore entity established or controlled, directly or indirectly, by PRC citizens or PRC entities
(collectively, as PRC residents) for the purpose of seeking offshore equity financing using assets or interests owned by such PRC
residents or PRC entities in onshore companies, while “round trip investment” refers to the direct investment in China
by PRC residents through the use of “special purpose vehicles,” including without limitation, establishing foreign
invested enterprises and using such foreign invested enterprises to purchase or control (by way of contractual arrangements) onshore
assets. Circular 75 requires that, before establishing or controlling a “special purpose vehicle,” PRC residents are
required to complete foreign exchange registration with the competent local counterparts of SAFE for their overseas investments.
In addition, such PRC resident is required to amend his or her SAFE registration or to file with SAFE or its competent local branch,
with respect to that offshore special purpose vehicle in connection with any increase or decrease of capital, transfer of shares,
merger, division, equity investment or creation of any security interest over any assets located in China by the offshore special
purpose vehicle. To further clarify the implementation of such amendment or filing procedure, SAFE requires domestic enterprises
under Circular 75 to coordinate and supervise such amendment or filings with SAFE or its local counterparts by such PRC residents.
If PRC residents fail to comply, the domestic enterprises are required to report to the local SAFE authorities.
Failure to comply with the registration
procedures set forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant
onshore company, including being prohibited from distributing its profits and proceeds from any reduction in capital, share transfer
or liquidation to its offshore parent or affiliate, and restrictions on the ability to contribute additional capital from the offshore
entity to the PRC entities, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration
regulations.
Regulation on Overseas Listings
On August 8, 2006, MOFCOM, the CSRC, the
State-owned Assets Supervision and Administration Commission, the SAT, the State Administration of Industry and Commerce and SAFE
jointly promulgated the “Rules on the Mergers and Acquisition of Domestic Enterprises by Foreign Investors,” which
became effective on September 8, 2006, and was further amended on June 22, 2009, or the M&A Rules.
Among other things, the M&A Rules include
provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of
such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However,
the application of this PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding
the scope and applicability of the CSRC approval requirement to various types of transactions, including those which involve the
use of variable interest entity agreements.
Regulations on Dividend Distribution
The principal regulations governing dividend
distributions by wholly foreign-owned enterprises include: Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000 and Wholly
Foreign-Owned Enterprise Law Implementing Rules (1990), as amended in 2001. Under these regulations, wholly foreign-owned enterprises
in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards
and regulations. Additionally, these foreign-invested enterprises are required to set aside 10% of their after-tax profits based
on the PRC accounting standards each year, if any, to fund their general reserve fund, until the accumulative amount of such reserves
reaches 50% of their registered capital. These reserves are not distributable as cash dividends. Besides the compulsory reserve
fund, wholly foreign-owned enterprises may also set aside any funds from their after-tax profits, at the discretion of their shareholders.
In addition, dividends we pay to our non-PRC shareholders may be subject to a 10% withholding tax, unless otherwise set forth in
the tax treaties between China and other countries or areas.
Regulations Relating to Taxation
The PRC Enterprise Income Tax Law applies
a 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except to the extent tax incentives
are granted to special industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends
generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to
a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless
there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before
January 1, 2008 are exempt from PRC withholding tax.
Under the PRC Enterprise Income Tax Law,
an enterprise established outside China with “de facto management bodies” within China is considered a “resident
enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on
its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify
certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of
China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises”
will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise
shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the
PRC tax authorities.
Under the implementation regulations to
the PRC Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall
management and control over the manufacturing and business operations, personnel and human resources, finances and properties of
an enterprise. In addition, the tax circular mentioned above specifies that certain PRC-invested overseas enterprises controlled
by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following
are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation
and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes
of board meetings and shareholders’ meetings; and 50% or more of the senior management or directors having voting rights.
Pursuant to the Notice of Value-added Tax
Rate in Metal and Non-metal Mineral Dressing Products promulgated on December 19, 2008 and effective on January 1, 2009, beginning
from January 1, 2009, the value-added tax rate for metal and non-metal mineral dressing products, including iron ore, is adjusted
from 13% to 17%.
Competition
Iron ore mines are classified by their annual
production capacity of iron ore. Large-scale mines have a production capacity greater than 2,000 ktpa. Medium-scale mines have
a production capacity between 600 ktpa to 2,000 ktpa. Small-scale mines have a production capacity of less than 600 ktpa. The Chinese
iron ore industry is highly fragmented and is dominated by small-sized producers. The majority of China's iron ore output
comes from small and medium scale mines. The remaining iron ore output is produced by large scale mines, most
of which belong to state-owned steel companies.
In our primary market, Hebei Province, we
face competition from local iron ore producers. There are approximately 2,700 small-scale iron ore mines in Hebei Province. Key
iron ore producers in Hebei Province include Hebei Steel Group, Shougang Group and Hanxing Mining, all of which are state-owned
enterprises. Of the top 10 iron ore mines in Hebei Province, eight are owned by state-owned enterprises.
We are in the early stages of our business
development and will compete with other iron ore concentrate producers mainly on the basis of price and quality of our output. If
we are successful in obtaining rights to or otherwise acquiring iron ore from mines in the vicinity of our property we believe
we will be in a good position to compete with other local concentrate producers because of (i) the high grade and quality of the
iron ore in the mines surrounding our property which, if we obtain the output from these mines, will allow us to efficiently produce
high grade concentrate and (ii) our close proximity to major potential customers and the associated low transportation costs. There
can be no assurance that we will be successful in obtaining the mining rights we seek and will likely have to compete with other
better capitalized companies to obtain such rights.
Because of the economies of transportation,
most large iron producers supply their products to steel companies relatively near their facilities. Given that iron ore concentrates
tend to be sold on the basis of market prices and that demand for iron concentrates in China currently exceeds the capacity of
the larger producers, smaller producers such as us, generally supply their iron ore to the same steel companies as the larger companies
and their ability to operate profitably, as well as ours, is determined by their ability to produce at a cost which allows them
to operate profitably. Consequently, we believe that if we have sufficient capital and can obtain access to iron ore
from the mines surrounding our facility, we can compete effectively and profitably.
Employees
We currently have 59 full-time employees
at China Jinxin, the majority of which work at our production facilities. The employees of China Jinxin are distributed
among the following categories:
Department
|
|
Employee #
|
Administrative
|
|
27
|
Finance
|
|
7
|
Quality Control
|
|
0
|
Production
|
|
25
|
Exploration
|
|
0
|
Total
|
|
59
|
China Huaxin has 72 full-time employees distributed among the
following departments:
Department
|
|
Employee #
|
Management
|
|
9
|
Production
|
|
13
|
Gas Station
|
|
0
|
Administrative
|
|
26
|
Electrical Engineer
|
|
7
|
Quality Control
|
|
6
|
Finance
|
|
4
|
Maintenance
|
|
2
|
Logistics
|
|
5
|
Total
|
|
72
|
We believe we are in material compliance
with all applicable labor and safety laws and regulations in the PRC, including the PRC Labor Contract Law (“LCL”), the
PRC Unemployment Insurance Law, the PRC Provisional Insurance Measures for Maternity of Employees, PRC Interim Provisions on Registration
of Social Insurance, PRC Interim Regulation on the Collection and Payment of Social Insurance Premiums and other related regulations,
rules and provisions issued by the relevant governmental authorities for our operations in the PRC. According to the
PRC LCL, we are required to enter into labor contracts with our employees and to pay them no less than the local minimum wage.
Our senior management is comprised of a
group of highly experienced professionals in the iron ore mining and processing field with an average industry experience exceeding
10 years. We have filled mid-level management positions and other key functions in our Company with specialists to support our
senior management. We require our employees to have appropriate education, training and/or work experience in their respective
fields. We believe that our management team possesses in-depth knowledge critical to our Company’s success in the iron ore
industry and is capable of identifying and seizing market opportunities, formulating sound business strategies, assessing and managing
risks, implementing management and production schemes, and increasing our overall profit to maximize our shareholder value.
Item 1A. Risk Factors
An investment in our common 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 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. You should read the section entitled “Special Notes Regarding Forward-Looking Statements” above for
a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the
context of this report.
Risks Related to Our Business
We may not be able to continue to operate as a going concern.
We incurred a net loss of $5.23 million
for the year ended December 31, 2016. We also had a working capital deficit of $51.99 million as of December 31, 2016. In addition
we have refused to sell our iron ore concentrate to our sole customer because of the low price offered for our product. The price
of iron ore concentrate is still in decline. These conditions raise a substantial doubt as to whether we can continue as a going
concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. One shareholder
has indicated she will continue to fund China Jinxin, though there is no written agreement in place and the Company currently owes
$10.04 million to the shareholder. In addition, China Huaxin borrowed $23.88 million from three shareholders, and borrowed $4.99
million from certain companies owned by its major shareholder. Despite such commitments, there is no assurance that adequate cash
will be available from current shareholders or from third parties and, if it is available, what the terms of any loan or investment
might be. If we are unable to obtain the funding required, we may have to curtail or cease our operations. The Company has no specific
plans, understandings or agreements with respect to the raising of such funds, and it may seek to raise the required capital by
the issuance of equity or debt securities or by other means. Since it has no such arrangements or plans currently in effect, its
inability to raise funds may have a severe negative impact on its ability to become a viable company.
We have extracted ore without a permit.
We have extracted and continue to extract
and process iron ore from the mine upon which China Jinxin’s production facilities are located even though we do not have
a permit to do so. If we were sanctioned for mining ore without a permit in accordance with the rules promulgated under
the Mineral Resources Law, we could be required to cease operations at the mining site, all of the net income from our mining activities
could be confiscated, and we could be subject to fines of up to 50% of the total net income. In such event, our results of operation
and financial condition would be materially and adversely affected.
We have not yet obtained the necessary permits to mine in
the areas surrounding our production facilities. Our failure or inability to obtain, retain or renew required government approvals,
permits and licenses for mining activities in the area surrounding our production facilities could have a material and adverse
effect our business, financial condition and results of operations.
Pursuant to the Mineral Resource Law of
PRC, promulgated on March 19, 1986, effective on October 1, 1986 and amended on August 29, 1996, and the related implementation
rules promulgated on March 26, 1994, mineral resources are owned by the State with the State Council exercising ownership over
such resources on behalf of the State. Any enterprise that intends to exploit mineral resources must acquire mining rights and
production safety permits for each mine prior to conducting mining. Besides, the mining enterprise must also pass periodic
inspections conducted by relevant environmental protection authorities, which are required by PRC production safety and environmental
protection-related laws as well as the local laws and regulations of Hebei Province, where our operations are located.
Therefore, our ability to conduct our business
is subject to our ability to obtain, renew and maintain the requisite mining and exploration approvals, permits and licenses. In
particular, we have not received any mining rights for the Zhuolu Mine or any other mine in the area of our current production
facilities. If we do not acquire rights to mines in the area of our production facilities, we will be forced to purchase
iron ore and other metals for processing from third parties. There is no guarantee that iron ores or any other metals
of suitable quality will be available to us, will be available on reasonable prices or will be located sufficiently close to our
facilities to make their processing by us economically feasible. In such event, we would not be able to realize the potential of
our production facilities and our business, results of operations, financial condition and ability to realize our business plans
would be materially and adversely affected.
We have not yet obtained all the necessary permits to operate
our production facilities.
We do not have long term permits and licenses
necessary to operate our production facilities in Zhuolu and, to date, have been operating pursuant to temporary licenses with
the consent of the local governmental authorities. We cannot guarantee we will be able to obtain, retain and renew the
approvals, permits and licenses required to operate our facilities or that we will be able to successfully obtain, retain or renew
future approvals, permits and licenses in a timely manner, or that such approvals, permits and licenses will not be revoked by
the relevant authorities or contain limitations that will adversely impact our ability to fully utilize our facilities. Moreover,
the authorities may impose different or additional conditions on our approvals, permits and licenses that may be burdensome and
costly to fulfill. We have been operating our Zhuolu facility under temporary manufacturing licenses, which have been granted on
an annual basis Failure to obtain, retain or renew and ensure continued compliance with such approvals, permits and licenses
as planned may cause us to experience delays in our production plans or have to cease or limit our production. In such
event we would not be able to realize the potential of our production facilities and our business, results of operations, financial
condition and ability to realize our business plans would be materially and adversely affected.
China Jinxin is dependent on a single customer who has ceased
purchases due to a failure to agree on price.
To date, all of China Jinxin’s iron
ore concentrate has been sold to HSG. The price we receive for our output is determined by HSG in light of market prices and the
quality of our product and is to result in a proper profit margin to us. If China Jinxin is not satisfied with the price
set by HSG it can attempt to renegotiate the price. China Jinxin has withheld deliveries from HSG since the end of 2011
because of its dissatisfaction with the price offered by HSG. If this customer significantly reduces its purchases of iron
ore concentrate from us, or if we are unable to sell iron ore concentrate to it on favorable terms or at all, and we are unable
to obtain additional customers, our business, financial condition and results of operations may be materially and adversely affected.
Our ability to receive payment for the sale of our iron ore concentrate depends on the continued creditworthiness of our customers.
Furthermore, the bankruptcy of any of our customers could materially and adversely affect our business. We may be required to extend
credit to customers, including on terms that could increase the risk of payment default, in order to compete with the terms offered
by other iron ore concentrate suppliers
Our business and results of operations will depend on the
market price of iron ore concentrate, which is driven by factors beyond our control.
Our business is sensitive to fluctuations
in the price of iron ore concentrate. Like many producers of iron ore concentrate in China, our iron ore concentrate is priced
primarily by reference to market prices. Consequently, fluctuations in the market price of iron ore concentrate, due to numerous
factors beyond our control such as an imbalance in the supply of and demand for iron ore concentrate in local, national and global
markets, the availability of competitive supplies, pricing mechanisms and foreign exchange rates, directly affect the pricing of
our iron ore concentrate and our results of operations.
The price of iron ore concentrate has historically
been subject to significant fluctuations in response to market forces, such as global iron ore production levels, demand for steel
products and general global and PRC economic conditions. Any sustained adverse movement in the price of iron ore concentrate in
the future will have a material adverse effect on our business, financial condition and results of operations.
We do not have the land use rights to the property upon which
one of our production facilities are located.
The land occupied by our Zhuolu facilities
is listed in the overall plan for land utilization of Zhangjiakou City as land to be used for construction. According to Chinese
laws and regulations related to land management, only state-owned land can be used for construction. The land occupied
by our production facilities is still owned collectively by local villagers and should only be used by us for construction after
it is changed to state-owned land through acquisition by the local government. We cannot assure you that we will obtain the land
use rights to the property upon which our production facility is located. The failure to obtain such land use rights would have
a material and adverse effect on our business, financial condition and results of operations.
Mining operations have a finite life, and eventual closure
of these operations will entail costs and risks regarding ongoing monitoring, rehabilitation and compliance with environmental
standards.
Any mining operation we might undertake
would have a finite life. The closure of any mine entails significant costs and risks, including among others:
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long-term management of permanent engineered structures;
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compliance with environmental closure standards;
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orderly retrenchment of employees; and
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relinquishment of the site with associated permanent structures and community development infrastructure and programs to new owners.
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If we were to commence mining operations,
the successful completion of these tasks depends on our ability to implement negotiated agreements with the relevant governmental
authorities, community organizations and employees. The consequences of a difficult closure range from increased closure costs
and handover delays to ongoing environmental rehabilitation costs and damage to our reputation if desired outcomes cannot be achieved,
which could materially and adversely affect our business and results of operations.
Our plan to acquire mineral reserves may not succeed.
We intend to acquire the right to mine mineral
reserves. However, we will encounter intense competition from other companies seeking to acquire the same assets and we may fail
to select or value targets appropriately. One of the important factors we will consider when we select or value targets is their
resource and reserve estimates. Resource and reserve estimates involve professional judgments based on factors such as technical
data, experience and industry practice. The accuracy of these estimates may be affected by many factors, including the quality
of the results of exploration drilling, sampling of the ore, analysis of the ore samples, estimation procedures and the technical
expertise and experience of the persons making the estimates. There are also many assumptions and variables beyond our control
that may result in inherent uncertainties in estimating reserves. As a result, resource and reserve estimates may be inaccurate
and may lead to a failure to select or value targets appropriately, which may in turn result in our inability to successfully implement
our expansion plans at a reasonable cost, or at all.
Even if we discover or acquire mineral reserves
at a price that we believe is in the interests of our Company, it can take several years from the initial phases of drilling until
production is possible, during which the economic feasibility of production may change. It takes substantial time and expenditures
to:
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comprehensively establish ore reserves through drilling;
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determine appropriate mining and production processes for optimizing the recovery of iron contained in ore;
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obtain environmental and other licenses;
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construct mining and processing facilities; and
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obtain the ore or extract iron content from the ore.
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If a project proves not to be economically
feasible by the time we are able to exploit it, we may incur substantial losses or write-offs. In addition, potential changes or
complications involving metallurgical and other technological processes arising during the life of a project may result in cost
overruns that may render the project not economically feasible. We also face risks in relation to changes to applicable laws and
regulations, compliance with which may make extracting the ore more expensive than we had previously estimated. We therefore cannot
assure you that new mineral reserves will be successfully developed or integrated within our existing operations at a reasonable
cost within a reasonable period of time or at all or that they will generate the expected economic returns. If our expansion plans
are delayed or they fail to deliver the expected economic benefits, our business, financial condition and results of operations
would be materially and adversely affected.
We face certain risks and uncertainties beyond our control
that are associated with our operations and our customers’ operations.
Our mining and processing operations are
subject to a number of operating risks and hazards, some of which are beyond our control. These operating risks and hazards include
the need to carry out unscheduled maintenance; critical equipment failures in our mining or ore processing operations; industrial
accidents; water, power or fuel supply interruptions; fires, inclement or hazardous weather conditions and natural disasters; and
unusual or unexpected variations in the ore and in the geological or mining conditions such as instability of the open-pit slopes
and subsidence of the working areas. Any of these risks and hazards or any combination thereof may disrupt or result in a suspension
of our operations, increase production costs, result in property damage, personal injuries and liability to us and harm our reputation.
Natural disasters and industrial accidents also may interrupt our customers’ operations and production, impacting the demand
they may have for our products. Moreover, natural disasters and industrial accidents may damage or substantially hamper critical
ancillary operations such as the transportation of our products to our customers. The occurrence of any natural disaster or industrial
accident adversely affecting our customers and their ancillary operations may have a material adverse effect on our business, financial
condition and results of operations.
Our insurance coverage may be insufficient to cover our business
risks.
We face various operational risks in connection
with our business. However, we are not insured against certain risks. Any losses and liabilities for which we are not insured or
for which our insurance coverage is inadequate to cover the entire liability may have a material adverse effect on our business,
financial condition and results of operations.
We cannot assure you that the safety measures
we have in place for our operations will be sufficient to mitigate or reduce industrial accidents. We also cannot assure you that
casualties or accidents will not occur or that our insurance coverage would be sufficient to cover costs associated with major
accidents. In the event that we incur substantial losses or liabilities and our insurance does not cover such losses or liabilities
adequately or at all, our business, financial condition and results of operations may be materially and adversely affected.
We may not be able to obtain and renew land use rights and
building ownership rights for our facilities in Zhuolu.
China Jinxin leases 15.80 hectares of land,
on which it built its production facilities and office buildings for a term ending in December 2026. China Jinxin constructed
five houses on its land. Pursuant to the certificates of ownership, the total area is 9,755 square meters. The valid
period of the land use right corresponding to 9,646 square meters terminated on August 30, 2009, and the Company is in the process
of renewing such land use right. The balance terminated on March 6, 2014. The Company has filed an application for the renewal
of its land rights. There can be no assurance we will be able to renew our leases upon expiration of their current terms.
The land occupied by our production facilities
in Zhuolu has been designated for construction. According to Chinese laws and regulations, only state-owned land can be used for
construction. However, the land occupied by China Jinxin’s production facilities is not and has never been state-owned. It
is currently owned collectively by local villagers. As a result, the land has to be acquired by the local government
and then transferred to China Jinxin. Because this process has not been completed, the houses, office buildings and production
facilities on the land are subject to limitations on transfer or the granting of mortgages. Further, there can be no
assurance that China Jinxin will be able to continue to use its facilities if the transfer process is not completed.
Our business requires significant and continuous capital
investment.
We will require a high level of capital
expenditure in the foreseeable future to fund our ongoing operations and future growth. We will require significant additional
capital to implement our strategy of acquiring mining assets and undertaking exploration activities. We intend to fund our capital
expenditures, future acquisitions and exploration activities out of internal sources of liquidity and/or through access to additional
financing from external sources. Our ability to obtain external financing in the future at a reasonable cost is subject to a variety
of uncertainties, including:
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our future financial condition, results of operations and cash flows;
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the condition of the global and domestic financial markets; and
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changes in the monetary policy of the PRC government with respect to bank interest rates and lending practices.
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If we require additional funds and cannot
obtain them on acceptable terms when required or at a reasonable financing cost or at all, we may be unable to fulfill our working
capital needs, upgrade our existing facilities or expand our business. These or other factors may also prevent us from entering
into transactions that would otherwise benefit our business or implementing our future strategies. Any of these factors may have
a material adverse effect on our business, financial condition and results of operations.
We may have difficulty in managing our future growth and
any associated increased scale of our operations.
We expect to expand through both organic
growth and acquisitions. Our future expansion may place a significant strain on our managerial, operational, technical and financial
resources. In order to better allocate our resources to manage our growth, we must hire, recruit and manage our workforce effectively
and implement adequate internal controls in a timely manner. If we are unable to effectively manage our growth and the associated
increased scale of our operations, our business, financial condition and results of operations could be materially and adversely
affected.
If we are unable to attract and retain senior management
and qualified technical and sales personnel, our operations, financial condition and prospects could be materially adversely affected.
Our future success depends in part on the
contributions of our management team and key technical and sales personnel and our ability to attract and retain qualified new
personnel. In particular, our success depends on the continuing employment of our Chief Executive Officer, Mr. Changkui Zhu,
and our Chief Financial Officer, Mr. Zhengting Deng. There is significant competition in our industry for qualified managerial,
technical and sales personnel and we cannot assure you that we will be able to retain our key senior managerial, technical and
sales personnel or that we will be able to attract, integrate and retain other such personnel that we may require in the future.
If we are unable to attract and retain key personnel in the future, our business, operations, financial condition, results of operations
and prospects could be materially adversely affected.
Our business depends on reliable and adequate transportation
capacity for our products.
Iron ore and iron ore-related products are
bulky and heavy. Although our sole customer has assumed responsibility for payment of transportation of our mining products, other
customers may be unwilling to do so, and as a result, transportation expenses may become a significant component of our selling
expenses. Fluctuations in transportation expenses may adversely affect our ability to produce and deliver our products as well
as our selling expenses, margins and profitability. If the capacity of transportation networks to or from our processing plants
is reduced or cut off entirely for any long period of time, we may lose our customers or breach existing sales contracts. Any difficulties
experienced by us in delivering our products may increase our transportation costs, reduce demand for our products and have a material
adverse effect on our business, financial condition and results of operations.
Our operating costs may increase.
Mining costs generally increase over the
lifespan of a mine as pits or underground mining faces become deeper. In addition, labor costs and raw material and utilities costs
in China are generally expected to increase. If our mining costs, labor costs or other operating costs increase and we cannot increase
our production efficiency to offset any such increase or pass any such increase on to our customers, our business, financial condition
and results of operations may be materially and adversely affected.
We may not be able to maintain an adequate and timely supply
of electricity, water, equipment, auxiliary materials and other critical supplies at reasonable prices or at all.
Cost effective operations of our mine depend,
among other things, on the adequate and timely supply of electricity, water and auxiliary materials, such as grinding balls, diesel
and explosives. Electricity and water are the main utilities used in our operations. Any increase in the prices of electricity
or water or disruption in our electricity or water supply could materially and adversely affect our financial condition and results
of operations. We source our auxiliary materials and equipment from domestic suppliers in the PRC. If our supplies of auxiliary
materials, equipment or spare parts are interrupted or their prices increase, or our existing suppliers cease to supply us on acceptable
terms, our business, financial condition and results of operations could be materially and adversely affected.
We may be subject to disputes with employees or other third
parties.
The businesses we operate involve dealings
with both permanent and temporary employees as well as numerous third parties including land use rights holders, suppliers and
customers, and we may be subject to claims or litigation involving such employees or third parties from time to time such as labor
disputes and claims under business contracts with suppliers or customers. We may also be subject to labor disputes, labor shortages
or other impositions on our business operations, such as supply shortages, if we are unable to amicably resolve disputes with any
such parties. Issues with the local communities surrounding the areas where we operate might also arise from the implementation
of our business activities, which may result in community protests, blocking of access to our operations and third party claims.
Our operations may be affected if we fail to successfully settle any such issues with local communities or groups. We cannot assure
you that any such disputes will not arise in the future and that the occurrence of one or multiple disputes will not have a material
adverse effect on our business and financial condition.
Risks Related to Doing Business in China
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.
Our business depends on China’s economic growth.
Our business and prospects depend on the
rate of economic growth in the PRC which, in turn, affects demand for iron and steel. The PRC economy differs from the economies
of most developed countries in many respects, including the amount of government involvement, level of development, growth rate,
control of foreign exchange, and allocation of resources. The PRC economy has grown significantly in recent years; however, we
cannot assure you that such growth will continue. If the PRC’s economic growth slows or if the PRC economy experiences
a recession, the demand for our products may decrease and our business, financial condition and results of operations may be materially
and adversely affected.
We derive substantially all of our revenue
from the sale of DRI. Growth in demand for iron ore concentrate and DRI is fueled largely by the growth of the PRC iron and steel
industries. Demand for our iron ore concentrate and DRI is, in particular, heavily dependent on the production levels of major
steel producers in Liaoning Province and Hebei Province in the PRC and their demand for our products.
Since 2008, China has been experiencing
a slowdown in growth, which led to a reduction in economic activity. As a result, the demand for, and market prices of, iron ore
concentrate in China also declined significantly. Any prolonged slowdown of the PRC economy in the future could have a material
adverse effect on our business, financial condition and results of operations.
Our business is subject to extensive regulations and affected
by government policies in the PRC mining industry.
We are subject to extensive national, provincial
and local government regulations, policies and controls in the PRC that govern many aspects of our industry, including, without
limitation:
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limits on increases in ore output volume;
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grant and renewal of mining rights;
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grant and renewal of safety production permits;
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production safety and casualty ratings;
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taxes and fees;
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environmental, health and safety standards; and
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annual verification of mining permits and exploration permits.
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The liabilities, costs, obligations and
requirements associated with these laws and regulations may be significant and may delay or interrupt our operations. Failure to
comply with the relevant laws and regulations in our mining operations may result in penalties or suspension of our operations.
Additionally, we cannot assure you that the relevant government agencies will not alter these laws or regulations or impose additional
or more stringent laws or regulations. Compliance with new laws or regulations may require us to incur significant costs, capital
expenditures or other obligations and secure new sources of financing. More stringent laws or regulations may also restrict our
business operations. The cost of compliance with regulations is and will continue to be substantial, and any increase in costs
due to changes in laws or regulations or to our failure to comply may have a material adverse effect on our business, financial
condition and results of operations.
In addition, the current PRC government
policies favor the acquisition and consolidation of mines by large mining companies. However, we cannot assure you that such policies
will not change in the future. In the event that those policies favoring our acquisition and expansion plans change, our costs
of carrying out our acquisition and expansion plans may increase substantially and our ability to effect such plans may decrease.
Our operations are exposed to risks in relation to environmental
protection and rehabilitation and our business operations may be affected by current or future safety and environmental regulations.
Our operations are subject to environmental
risks and hazards and we are subject to extensive and increasingly stringent safety and environmental protection laws and regulations
in the PRC. These laws and regulations:
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impose fees for the discharge of waste substances;
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require the establishment of reserves for reclamation and rehabilitation;
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impose fines for serious environmental offences; and
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allow the PRC government, at its discretion, to close down any facilities failing to comply with orders to correct or stop operations that have caused environmental damage.
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Environmental hazards may occur in connection
with our operations as a result of human negligence, force majeure or otherwise. The occurrence of any environmental hazards may
delay production, increase production costs, cause personal injuries or property damage, result in liability to us and/or damage
our reputation. Claims may be asserted against us arising out of our operations in the normal course of business, including claims
relating to land use, safety, health and environmental matters. Some incidents may also result in a breach of conditions of our
mining permits and exploration permit, or other consents, approvals or authorizations, which may result in fines or penalties or
even possible revocation or our mining permits and/or exploration permit. We are not insured against environmental liabilities
and there can be no assurance that environmental liabilities would not materially and adversely affect our business and results
of operations.
The PRC government is currently moving towards
more rigorous enforcement of applicable laws and regulations, as well as the adoption and enforcement of more stringent environmental
standards. As a result, our budgeted capital expenditures for safety and environmental regulatory compliance may be insufficient
and we may need to allocate additional funds. Moreover, we cannot assure you that we can comply with all applicable safety and
environmental laws and regulations that may be adopted or amended in the future. If we fail to comply with current or future safety
or environmental laws and regulations, we may be required to stop production, pay penalties or fines and take corrective actions,
any of which may have a material adverse effect on our business, financial condition and results of operations.
Restrictions on foreign investment in the PRC mining industry
could materially and adversely affect our business and results of operations.
In the PRC, foreign companies have been,
and currently are required to operate within a framework different from that imposed on domestic PRC companies. However, the PRC
government has been opening up opportunities for foreign investment in mining projects and this process is expected to continue,
especially following the PRC’s accession into the World Trade Organization. Iron ore mining is an encouraged industry for
foreign investment in China. However, if the PRC government should reverse this trend, or impose greater restrictions on foreign
companies, or seek to nationalize our PRC operations, our business and results of operations could be materially and adversely
affected.
Fluctuations in exchange rates could adversely affect our
business and the value of our securities.
The value of our common stock will be indirectly
affected by the foreign exchange rate between U.S. dollars 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 is no longer pegged
to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar
in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in
the RMB exchange rate and lessen intervention in the foreign exchange market.
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.
Restrictions under PRC law on our WFOE’s 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 businesses.
Practically all of our revenues are earned
by China Tongda, our wholly-owned foreign enterprise or WFOE, through its VIE China Jinxin and its wholly own subsidiary China
Huaxin. PRC regulations restrict the ability of our WFOE to make dividends and other payments to its offshore parent company.
PRC legal restrictions permit payments of dividends by our WFOE only out of its accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our WFOE also is required under PRC laws and regulations to allocate
at least 10% of its 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 its 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 China Tongda 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.
Governmental control of currency conversion may affect the
value of your investment.
The PRC government imposes controls on currency
conversion between Renminbi and foreign currencies and, in certain cases, the remittance of currency out of and into China. We
receive all of our revenue in Renminbi, which is currently not a freely convertible currency. Under our current corporate structure,
income of our Company will be primarily derived from dividend payments from China Tongda. Shortages in the availability of foreign
currency may restrict the ability of China Tongda to remit sufficient foreign currency to pay dividends to us, or otherwise satisfy
its foreign currency dominated obligations.
Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, can be made in foreign currencies without prior approval from
SAFE by complying with certain procedural requirements. However, in most cases, particularly payments of capital account items,
approval from appropriate PRC governmental authorities is required where (i) Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of offshore bank loans denominated in foreign currencies,
and (ii) any foreign currency is to be converted into Renminbi for investment in China. The PRC government may also at its discretion
restrict access in the future to foreign currencies for current account transactions. In addition, the ‘‘Notice of
SAFE on Issues Relating to Foreign Exchange Control on Fund Raisings by Domestic Residents Through Offshore Special Purpose Vehicles
and Round-trip Investments’’ (‘‘Circular 75’’) promulgated by SAFE, which came into force on
November 1, 2005, applies to our Company and the Controlling Shareholders. All of the Chinese beneficial owners of our shares
have filed the application of foreign exchange registration for overseas investment with the local branch of SAFE but have not
yet received the requisite approvals. However, they are required to file a modification to the foreign exchange registration for
overseas investment in the event of any material capital changes, including, without limitation, (i) a subsequent equity financing
for our Company outside of the PRC; (ii) a capital change in our Company; and (iii) any share transfer or share swap involving
our Company in accordance with Circular 75. Payment of dividends, profits and other payments to our Company will not be permitted
unless the aforesaid modification has been filed. If the foreign exchange control system prevents us from converting Renminbi into
foreign currencies or vice versa, and obtaining sufficient Renminbi or foreign currency to satisfy our currency demands, our ability
to transfer Renminbi to fund our business operations in China or to pay dividends in foreign currencies to our shareholders, including
holders of our common shares, may be adversely affected.
Failure to comply with PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our
ability to acquire PRC companies or to inject capital into our PRC subsidiary or affiliate, limit our PRC subsidiary’s and
affiliate’s ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE, issued the Notice
on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents
Inside China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch
before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity
financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines
issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to
cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control”
over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the
PRC resident’s funds used to establish or acquire the offshore entity; covering the use of existing offshore entities for
offshore financings; (3) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires
an unrelated company or unrelated assets in China; and (4) making the domestic affiliate of the SPV responsible for the accuracy
of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the
overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection
with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security
interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible
for these filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before
the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006;
this date was subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign
exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure
to comply with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s
affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer
or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
We have advised our shareholders who are
PRC residents, as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with
their equity interests in us and our acquisitions of equity interests in our PRC subsidiary and affiliate. However, we cannot provide
any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their
registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because of uncertainty
over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it
will affect our business operations or future strategies. For example, our present and prospective PRC subsidiary’s and affiliate’s
ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents may not always
be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our
present or prospective direct or indirect shareholders or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident shareholders to comply with Circular 75, if SAFE requires it, could subject these PRC
resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our
subsidiary’s and affiliate’s ability to make distributions or pay dividends or affect our ownership structure, which
could adversely affect our business and prospects.
Our business and financial performance may be materially
adversely affected if the PRC regulatory authorities determine that our acquisition of China Jinxin constitutes a Round-trip Investment
without MOFCOM approval.
On August 8, 2006, six PRC regulatory agencies
promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which
became effective on September 8, 2006. According to the 2006 M&A Rule, when a PRC business that is owned by PRC individual(s)
is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s) it must
be approved by the Ministry of Commerce, or MOFCOM, and any indirect arrangement or series of arrangements which achieves the same
end result without the approval of MOFCOM is a violation of PRC law.
The PRC regulatory authorities may take
the view that the Share Exchange Agreement is part of an overall series of arrangements which constitute a Round-trip Investment,
because at the end of these transactions, the current owners of China Jinxin will have effective control of a foreign entity that
acquired ownership of our Chinese subsidiary. The PRC regulatory authorities may also take the view that the registration
of the acquisition of China Tongda with the relevant AIC and the filings with the SAFE may not be evidence that the acquisition
has been properly approved because the relevant parties did not fully disclose to the AIC, SAFE or MOFCOM the overall restructuring
arrangements, the existence of the Share Exchange Agreement and its link with the acquisition. If the PRC regulatory authorities
take the view that the acquisition constitutes a Round-trip Investment under the 2006 M&A Rules, we cannot assure you we will
be able to obtain the approval required from MOFCOM.
If the PRC regulatory authorities take the
view that the acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and
ownership of our Chinese subsidiary. Additionally, the PRC regulatory authorities may take the view that the acquisition
constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM
approval is obtained. We believe that if this takes place, we may be able to find a way to re-establish control of our Chinese
subsidiary’s business operations through a series of contractual arrangements rather than an outright purchase of our Chinese
subsidiary. But we cannot assure you that such contractual arrangements will be protected by PRC law or that the registrant
can receive as complete or effective economic benefit and overall control of our Chinese subsidiary’s business than if the
Company had direct ownership of our Chinese subsidiary. In addition, we cannot assure you that such contractual arrangements
can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory
authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent
means of control of our Chinese subsidiary, our business and financial performance will be materially adversely affected.
Under the EIT 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.
Under the PRC Enterprise Income Tax Law,
or the EIT Law, which became effective on January 1, 2008, an enterprise established outside 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 Chinese State Administration
of Taxation (“SAT”) issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further
interpreting the application of the EIT Law and its implementation to a 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 reside 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 are 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 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 subsidiary
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. We are actively monitoring the possibility of being
treated as a “resident enterprise”.
If we were treated as a “resident
enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax and out U.S. tax may not be creditable against our PRC tax.
We face uncertainty from China’s Circular on Strengthening
the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer, or Circular 698, released in December
2009 with retroactive effect from January 1, 2008.
SAT released a circular on December 15,
2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which
is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies
to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly
taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers
equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of its residents is
not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the
relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests
in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes to the
organization and the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature
of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the
offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For
example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities
have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China.
It is also unclear, in the event that an offshore holding company is treated as a domestically incorporated resident enterprise,
whether Circular 698 would still be applicable to a transfer of shares in such offshore holding company. Moreover, the relevant
authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the
country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident
enterprise. In addition, there are not any formal declarations with regard to how to decide what is an “abuse of form of
organization” or a “reasonable commercial purpose,” which can be utilized by us to determine if our Company complies
with the Circular 698. If Circular 698 is determined to be applicable to us based on the facts and circumstances, we or those that
transfer our shares may become at risk of being taxed under Circular 698 and we or those that transfer our shares may be required
to expend valuable resources to comply with Circular 698 or to establish that we or they should not be taxed under Circular 698,
which could have a material adverse effect on our financial condition and results of operations. Moreover, if it is
determined that Circular 698 is applicable to transfers of our shares, the price of our shares may be adversely affected if individuals
who might otherwise purchase our shares determine not to do so due to the threat of having to comply with or pay taxes pursuant
to Circular 698.
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 US persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and we make the majority of our sales in China. 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 US government may seek to hold our Company liable for successor liability FCPA
violations committed by companies in which we invest or that we acquire.
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 subsidiary and affiliate in the PRC. Our principal operating subsidiary and affiliate, China Tongda
and China Jinxin, are 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 involves 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, all of our
executive officers and all of our directors are residents of China and not of the US, and substantially all the assets of these
persons are located outside the US. As a result, it could be difficult for investors to effect service of process in the
US or to enforce a judgment obtained in the US against our Chinese operations, subsidiary and affiliate.
You may have difficulty enforcing judgments against us.
We are a Nevada holding company, but Real
Fortune HK is a Hong Kong company, and our principal operating subsidiaries and affiliate, China Tongda, China Huaxin and China
Jinxin, are located in the PRC. Most of our assets are located outside the US 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 US. A
substantial portion of the assets of these persons is located outside the US. As a result, it may be difficult for you to effect
service of process within the US upon these persons. It may also be difficult for you to enforce in US courts judgments predicated
on the civil liability provisions of the US federal securities laws against us and our officers and directors, most of whom are
not residents in the US and the substantial majority of whose assets are located outside the US. In addition, there is uncertainty
as to whether the courts of the PRC would recognize or enforce judgments of US courts. The recognition and enforcement of foreign
judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance
with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made
or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal
recognition and enforcement of foreign judgments with the US. 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 US.
Future inflation in China may inhibit our ability to conduct
business in China
.
In recent years, the Chinese economy has
experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.
High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Risks Relating to the VIE Agreements
The PRC government may determine that the VIE Agreements
are not in compliance with applicable PRC laws, rules and regulations.
China Tongda manages China Jinxin pursuant
to the rights its holds under the VIE Agreements. Almost all economic benefits and risks arising from China Jinxin’s
operations are transferred to China Tongda under these agreements.
There are risks involved with the operation
of a business in reliance on the VIE Agreements, including the risk that the VIE Agreements may be determined by PRC regulators
or courts to be unenforceable. If the VIE Agreements were for any reason determined to be in breach of any existing or future
PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such breach, including:
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imposing economic penalties;
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discontinuing or restricting the operations of China Jinxin or China Tongda;
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imposing conditions or requirements in respect of the VIE Agreements with which China Jinxin or China Tongda may not be able to comply;
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requiring our company to restructure the relevant ownership structure or operations;
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taking other regulatory or enforcement actions that could adversely affect our company’s business; and
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revoking the business licenses and/or the licenses or certificates of China Tongda, and/or voiding the VIE Agreements.
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Any of these actions could adversely affect
our ability to manage, operate and gain the financial benefits of China Jinxin, which would have a material adverse impact on our
business, financial condition and results of operations.
Our ability to manage and operate China Jinxin under the
VIE Agreements may not be as effective as direct ownership.
Our plans for future growth are based
substantially on growing the operations of our subsidiaries in China. However, the VIE Agreements may not be as effective
in providing us with control over China Jinxin as direct ownership. Under the VIE Agreements, as a legal matter, if China
Jinxin fails to perform its obligations under these contractual arrangements, we may have to (i) incur substantial costs and resources
to enforce such arrangements, and (ii) rely on legal remedies under PRC law, which we cannot be sure would be effective. Therefore,
if we are unable to effectively control China Jinxin, it may have an adverse effect on our ability to achieve our business objectives
and grow our revenues.
As the VIE Agreements are governed by PRC law, we would be
required to rely on PRC law to enforce our rights and remedies under them; PRC law may not provide us with the same rights and
remedies as are available in contractual disputes governed by the law of other jurisdictions.
The VIE Agreements are governed by the PRC
law and provide for the resolution of disputes through arbitral proceedings pursuant to PRC law. If China Jinxin or its shareholders
fail to perform the obligations under the VIE Agreements, we would be required to resort to legal remedies available under PRC
law, including seeking specific performance or injunctive relief, or claiming damages. We cannot be sure that such remedies would
provide us with effective means of causing China Jinxin to meet its obligations, or recovering any losses or damages as a result
of non-performance. Further, the legal environment in China is not as developed as in other jurisdictions. Uncertainties in the
application of various laws, rules, regulations or policies in PRC legal system could limit our liability to enforce the VIE Agreements
and protect our interests.
The payment arrangement under the VIE Agreements may be challenged
by the PRC tax authorities.
We generate a portion of our revenues through
the payments we receive pursuant to the VIE Agreements. We could face adverse tax consequences if the PRC tax authorities determine
that the VIE Agreements were not entered into based on arm’s length negotiations. For example, PRC tax authorities may adjust
our income and expenses for PRC tax purposes, which could result in our being subject to higher tax liability, or cause other adverse
financial consequences.
Our principal shareholders have potential conflicts of interest
with our company which may adversely affect our business.
Changkui Zhu is our chief executive officer.
Mr. Zhu also is an officer of China Jinxin. There could be conflicts that arise from time to time between our interests and
the interests of Mr. Zhu. There could also be conflicts that arise between us and China Jinxin that would require our shareholders
and China Jinxin’s shareholders to vote on corporate actions necessary to resolve the conflict. There can be no assurance
in any such circumstances that significant shareholders of our company who are also significant shareholders of China
Jinxin will vote their shares in our best interest or otherwise act in the best interests of our company. If Mr. Zhu or those
shareholders fail to act in our best interests, our operating performance and future growth could be adversely affected.
If China Tongda exercises the purchase option it holds over
China Jinxin’s share capital pursuant to the VIE Agreements, the payment of the purchase price could materially and adversely
affect our financial position.
Under the VIE Agreements, China Jinxin’s
shareholders have granted China Tongda an option for thirty years beginning from the effective date of the agreement (or longer
if the term of the option is extended) or the maximum period of time permitted by law to purchase all of the equity interest in
China Jinxin at a price equal to the capital paid in by the transferors, adjusted pro rata for purchase of less than
all of the equity interest, unless applicable PRC laws and regulations require an appraisal or stipulate other restrictions regarding
the purchase price of the equity interest. As China Jinxin is already our contractually controlled affiliate, China Tongda’s
exercising of the option would not bring immediate benefits to our company, and payment of the purchase prices could adversely
affect our financial position.
Risks Relating to Our Common Stock and Our Status as a
Public Company
Our common stock is traded in the over-the-counter market,
which may have an unfavorable impact on our stock price and liquidity
.
Our shares of common stock are traded in
the over the counter market, and quoted on the OTCQB. The trading market for securities of companies quoted on the OTCQB or other
quotation systems is substantially less liquid than the average trading market for companies listed on a national securities exchange.
The quotation of our shares on the OTCQB or other quotation system may result in a less liquid market available for existing
and potential shareholders to trade shares of our common stock, could depress the trading price of our common stock and could have
a long-term adverse impact on our ability to raise capital in the future.
Certain of our stockholders have substantial influence over
our company, and their interests may not be aligned with the interests of our other stockholders.
Ms. Jiazhen Liu owns approximately 30.70%
of our outstanding shares and together with the other former shareholders of Target own in the aggregate over 90.0% of our outstanding
shares. As a result, Ms. Liu and the other former shareholders of Target have significant influence over our business,
including decisions regarding mergers, consolidations, the sale of all or substantially all of our assets, election of directors
and other significant corporate actions. As a result of this concentration of ownership, you and our other shareholders, acting
alone, do not have the ability to determine the outcome of matters requiring shareholder approval, including the election of our
directors or significant corporate transactions. In addition, this concentration of ownership, which is not subject to any voting
restrictions, may discourage, delay or thwart efforts by third parties to take-over or effect a change in control of our company
which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company,
and may limit the price that investors are willing to pay for our common stock.
Our management is not familiar with the United States securities
laws.
Our management is generally unfamiliar with
the requirements of the US securities laws and may not appreciate the need to devote the resources necessary to comply with such
laws. A failure to adequately respond to applicable securities laws could lead to investigations by the Securities and Exchange
Commission (“SEC”) and other regulatory authorities that could be costly, divert management's attention and disrupt
our business. Moreover, our management is not familiar with the customs and business practices utilized outside of China to manage
businesses. Such lack of familiarity may result in decisions being made that are contrary to the expectations of investors in the
United States or Europe.
Our accounting personnel who are primarily responsible for
the preparation and supervision of the preparation of our financial statements under generally accepted accounting principles in
the US have had no education or training in US GAAP and SEC rules and regulations pertaining to financial reporting, which could
impact our ability to prepare our financial statements and convert our books and records to US GAAP.
We maintain our books and records in accordance
with generally accepted accounting principles in the PRC, or PRC GAAP. Our accounting personnel in the PRC who have the primary
responsibilities of preparing and supervising the preparation of financial statements under US GAAP have had no education or training
in US GAAP and related SEC rules and regulations. As such, they may be unable to identify potential accounting and disclosure issues
that may arise upon the conversion of our books and records from PRC GAAP to US GAAP, which could affect our ability to prepare
our financial statements in accordance with US GAAP. We have taken steps to ensure that our financial statements are in accordance
with US GAAP, including our hiring of a US accounting firm to work with our PRC accounting personnel and management to convert
our books and records to US GAAP and prepare our financial statements. However, the measures we have taken may not be sufficient
to mitigate the foregoing risks. Furthermore, the need to comply with US GAAP may require us to expend substantial amounts of resources
and time that could divert our management’s attention and disrupt our business.
We will incur significant costs as a result of operating
as a public company, and our management will be required to devote substantial time to new compliance requirements, including establishing
and maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable to comply
with these requirements.
As a public company we will incur significant
legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), together with
rules implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements
on public companies, including requiring certain corporate governance practices. Our management and other personnel
will need to devote a substantial amount of time to these requirements. These rules will increase our legal and financial costs
and will make some activities more time-consuming and costly.
PRC companies have historically not adopted
a Western style of management and financial reporting concepts and practices, which include strong corporate governance, internal
controls and, computer, financial and other control systems. Most of our middle and top management staff are not educated and trained
in the Western system, and we may have difficulty hiring new employees in the PRC with such training. As a result of these
factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting business practices that meet Western standards.
The Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular,
we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management
to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts.
On June 30, 2014, we, then a public shell
company, acquired Target Acquisition I, Inc., in a transaction treated as a reverse acquisition. At such time we adopted the system
of disclosure controls and procedures of Target Acquisition I, Inc. as ours. Such disclosure controls and procedures were not adequate
for a public reporting company and our management began the process of upgrading our disclosure controls and procedures. Among
others weaknesses, the lack of familiarity of our accounting staff with US GAAP constitutes a material weakness in our controls
for financial reporting. We have taken steps to rectify this weakness, including hiring a US accounting firm to
work with our management and accounting personnel. There is no assurance, however, that the steps taken to date will be sufficient
to rectify this material weakness. In the event that we fail to remedy the weaknesses in our controls over financial reporting
and adopt appropriate disclosure controls and procedures, our financial reporting may be deficient and we may fail to comply with
the reporting requirements of the Exchange Act and other US securities laws, in which event, the market price of our
common stock could decline if investors and others lose confidence in the reliability of our financial statements and we could
be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.
We are an “emerging growth company” and we cannot
be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive
to investors.
The JOBS Act permits "emerging
growth companies" like us to rely on some of the reduced disclosure requirements that are already available to companies having
a public float of less than $75 million, for as long as we qualify as an emerging growth company. During that period, we are
permitted to omit the auditor's attestation on internal control over financial reporting that would otherwise be required by the
Sarbanes-Oxley Act. Companies with a public float of $75 million or more must otherwise procure such an attestation beginning with
their second annual report after their initial public offering. For as long as we qualify as an emerging growth company, we are
also excluded from the requirement to submit "say-on-pay", "say-on-pay frequency" and "say-on-parachute"
votes to our stockholders and may avail ourselves of reduced executive compensation disclosure compared to larger companies.
In addition, as described in the following risk factor, as an emerging growth company we can take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public companies.
Until such time as we cease to qualify as
an emerging growth company, investors may find our common stock less attractive because we may rely on these exemptions. If some
investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and
our stock price may be more volatile.
As an "emerging growth company" we may take advantage
of an extended transition period to comply with new or revised accounting standards applicable to public companies.
Section 107 of the JOBS Act also provides
that, as an emerging growth company, we can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We can therefore delay the adoption
of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take
advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those
of companies that comply with such new or revised accounting standards. Please refer to Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates for further discussion
of the extended transition period for complying with new or revised accounting standards.
At such time as we cease to qualify as an "emerging
growth company" under the JOBS Act, the costs and demands placed upon management will increase.
We will continue to be deemed an emerging
growth company until the earliest of (i) the last day of the fiscal year during which we had total annual gross revenues of $1,000,000,000
(as indexed for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale
of common stock under a registration statement under the Securities Act ; (iii) the date on which we have, during the previous
3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large
accelerated filer’ as defined by the SEC, which would generally occur upon our attaining a public float of at least
$700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon management to increase,
as we would have to comply with additional disclosure and accounting requirements, particularly if our public float should exceed
$75 million.
Since our Articles of Incorporation authorizes the issuance
of one million shares of “blank-check” preferred stock, our Board of Directors will have authority, without stockholder
approval, to issue preferred stock with terms that may not be beneficial to common stock holders and with the ability to adversely
affect stockholder voting power and perpetuate the board's control over our company.
Our Articles of Incorporation authorizes
our Board to issue up to 1,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the BOD without further action by stockholders. These terms may include preferences
as to dividends and liquidation, voting rights, conversion rights, redemption rights and sinking fund provisions. The issuance
of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such 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 our BOD 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 our stockholders 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.
We may, in the future, issue additional shares of our common
stock, which would reduce investors' percent of ownership and may dilute our share value.
Our Articles of Incorporation authorizes
the issuance of 100 million shares of common stock, of which 66,760,110 shares have been issued and are outstanding. The future
issuance of common stock may result in substantial dilution in the percentage of our common stock held by our then existing stockholders.
We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions
or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse
effect on any trading market for our common stock.
The price of our common stock may be adversely impacted by
developments applicable to other Chinese companies.
There has been substantial press regarding
certain Chinese companies that have apparently engaged in frauds and deceptive practices resulting in significant losses to investors.
Such activities and the resulting negative press has had a negative impact on the prices of the stocks of Chinese companies generally. There
is no guarantee that such that such activities will not continue causing investors to avoid buying our stock. Such activities could
have a depressive impact on the price of our common stock.
Increased scrutiny of Chinese companies by short-sellers.
The fraudulent activities of certain Chinese
issuers has encouraged analysts to investigate Chinese companies in an effort to discredit the disclosures in their public filings
or otherwise uncover deceptive practices. If such analysts elect to investigate a company they will often short the stock and release
materials disparaging the issuer or questioning the accuracy of its public disclosures. Given the current environment
for Chinese stocks, if an analyst were to publish a negative article about us, it could cause an immediate and substantial decline
in the price of our stock, regardless of the accuracy of the claims in the article.
The market price of our common stock can become volatile,
leading to the possibility of its value being depressed at a time when you may want to sell your holdings.
The market price of our common stock can
become volatile. Numerous 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 stock;
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speculation about our business in the press or the investment community;
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significant
developments relating to our relationships with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industry;
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customer demand for our products;
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investor perceptions of our industry in general and our Company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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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; and
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sales of our common stock, including sales by our directors, officers or significant stockholders; and departures of key personnel.
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Securities class action litigation is often
instituted against companies following periods of volatility in their stock price. Should this type of litigation be instituted
against us, it 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 the operating performance of particular companies.
These market fluctuations may adversely affect the price of our common stock and other interests in our Company at a time when
you want to sell your interest in us.