JX Luxventure Group Inc 20-F for FY2021
JX Luxventure Group Inc. (JXG)
About this 20-F
JX Luxventure Group Inc filed this 20-F on May 13, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $59M
- up 442.5% from $10.88M a year earlier
- Net loss
- $37.22M
- compared with a net loss of $5.67M a year earlier
- Diluted EPS
- -$8.23
- compared with -$2.09 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
OR
For the fiscal year ended
OR
For the transition period from ___________ to ___________
OR
Date of event requiring this shell company report:
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
Not Applicable
(Translation of Registrant’s Name Into English)
Republic of the
(Jurisdiction of Incorporation or Organization)
People’s Republic of
(Address of Principal Executive Offices)
People’s Republic of
Tel: +
Fax:
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered | ||
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
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Indicate the number of outstanding shares of each
of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2021):
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well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934. Yes ☐
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
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has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | ☒ | Emerging Growth Company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
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| U.S. GAAP ☐ | International Accounting Standards Board ☒ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Not Applicable
Annual Report on Form 20-F
Year Ended December 31, 2021
TABLE OF CONTENTS
i
ii
INTRODUCTORY NOTES
Use of Certain Defined Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:
| ● | “JX Luxventure,” “we,” “us,” “our” and the “Company” are to JX Luxventure Limited, a company organized in the Republic of the Marshall Islands; |
| ● | “KBS International,” refers to KBS International Holding Inc., a Nevada corporation, which was dissolved in August 2014 |
| ● | “Hongri PRC,” refers to Hongri (Fujian) Sports Goods Co., Ltd., which is our wholly-owned subsidiary organized in the PRC; |
| ● | “Hongri International” are to Hongri International Holdings Limited, which is our wholly-owned subsidiary and a company organized in the BVI; |
| ● | “BVI” are to the British Virgin Islands; |
| ● | “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China; |
| ● | “PRC” and “China” are to the People’s Republic of China; |
| ● | “SEC” are to the Securities and Exchange Commission; |
| ● | “Exchange Act” are to the Securities Exchange Act of 1934, as amended; |
| ● | “Securities Act” are to the Securities Act of 1933, as amended; |
| ● | “Renminbi” and “RMB” are to the legal currency of China; and |
| ● | “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States. |
| ● | “Flower Crown” are to Flower Crown Holding, which is our wholly-owned subsidiary organized in Cayman Islands. |
| ● | “Flower Crown HK” are to Flower Crown (China) Holding Group Co., Limited, which is our wholly-owned subsidiary organized in Hong Kong. |
| ● | “Kim Hyun Tianjin” are to Kim Hyun Technology (Tianjin) Co., Ltd., which is our wholly owned subsidiary organized in PRC. |
| ● | “JX Hainan” or “WOFE” are to Jin Xuan (Hainan) Holding Co., Ltd, which is our wholly owned subsidiary organized in PRC. | |
| ● | “Jin Xuan Luxury Tourism” are to Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd, which is a limited liability company organized in PRC and wholly owned by the WFOE. |
| ● | “Heyang Travel” are to Beijing Heyang International Travel Service Co., Ltd., which is a wholly owned subsidiary of Jin Xuan Luxury Tourism organized in PRC. |
iii
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this annual report on Form 20-F (the “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Potential risks and uncertainties include, among other things, the possibility that we may not be able to maintain or increase our net revenues and profits due to our failure to anticipate consumer preferences and develop new menswear products, our failure to execute our business expansion plan, changes in domestic and foreign laws, regulations and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic, political and social events in China, a general economic downturn, a downturn in the securities markets, and other risks and uncertainties which are generally set forth under Item 3 “Key information—D. Risk Factors” and elsewhere in this report.
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
On February 9, 2017, the Company effective a one-for-fifteen (1-for-15) reverse stock split of the Company’s issued and outstanding common stock (“Common Stock”). All references in this report to share and per share data have been adjusted, including historical data which has been retroactively adjusted, to give effect to the reverse stock split unless specified otherwise.
iv
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
| A. | Directors and Senior Management |
Not applicable.
| B. | Advisors |
Not applicable.
| C. | Auditors |
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
| A. | Offer Statistics |
Not applicable.
| B. | Method and Expected Timetable |
Not applicable.
ITEM 3. KEY INFORMATION
| A. | [Reserved] |
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. | Risk Factors |
An investment in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this annual report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
1
Risks related to a future determination that the Public Company Accounting Oversight Board (the “PCAOB”) is unable to inspect or investigate our auditor completely.
The audit report was issued by Onestop Assurance PAC (“Onestop”) a Singapore-based accounting firm that is registered with the PCAOB and can be inspected by the PCAOB. We have no intention of dismissing Onestop in the future or of engaging any auditor not subject to regular inspection by the PCAOB. There is no guarantee, however, that any future auditor engaged by the Company would remain subject to full PCAOB inspection during the entire term of our engagement. The PCAOB is currently unable to conduct inspections in China without the approval of Chinese government authorities. If it is later determined that the PCAOB is unable to inspect or investigate our auditor completely, investors may be deprived of the benefits of such inspection. Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections of audit work undertaken in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures, could result in a lack of assurance that our financial statements and disclosures are adequate and accurate. In addition, under the HFCAA, our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our Ordinary Shares being delisted. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if enacted, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
Pursuant to the HFCAA, the PCOAB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China, because a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition the PCOAB’s report identified the specific registered public accounting firms which are subject to these determinations. Our registered public accounting firm, Onestop Assurance PAC is not headquartered in mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination.
RISKS RELATED TO OUR BUSINESS
Menswear:
Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19).
An outbreak of respiratory illness caused by COVID-19 emerged in late 2019 and has spread within the PRC and globally. The coronavirus is considered to be highly contagious and poses a serious public health threat. The World Health Organization labeled the coronavirus a pandemic on March 11, 2020, given its threat beyond a public health emergency of international concern the organization had declared on January 30, 2020.
Any outbreak of health epidemics in the PRC or elsewhere in the world may materially and adversely affect the global economy, our markets and business. During whole the first quarter of 2021, there are some different periods of lock-down of different areas which cause our distributors’ operations closure. The areas lock-downs and quarantines also influence income of household resident and spending confidence on clothing. While the outbreak of COVID-19 has come under control in the PRC since the second quarter of 2020, there was a significant rise in COVID-19 cases, including the COVID-19 Delta and Omicron variant cases, in various cities in China in early 2022. The local governments of the affected cities have reinstated certain COVID-related measures, including travel restrictions and stay-at-home orders. The pandemic has also depressed customers’ demand for our products and services, since during the past few months, businesses across China largely suspended or reduced operations. As a provider of casual menswear in China, we are sensitive to the overall business environment and vulnerable to any market downturns. We also incurred insignificant costs in relation to the measures we took to contain the impact of the COVID outbreak, including purchasing personal protective equipment, monitoring our employees’ health, and rotation arrangements to avoid infection transmission. The extent to which COVID-19 impacts our financial position, results of operations and cash flows in future periods will depend on the future developments of the COVID-19 outbreak, including any potential future variants of the virus, the effectiveness of the mass vaccination programs, the development in medical treatment and other actions taken to contain its spread, which are highly uncertain and unpredictable. If there is not a material recovery in the COVID-19 situation, or the situation further deteriorates in China, our business, results of operations and financial condition could be materially and adversely affected.
2
With the coronavirus epidemic expanding globally, the world economy is suffering a noticeable slowdown. Commercial activities throughout the world have been curtailed with decreased consumer spending, business operation disruptions, interrupted supply chain, difficulties in travel, and reduced workforces. The duration and intensity of disruptions resulting from the coronavirus outbreak is uncertain. It is unclear as to when the outbreak will be successfully contained, and we also cannot predict if the impact will be short-lived or long-lasting. The extent to which the coronavirus impacts our financial results will depend on its future developments. If the pandemic is not effectively controlled in a short period of time, our business operation and financial condition may be materially and adversely affected as a result of slowdown in economic growth, operation disruptions or other factors that we cannot predict.
General economic conditions, including a prolonged weakness in the economy, may affect consumer discretionary spending, which could adversely affect our business and financial performance.
The apparel industry has historically been subject to substantial cyclical variations. Our business and financial performance are dependent on a number of factors impacting consumer discretionary spending, including general economic and business conditions; consumer confidence; wages and employment levels; the housing market; consumer debt levels; availability of consumer credit; credit and interest rates; fuel and energy costs; energy shortages; taxes; general political conditions, both domestic and abroad. Consumer product purchases, including purchases of our products, may decline during recessionary periods. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could impair on our ability to open additional stores or build additional manufacturing lines. In addition, as domestic and international economic conditions change, trends in consumer spending on discretionary items, including our merchandise, become unpredictable and subject to reductions due to economic uncertainties. A prolonged economic recovery or an uncertain outlook in the economy could result in additional declines in consumer discretionary spending, which could materially affect our financial performance.
A contraction in apparel sales and production could impair our results of operations and liquidity and jeopardize our supply base.
Apparel sales and production are cyclical and depend, among other things, on general economic conditions and consumer spending and preferences. As the volume of apparel production fluctuates, the demand for our products also fluctuates. A contraction in apparel sales could harm our results of operations and liquidity. In addition, our suppliers would also be subject to many of the same consequences which could pressure their results of operations and liquidity. Depending on an individual supplier’s financial condition and access to capital, its viability could be challenged which could impact its ability to perform as we expect and consequently our ability to meet our own commitments.
If we are unable to anticipate consumer preferences and develop new menswear products, we may not be able to maintain or increase our net revenues and profits.
Our success depends on our ability to identify, originate and define apparel trends as well as to anticipate, gauge and react to changing consumer demands for menswear in a timely manner. Our target market of consumers comprises urban males between the ages of 20 and 40 with moderate-to-high levels of disposable income. Our business is particularly sensitive to their fashion preferences, which cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and categories, we could experience lower sales, excess inventories and lower profit margins. In a distressed economic and retail environment, many of our competitors may engage in aggressive activities, such as markdowns or other promotional sales to dispose of excess, slow-moving inventory, further increasing the need to react appropriately to changing consumer preferences and fashion trends. Failure to do so could adversely affect the level of acceptance of our products, our brand image and our relationship with our distributors, and therefore have a material adverse effect on our financial condition or results of operations.
The apparel industry is highly competitive, and if we fail to compete effectively, we could lose our market position.
The menswear industry is highly competitive in China and worldwide. We compete with various domestic brands with similar business models and target markets. We also compete with a growing number of international brands trying to expand their market share in China to take advantage of rising consumer spending on casual menswear. Our primary international and domestic competitors include Exceed, Xiniya, Cabbeen, GXG and NQ. Some of our competitors are significantly larger and have greater financial resources than we do. In order to compete effectively, we must: (1) maintain the image of our brands and our reputation for innovation and high quality; (2) be flexible and innovative in responding to rapidly changing market demands on the basis of brand image, style, performance and quality; and (3) offer consumers a wide variety of high quality products at competitive prices.
3
The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product features. Some of our competitors enjoy competitive advantages, including greater brand recognition and greater financial resources for competitive activities, such as sales, marketing and strategic acquisitions. The number of our direct competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into our product lines. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences. Our results of operations and market position may be adversely impacted by our competitors and the competitive pressures in the menswear industries.
Failure to effectively promote or develop our brand could materially and adversely affect our sales and profits.
We sell all our products under the KBS brand, from which we derive most of our revenues. Brand image is an important factor that affects a customer’s purchasing decision for menswear products. Our success therefore depends on, among other things, market recognition and acceptance of the KBS brand and the culture, lifestyle, and images associated with the brand, some of which may not be within our control. We have limited control over our distributors that we rely upon to sell our products, which may limit our ability to ensure a consistent brand image. We have limited control over the ultimate retail sales by our distributors and our image and business may be adversely affected if our distributors fail to adhere to, or fail to cause the third party retail outlet operators to adhere to, our retail policies and standards.” We began designing, promoting, and selling KBS branded products in China in 2006. To effectively promote KBS brand, we need build and maintain the brand image by focusing on a variety of promotional and marketing activities to promote brand awareness, as well as to increase its presence in the markets in which we compete. There is no assurance that we will be able to effectively promote or develop KBS brand, and if we fail to do so, the goodwill of KBS brand may be undermined and our business as well as our financial results may be adversely affected. In addition, negative publicity or disputes regarding KBS brand, products, company, or management could materially and adversely affect public perception of KBS brand. Any impact on our ability to continue to sell KBS brand or any significant damage to KBS brand’s image could materially and adversely affect our sales and profits.
Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.
Our future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely on the expertise, experience, and business contacts, of Ms. Sun Lei, our Chief Executive Officer and Mr. Keyan Yan, our interim Chief Financial Officer. If one or more of our senior executives are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating the replacements into our operations, which would substantially divert management’s attention from and severely disrupt the Company business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers and key employees.
Failure to execute our business expansion plan could adversely affect our financial condition and results of operations.
A large part of our initial growth resulted from an increase in the number of our retail sales outlets, including corporate and franchised stores, and the increased sales volume and profitability provided by these sales outlets. The number of our sales outlets increased from 8 in 2006 to 30 as of December 31, 2021.
We have our factory located in Taihu City in Anhui Province, China, consisting of an aggregate of 110,457 square meters of land. Currently, the facility there has a production capacity of 2 million pieces of clothes per year and can accommodate 5,000 workers. This production facility mainly produces original equipment manufacturer (OEM) products for online stores, regional apparel brands and overseas orders. The construction commenced in 2011 and takes place in four phases: Phase 1 consists of the construction of a 5-story dormitory; Phase 2 is to add facilities with annual production capacity of five million pieces of clothes. We have completed the construction of facilities of Phase 1 and Phase 2 by the end of 2014. Phase 3 construction of the adjacent facility on the third parcel of land has been delayed because the local government needs additional time to conclude negotiations with local residents over appropriate resettlement terms. Because the time for the government to resolve this matter is uncertain, we wrote off the land use right of the third parcel of land from account balance, according to the international framework reporting standard. Phase 4 includes building production facilities with annual production capacity of 10 million pieces, an office building, staff quarters and living facilities on the third parcel of land. As a result, our commitments to this facility may reduce our liquidity for an indefinite period and until it is completed. We could also indefinitely lose opportunities to expand our sales due to any further delay of our construction.
4
The decision to increase our production capacity was based in part on our projections of market demand for our products and OEM orders from other brand name owners. If actual customer demand does not meet our projections, we will likely suffer overcapacity problems and may have to leave capacity idle or need to contract out our facilities at an unfavorable price, which may reduce our overall profitability and adversely affect our financial condition and results of operations. Our future success depends on our ability to expand the Company’s business to address growth in demand for our current and future products.
Our ability to expand the Company’s business is subject to significant risks and uncertainties, including:
| ● | the unavailability of additional funding to invest more in brand recognition such as advertisement, expand our production capacity, purchase additional fixed assets and purchase raw materials on favorable terms or at all; | |
| ● | our inability to manage an online shop, hire qualified personnel and establish distribution methods; | |
| ● | conditions in the commercial real estate market existing at the time we seek to expand; | |
| ● | delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as problems with equipment vendors and contract manufacturers; | |
| ● | failure to maintain high quality control standards; | |
| ● | shortage of raw materials; | |
| ● | our inability to obtain, or delays in obtaining, required approvals by relevant government authorities; |
| ● | diversion of significant management attention and other resources; and | |
| ● | failure to execute our expansion plan effectively. |
The expansion of our business may place significant strain on our personnel, management, financial systems and operational infrastructure and may impede our ability to meet any increased demand for our products. To accommodate the Company’s growth, we will need to implement a variety of new and upgraded operational and financial systems, procedures, and controls, including improvements to our accounting and other internal management systems, by dedicating additional resources to our reporting and accounting function and improvements to our record keeping and contract tracking system. We will also need to recruit more personnel and train and manage our growing employee base. Furthermore, we will need to maintain and expand relationships with our current and future customers, suppliers, distributors and other third parties, and there is no guarantee that we will succeed.
In the future, we also intend to invest more resources to research and purchase online sales platforms and online stores. We believe that we will have better opportunities to expand by purchasing online sales platforms or online stores. In addition, we will keep on exploring other areas and business models, such as the use of artificial intelligence for brand promotion, learning customer preferences, and identifying shopping trends.
5
If we encounter any of the risks described above or if we are otherwise unable to establish or successfully operate online shops or additional production capacity, we may be unable to grow our business and revenues, reduce our operating costs, maintain our competitiveness or improve our profitability and, consequently, our business, financial condition, results of operations and prospects will be adversely affected.
Our past results may not be indicative of our future performance and evaluating our business and prospects may be difficult.
Our business has gone through various stages of the business life cycle in recent years as demonstrated by our growth in net sales, which reached $99.6 million for the year ended December 31, 2013, while in 2014 our net sales decreased by 40% to $58.8 million and in year 2015 net sales went up slightly by 4.3% to $61.3 million, our net sales decreased by 32.8% to $41.2 million in 2016, net sales decreased 42% to $23.8 million in 2017, net sales further decreased 22% to $18.53 million in 2018, and decreased 11% to $16.47 million in 2019，and decreased 42% to $9.54 million in year 2020, then decreased 48% to $4.96 million in year 2021. The decrease in sales in 2019, 2020 and 2021 of menswear business as compared with 2013 was mainly due to the slowdown of the Chinese economic growth and a challenge from COVID-19. As a result, we cannot assure that we will be able to achieve similar growth in future periods as years before 2014, and our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. Moreover, our ability to achieve satisfactory production results at higher volumes is unproven. Therefore, you should not rely on our past results or our historical rate of growth as an indication of our future performance.
We experience fluctuations in operating results.
Our annual and quarterly operating results have fluctuated and are expected to continue to fluctuate. Among the factors that may cause our operating results to fluctuate are customers’ response to merchandise offerings, the timing of the roll out of new sales outlets, seasonal variations in sales, the timing of merchandise receipts, the level of merchandise returns, changes in merchandise mix and presentation, our cost of merchandise, unanticipated operating costs, and other factors beyond our control, such as general economic conditions and actions of competitors.
We have historically experienced seasonal fluctuations in our sales. A substantial portion of our revenues are typically earned during the second and fourth quarters and we generally experience lowest revenues during the first and third quarters. If sales during the second and fourth quarters are lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on our annual operating results. The sales of our products are also affected by local spending behavior, which are typically affected by seasonal shopping patterns during major Chinese holidays.
As a result of these factors, we believe that period-to-period comparisons of historical and future results will not necessarily be meaningful and should not be relied on as an indication of future performance.
Our failure to collect the trade receivables or untimely collection could affect our liquidity.
Our distributors place advance purchase orders twice a year. From 2015 to 2021, we typically expect and receive payment within 30-180 days of product delivery. Starting in September 2015, we extended credit to some of our customers to 150-180 days without requiring collaterals. We perform ongoing credit evaluations of the financial condition of our customers and we generally require no collateral from our distributors and authorized retailers to secure their payment obligations. However, our sales going forward may rely more heavily on credit, and if we encounter future problems collecting amounts due from our clients or if we experience delays in the collection of amounts due from our clients, our liquidity could be negatively affected.
The Chinese economy experienced a softening of economic growth, and the apparel industry is also facing a downturn. The impact of the current and possible future economic downturn on our distributors cannot be predicted and may be severe, causing a significant impact on their business. As a result, our financial condition and result of operations could be negatively affected. In addition, if they cannot continue their orders of our products due to the failure of paying us for its previous purchases, our brand image and reputation may be materially negatively affected as well.
6
We rely on distributors for a substantial portion of our sales and the loss of any of our large distributors would harm our business
A substantial portion of our sales are made to distributors that resell our products. For the years ended December 31 2019, 2020 and 2021, distributors accounted for approximately 41.7%, 87.7% and 92.6% of our total menswear sales, respectively, and our top five distributors accounted for approximately 24.4 %, 38.9 %and 50.5 % of our total sales, respectively. The marketing efforts of our distributors are critical for our success. If we fail to attract additional distributors, and our existing distributors do not promote our products at the same or at a greater level than the products of our competitors, our business, financial condition and results of operations could be adversely affected.
Furthermore, there is no assurance that any of our distributors will satisfy the sales targets set forth in their distribution agreements and we or they may not wish to renew the distribution agreements in future years. Moreover, our distributors are not obliged to continue to place orders with the Company at the same level as before or at all and there is no assurance that we would be able to obtain orders from other distributors to replace any such lost sales on terms satisfactory to us or all. If any of our largest distributors substantially reduces its purchases from us, or otherwise fails to renew its distribution agreement with us, we may suffer a significant loss of sales and our business, results of operations, and financial condition may be materially and adversely affected.
We have limited control over the ultimate retail sales by our distributors and our image and business may be adversely affected if our distributors fail to adhere to, or fail to cause the third party retail outlet operators to adhere to, our retail policies and standards.
We rely on the contractual obligations set forth in the distribution agreements that we enter into with our distributors, as well as policies and standards we formulate from time to time, to impose our retail policies on these distributors in respect of the franchisee retail outlets. In addition, as we do not enter into any agreements with the third party retail outlet operators, we rely on our distributors to ensure that these franchisee retail outlets operate in accordance with our retail policies. As such, our control over the ultimate retail sales by our distributors and the franchisee retail outlet operators is limited. There is no assurance that our distributors or the third party franchisee retail outlet operators will comply with, or that the distributors will enforce, our retail policies. As a result, we may not be able to effectively manage our sales network or maintain a uniform brand image, and cannot assure you that franchisee retail outlets would continue to offer quality services to consumers.
In addition, if any of the distributors or third party franchisee retail outlet operators experiences difficulties in selling our products in the retail market, they may attempt to disregard our pricing policies and liquidate their excessive inventory buildup through aggressive discounts, which may damage the image and the value of our brand. There is no assurance that we will be able to, in a timely manner, impose penalties on or replace any distributors who consistently fail to comply with, or fail to cause the third party franchisee retail outlet operators appointed by them to comply with, our retail policies in their operation of franchisee retail outlets. In such event, our business, results of operations and financial condition may be materially and adversely affected.
We may not be able to accurately track the inventory levels at our distributors, retailers or department store concessions.
Our ability to track the sales by our distributors to third-party retailers and the ultimate retail sales by the retailers, and consequently their respective inventory levels, is limited. We implement a policy to require our distributors to provide us with their sales reports on a weekly basis and we carry out random on-site inspections of our distributors to track their inventories. The purpose of tracking the inventory level is mainly to gather information regarding the market acceptance of our products so that we can reflect consumers’ preferences in the design and development of our products for the next season. The tracking of inventory level also helps us to understand the market recognition of our products in a particular region, and thus allows us to adjust our marketing strategy if necessary. The implementation of the policy, however, requires the distributors to accurately report the relevant data to us in a timely manner, which is largely dependent on the cooperation of the Company’s distributors. We may not always obtain the required data in time and the data provided to us by our distributors may be inaccurate or incomplete.
Inaccurate, mistaken, incomplete or delayed data regarding inventory levels may mislead the Company to make wrong business judgments for its production, marketing efforts and sales strategies. If that happens, our operations and financial results may be materially adversely affected. In addition, if we cannot manage inventory levels properly, future orders of our products may be reduced, which would materially adversely affect our future business, financial condition, results of operation and prospects.
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Our operations could be materially adversely affected if we fail to effectively manage our relationships with, or lose the services of, our OEM contract manufacturers.
The production of our brand name products is 100% outsourced to PRC-based third-party OEM contract manufacturers. In the years ended December 31, 2021, 2020, and 2019, we had six, six and four OEM contract manufacturers, respectively. Purchases from our OEM contract manufacturers accounted for approximately 100%, 78.8%, and 74.6% of our total purchases for the years ended December 31, 2021, 2020, and 2019, respectively. As we do not enter into long-term contracts with our OEM contract manufacturers, they may decide not to accept our future OEM orders on the same or similar terms, or at all. Although we are not heavily reliant on any single OEM contract supplier, if an OEM contract manufacturer decides to substantially reduce its volume of supply to us or to terminate its business relationship with us, we may not be able to find a proper replacement in a timely manner and may be forced to default on the agreements with our distributors that sell our products. This may negatively impact our revenues and adversely affect our reputation and relationships with our distributors that sell our products, causing a material adverse effect on our financial condition, results of operations and prospects.
Further, if any of our OEM contract manufacturers fails to provide the required number of products meeting our quality standards, we may have to delay delivery of products to our distributors, become unable to supply products at all, or even recall products previously dispatched. This could cause the Company to lose revenues or market share and damage our reputation, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, some OEM contract manufacturers may not fully comply with certain laws, such as labor and environmental laws. If any of our OEM contract manufacturers is found to have violated laws and regulations in the PRC, media reports on such violations may negatively affect our reputation and image, resulting in material adverse impact on our business, financial condition and results of operations.
While we provide the designs of our products to the OEM contract manufacturers, as well as guidance for manufacturing the products ordered by us, we do not have direct control over the OEM contract manufacturers. If any of them is involved in unauthorized production and sale of goods using the KBS brand, our reputation, financial condition and results of operations may be materially adversely affected.
As the Company grows, our reliance on OEM contract manufacturers may also grow as our added production capacity may not be sufficient to keep pace with the increased production requirements driven by our growth. We may not be able to find sufficient additional OEM contract manufacturers to produce our products on the same or similar terms as our existing OEM contract manufacturers, and we may not be able to achieve our growth and development goals.
Any interruption in our operations could impair our financial performance and negatively affect our brand.
Our operations are complicated and integrated, involving the coordination of third party OEM contract manufacturers and external distribution processes. While these operations are modified on a regular basis in an effort to improve outsourcing and distribution efficiency and flexibility, we may experience difficulties in coordinating the various aspects of our operations processes, thereby causing downtime and delays. In addition, we may encounter interruption in our operations processes due to a catastrophic loss or events beyond our control, such as fires, explosions, labor disturbances or violent weather conditions. Any interruptions in our operations or capabilities at our facilities could result in our inability to procure our products, which would reduce our net sales and earnings for the affected period. If there are delays in delivery times to our customers, our business and reputation could be severely affected. Any significant delays in deliveries to our customers could lead to increased returns or cancellations and cause the Company to lose future sales. The Company currently does not have business interruption insurance to offset these potential losses, delays and risks so a material interruption of our business operations could severely damage our business.
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Failure to protect the integrity, security and use of our customers’ information and media could expose us to litigation and materially damage our standing with our customers.
Increasing costs associated with information security — such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud — could cause our business and results of operations to suffer materially. While we have taken significant steps to protect customer and confidential information, including entering into confidentiality agreements with relevant employees and incorporate confidentiality clauses in our policies, there can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and personal data. If any such compromise of our security were to occur, it could have a material adverse effect on our reputation, operating results and financial condition. Any such compromise may materially increase the costs we incur to protect against such information security breaches and could subject us to additional legal risk. Procurement specialists and managers are required to sign a confidentiality agreement.
We have limited insurance coverage in China and may not be able to recover insurance proceeds if we experience uninsured losses.
Operation of our facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business interruptions. We do not carry any business interruption insurance, product recall or third-party liability insurance for our production facilities or with respect to our products to cover claims pertaining to personal injury or property or environmental damage arising from defects in our products, product recalls, accidents on our property or damage relating to our operations. While business interruption insurance and other types of insurance are available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Our inability to protect our trademarks and other intellectual property rights may prevent us from successfully marketing our products and competing effectively.
We believe our trademarks and other intellectual property rights are important to our success and competitive position and recognize the importance of registering the trademarks related to our KBS brand for protection against infringement. We currently hold two registered trademarks. Failure to protect our intellectual property could harm our brand and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks, patents, copyrights and trade secrets, could result in the expenditure of significant financial and managerial resources. We produce, market and sell our products under registered trademarks. We regard our intellectual property, particularly our trademarks and trade secrets to be of considerable value and importance to our business and our success. We rely on a combination of trademark, patent, and trade secrecy laws, and contractual provisions to protect our intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets or similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse effect on our ability to market or sell our brands, and profitably exploit our products.
Environmental regulations impose substantial costs and limitations on our operations.
We do not use chemicals in our manufacturing operations. However, as part of our operations involves contract manufacturing for other brands, we are subject to various national and local environmental laws and regulations in China concerning issues such as air emissions, wastewater discharges, and solid waste management and disposal. These laws and regulations can restrict or limit our operations and expose us to liability and penalties for non-compliance. While we believe that our facilities are in material compliance with all applicable environmental laws and regulations, the risks of substantial unanticipated costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new environmental compliance or remediation liabilities and costs. While we believe that we can comply with existing environmental legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance may prove to be more limiting and costly than anticipated.
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RISKS RELATED TO FLOWER CROWN
If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.
As we continue to expand, our continued growth could strain our existing resources, and we could experience ongoing challenges, including:
| ● | managing our operational, administrative and financial capabilities and other resources; |
| ● | managing our brand portfolio, including further expanding our products and services; |
| ● | expanding marketing channels and deepening end customer outreaches; | |
| ● | staying abreast of the evolving industry demands and market developments and catering to end user’ changing tastes of our business customers; |
| ● | developing and applying technologies necessary to support our expanded operations; |
| ● | effectively managing our supply chain; |
| ● | responding to changes in the regulatory environment; |
| ● | exploring new market opportunities; and |
| ● | addressing other challenges resulting from our expansion. |
All efforts to address the potential challenges on our way to expansion require significant managerial, financial and human resources. We cannot assure you that we will be able to effectively or timely address operating difficulties and challenges to keep up with our growth. If we are unable to successfully address these difficulties, risks and uncertainties, our business, financial conditions and results of operations could be materially and adversely affected.
Our business depends on the continued success of our growing brand portfolio and if we fail to maintain and expand our brand portfolio or maintain and enhance our brand recognition, our business, results of operations and prospects may be harmed.
We mainly depend on our brand portfolio to scale our business, attract and retain our business customers. Our Luxventure portfolio, which covers cross border merchandise and tourism, seamlessly connected various brands from our suppliers. Although we have devoted significant resources to and incurred large amount of expenses on sourcing, maintaining, promoting and expanding our brands, we cannot assure you that these efforts will be successful. In addition, maintaining and enhancing the recognition of our brands are also key to our success, which could be affected by various factors, including the effectiveness of our brand marketing strategy, publicity about our business, quality of products offered under the brands as well as preference of consumers, certain of which are beyond our control. Any failure to maintain and expand our brand portfolio or maintain and enhance our brand recognition could have a material and adverse effect on our business, results of operations and prospects.
Negative publicity about our brands, our business model or our products may materially and adversely affect our reputation, our business and the trading price of our shares, regardless of its accuracy. We may also be adversely affected by negative publicity concerning us and our business, shareholders, affiliates, directors, officers, employees, agents, other business partners and the industry in which we operate, regardless of its accuracy.
Regardless of its accuracy, negative publicity about our business model or our products may arise and appear on the internet and other media from time to time, and negative publicity of more serious natures may arise in the future.
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In addition, our business model may be alleged to be involved in misconducts, improper activities, rumors, scandals or illegal activities from time to time related to a variety of matters, such as misleading advertising practice. These allegations, even if factually incorrect or based on isolated events, would result in negative publicity of our business, and may further have an adverse effect on our brand and reputation.
Our brands and brands of our suppliers may also be subject to negative publicity for various reasons, such as complaints about the quality of the products, customer services or other public relation incidents of us, which may adversely affect our reputation, brand loyalty and consequently affect the operation of our business. Any such negative publicity, regardless of its veracity, could result in the expenditure of funds and management time and may have a material and adverse effect on our reputation, our business and the trading price of our shares.
Moreover, negative publicity concerning us and our business, shareholders, affiliates, directors, officers, employees, agents, other business partners and the industry in which we operate can harm our brand and reputation, regardless of its accuracy. Negative publicity concerning these parties could be related to a wide variety of matters, including, but are not limited to:
| ● | alleged misconducts or other improper activities committed by our directors, officers, employees, agents and other business partners; |
| ● | false or malicious allegations or rumors about us or our directors, shareholders, affiliates, officers, employees and other business partners; |
| ● | complaints from our business customers about our products and services; |
| ● | employment-related claims relating to employment discrimination, working hours violation, tax, wage or pension matters; |
| ● | governmental and regulatory investigations, penalties or claims resulting from misconduct of our business partners, or our failure to comply with applicable laws and regulations; |
| ● | negative publicity and claims asserted against our brand partners, especially any product quality issues of our brand partners’ products; and |
| ● | negative publicity of the industry in which we operate, including, but not limited to, bankruptcy and cessation of business operations of any of our major competitors. |
If we fail to anticipate and respond to changing business customer preferences and shifts in market trends in a timely manner, our business and operating results could be harmed.
Our success largely depends on our ability to consistently gauge business customers’ tastes and market trends, provide a balanced assortment of merchandise and source brands that satisfies business customer demands in a timely manner. Our failure to anticipate, identify or react appropriately and timely to changes in business customer preferences, tastes and market trends or economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability. In addition, failure to respond to changing business customer preferences and trends in brand could negatively impact our brand image with our business customers and result in diminished brand loyalty, and thus harm the prospects of our business.
Our product supply chain is essential to our business and is subject to risks associated with demands forecasting, timely supplying and warehousing, as well as maintaining relationship with our suppliers.
We largely depend on our supply chain management capabilities to minimize our inventory risks, maintain our short turnaround time and improve our operational efficiency. However, our demand forecast may not be accurate, which could result in inventory write-offs or inventory shortages. Even if we are able to make accurate demand forecast, our product supply chain may not be able to meet our demand on a timely basis due to unexpected reasons. In addition, warehouses that we operate may not have sufficient capacity to process orders efficiently.
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Our product supply chain is also largely dependent on our relationship with our product suppliers. We cannot assure you that our current product suppliers will continue to sell products or provide services to us on commercially acceptable terms, or at all, after the current term of the agreement expires. If our suppliers cease to transact with us on favorable payment terms or deliver production in a timely manner as agreed under the contract terms, our operations may be materially and adversely affected.
Although we believe our supply chain has capacity to support our current operation, we cannot guarantee our supply chain will be adequate to support our expanded business in the future. Thus, if we fail to manage our supply chain in line with our business expansion, our business, prospects, financial condition and results of operations may suffer.
If we fail to develop, upgrade and apply our technologies to support and expand our business, our business may be materially and adversely affected.
We rely on our technology infrastructure and operating systems to carry out the key aspects of our business, including identifying market trends in brands, selecting and partnering with quality brand partners, forecasting business customers’ demands, supporting our product supply chain, enabling effective marketing and distribution, and refining business customer services. Although we did not experience any material failure or breakdown of our operating systems in the past, we cannot guarantee that such risks are always under control. In addition, computer viruses, security breaches and information theft may lead to delays or errors in transaction processing, inability to fulfill purchase orders or loss of data. Any interruptions of our operating platform, whether caused by computer viruses, hacking or other security breaches, and errors encountered during platform upgrades or other issues resulting in the unavailability, or slowdown of our information technologies may, individually or collectively, materially and adversely affect our business and results of operations.
Cross border merchandise and tourism business are subject to rapid technological changes and innovations. Our technologies may become obsolete or insufficient, and we may have difficulties in following and adapting to technological changes in the industry in a timely and cost-effective manner, which could impact every key aspect of our business. New technologies developed and introduced by our competitors could render our products and services less attractive or obsolete, thus materially affecting our business and prospects. In addition, our substantial investments in technology may not produce expected results. If we fail to continue to develop, innovate and utilize our technologies or if our competitors develop or apply more advanced technologies, our business, financial condition and results of operations could be materially and adversely affected.
We conduct our business through online third party platforms operated by our business customers. The material disruption of those platforms or any adverse changes on our cooperation with them could harm our business and operation.
We use third party platforms operated by our business customers to promote and sell our products. Our growth is subject to aforesaid third party platforms’ traffic growth, account using terms and conditions and regulations, among other factors. If these platforms’ traffic fails to grow in the future, our growth may slow down as well. If we breach the using terms of such platforms, the platform operators may decide at any time to curtail or inhibit our ability to use such platforms. Meanwhile, these platforms may increase their fees or make changes to their respective business models, using terms, policies or systems, and those changes could impair or restrict our ability sell products. In addition, these platforms may be interrupted by regulatory restrictions, cease operations unexpectedly due to a number of events, or even shut down due to their operating problems.
Any of the above could affect our ability to maintain profitability or have a material adverse effect on our business, financial condition or results of operations.
Order cancelation as well as merchandise return and exchange policies may adversely affect our business and results of operations.
We allow our business customers to cancel orders within a fixed amount of time after the payment and to return products, subject to our return policy. Our order cancelation rate and product return rate may fluctuate or even increase in the future due to various factors, many of which are beyond our control. In addition, as we diversify our marketing efforts and expand to more sales channels, our order cancelation rate and product return rate may further increase. Moreover, our products might be damaged during transit from time to time, especially during the international transportation, which increases return rate and harms our brands as well. If the rate of order cancelation or product returns increases significantly, our inventory turnovers and cash flow could be adversely affected, and thus harm our financial condition and operating results.
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Moreover, we may be required by law to adopt new or amend existing return and exchange policies from time to time. In addition to regulatory requirements, we may also modify our return policies from time to time, which may result in customers’ dissatisfaction or an increase in order cancelation or product returns rates.
Our industry is highly competitive and we may not be able to compete successfully against current and future competitors.
We face intense competition in the cross-bordered merchandise and tourism industries in China. We expect greater competition in the future from existing players and new market entrants. Some of our current and future competitors may have greater brand recognition and financial and other resources than we do, which may make it more difficult for us to maintain or gain market share.
If we are not able to effectively compete against current or future competitors, our business, financial condition and results of operations could suffer. Increased competition may result in higher pricing pressure, reducing our ability to charge competitive prices for our products and services and decreased market share, any of which could materially and negatively affect our business, financial condition and results of operation.
We rely on third-party product suppliers, manufacturers, logistics service providers and other vendors to serve our business customers. If they fail to provide products or services that are consistent with our standards or applicable regulatory requirements, we may have to find alternative vendors, and our reputation and operation could suffer.
We do not own or operate any manufacturing facilities. Instead, we rely on third-party manufacturers and third-party product suppliers to supply all of the products offered on third party platform operated by our business customers. We enter into framework procurement contracts with different third-party product suppliers and manufacturers. The capacities of our third-party product suppliers and manufacturers are subject to orders placed by their other clients, which may include our competitors. If our demands increase significantly, or our existing suppliers run out of their capacity, we may not be able to find additional or alternative suppliers in a timely manner. We also cannot guarantee that we will have superior bargaining power over third-party product suppliers and manufacturers for our newly launched products. In addition, quality control issues, such as the use of unqualified materials, may exist in certain third-party product suppliers and could cause consumer dissatisfaction and as a result, harm our business.
We rely on third-party logistics service providers to deliver products to our customers. Any delay, damages, loss and inappropriate actions taken by logistics service providers might cause customer complaints. Although we may claim compensation from third-party logistics service providers in some cases, our business, financial condition and results of operations could suffer as well.
We procure inventory based on our forecast on business customer demands, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.
Our scale and business model require us to manage a large volume of inventory effectively. Our forecast on demands may significantly differ from actual demands. Demands may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in business consumer spending patterns, changes in business consumer tastes with respect to our products and other factors, and our business consumers may not purchase products in the quantities that we expect. We may not be able to return unsold products to our suppliers unless the products are defective or otherwise agreed with our suppliers.
On the other hand, if we underestimate demands and thus run short of inventory, our growth may be adversely affected due to lower sales volume and unsatisfied shopping experiences.
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Furthermore, if we fail to negotiate favorable credit terms with third-party suppliers and manufacturers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write- downs or write-offs. In case that we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and operating results.
If we fail to obtain requisite approvals or licenses, or fail to comply with other regulatory requirements applicable to our operations, we may be subject to administrative penalties and our business and operating results could be adversely affected.
Our business is subject to general business regulations governing cross border and tourism industries. We are also subject to supervision and regulation by the State Administration for Market Regulation of the PRC and other relevant PRC government authorities and/or their relevant local counterparts. While we currently hold all material licenses and permits required for our operations, we may be required to renew these licenses and permits upon their expiration or obtain new licenses or permits in the future as a result of our business expansion, changes of our operations, changes in laws and regulations applicable to us, or changes of interpretation from relevant authorities on such laws and regulations.
Any failure, or perceived failure, by us to comply with any of these requirements could result in damage to our reputation, a loss in business, and proceedings or actions against us which could be costly and disrupt our overall operations. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of noncompliance with any such laws or regulations. Any of these events may have a material and adverse effect on our business, financial condition and results of operations.
Our results of operations may fluctuate due to the seasonality of our business and other events, which could cause our stock price to decline.
We have experienced, and expect to continuously experience, seasonal fluctuations in our results of operations, due to seasonal changes in sales volume, as well as seasonality in our advertising services. In addition, the business hours of our logistics and fulfillment service will be impacted by the holidays. Moreover, our results of operations may fluctuate due to changes in production cycle and launch of new styles or events.
If we cannot successfully protect our intellectual property and exclusive rights, our brand and business would suffer.
We rely on a combination of trademark, patent, copyright, domain name and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights and other exclusive rights. We also enter into agreements containing confidentiality obligations with our employees and any third parties who may access our proprietary technology and information, and we rigorously control access to our proprietary technology and information.
Nevertheless, we cannot guarantee that we can successfully protect our intellectual property and exclusive rights from unauthorized usage by third parties or breach of confidentiality obligations by our counterparties. Furthermore, a third party may take advantage of the “first-to-file” trademark registration system in China to register our brands in bad faith, which will cause us to incur additional costs for legal actions. Moreover, confidentiality obligations may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights and exclusive rights or to enforce our contractual rights in China or elsewhere.
In addition, policing any unauthorized use of our intellectual property and exclusive rights is difficult, time-consuming and costly. The precaution steps we have taken for protecting our rights may be inadequate. In the event that we resort to litigation to enforce our intellectual property rights and exclusive rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation or that we would be able to halt any unauthorized use of our intellectual property and exclusive rights. In addition, our trade secrets may be leaked to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
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Pandemics and epidemics, natural disasters, terrorist activities, political unrest, and other outbreaks could disrupt our delivery and operations, which could materially and adversely affect our business, financial condition, and results of operations.
Global pandemics, epidemics in China or elsewhere in the world, or fear of spread of contagious diseases, such as Ebola virus disease (EVD), coronavirus disease 2019 (COVID-19), Middle East respiratory syndrome (MERS), severe acute respiratory syndrome (SARS), H1N1 flu, H7N9 flu, and avian flu, as well as hurricanes, earthquakes, tsunamis, or other natural disasters could disrupt our business operations, reduce or restrict our supply of products and services, incur significant costs to protect our employees and facilities, or result in regional or global economic distress, which may materially and adversely affect our business, financial condition, and results of operations. Actual or threatened war, terrorist activities, political unrest, civil strife, and other geopolitical uncertainty could have a similar adverse effect on our business, financial condition, and results of operations. Any one or more of these events may impede our production and delivery efforts and adversely affect our sales results, or even for a prolonged period of time, which could materially and adversely affect our business, financial condition, and results of operations.
The current COVID-19 pandemic adversely affected many businesses in China. As China implemented nationwide efforts to contain the spread of the novel coronavirus, logistic and delivery of products to our clients were effected greatly, which lead to overdue deliveries. Our operational efficiency could affected by the COVID-19 pandemic, our suppliers’ abilities to timely deliver and other services were affected due to the temporary travel restrictions in China, which adversely affected the logistic of our suppliers. The global spread of COVID-19 may also affect our sales. We do believe that the pandemic could have a material adverse effect on our business and related financials.
We are also vulnerable to natural disasters and other calamities. We cannot assure you that we are adequately protected from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks, or similar events. Any of the foregoing events may give rise to interruptions, damage to our property, delays in production, breakdowns, system failures, or internet failures, which could adversely affect our business, financial condition, and results of operations.
Our business is also vulnerable to natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of other widespread health epidemics, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola and other events, such as wars, acts of terrorism, environmental accidents, power shortages or communication interruptions. The occurrence of such a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could materially disrupt our business and operations. Such events could cause a temporary closure of the facilities we use for our operations. Our operations could be disrupted if any of our employees or employees of our business partners were suspected of having any contagious disease, since this could require us or our business partners to quarantine some or all of such employees or disinfect the facilities used for our operations. Our operations could also be severely disrupted if our buyers, sellers or other participants were affected by such natural disasters, health epidemics or other outbreaks. In addition, our revenues and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general and our industry as a whole.
We may be accused of infringing intellectual property or proprietary rights of third parties.
We cannot assure you that our content, product design, our offerings or our technologies do not or will not infringe upon copyrights or other intellectual property rights (including, but not limited to, trademarks, patents and know-how) held by third parties. Nor can we assure you that our use of software or any other intellectual properties in business and operation will not be alleged by any third party as infringement resulting from lack of licenses. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims. We may also be prohibited from using such intellectual property or relevant content. As a result, we may incur licensing or usage fees, develop alternatives of our own, or even need to pay damages, legal fees and other costs. Even if such assertions against us are unsuccessful, they may cause us to lose existing and future business and incur reputational harm and substantial legal fees. As a result, our reputation may be harmed and our business and financial performance may be materially and adversely affected.
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We have adopted policies and procedures to prohibit our members, employees and business partners from infringing upon third-party copyright or other intellectual property rights. However, we cannot assure you that they will not, against our policies, use third-party copyrighted materials or intellectual property without proper authorization, and therefore result in disputes. In addition, we may incur liability for unauthorized duplication or distribution of materials used in our online store and during our services. Although we have set up rules and procedures to enable copyright owners to provide us with notice of alleged infringement, given the volume of content we offer, we may not be able to identify and remove all potentially infringing content that may exist, and thus we may encounter intellectual property claims against us.
Our product suppliers, manufacturers, independent contractors or commercial partners may engage in misconduct or other improper activities, including unfair competition and noncompliance with laws and regulations, which may adversely affect our business and results of operations.
We are exposed to the risk that our product suppliers, manufacturers, independent contractors or commercial partners may engage in misconduct. Misconduct by these parties could include intentional, reckless or negligent conduct or improper sales, marketing and business arrangements, in particular, arrangements that may constitute unfair competition. It is not always possible for us to identify and deter misconduct by our product suppliers, independent contractors or commercial partners, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown, unmanaged risks and losses, or in protecting us from negative publicity, governmental investigations, actions or lawsuits stemming from such misconducts. No matter whether we can succeed in dealing with negative publicity or defending against investigations or actions, we could incur substantial costs and divert the attention of management, which could adversely affect our ability to operate our business and our results of operations.
The success of our business depends on the continuing efforts of our senior management and other key personnel. If we fail to retain, attract and train such personnel, our business may be materially and adversely affected.
The success of our business depends significantly on our senior management. In particular, we rely on the expertise, experience and vision of our Chief Executive Officer, Ms. Sun Lei and our interim Chief Financial Officer and director, Mr. Keyan Yan. If any of them becomes unable or unwilling to continue to contribute their services to us, we may not be able to replace them easily, or at all. As a result, our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected.
Additionally, our future success also depends on our ability to attract, recruit and train a large number of qualified employees and retain existing key employees. Competition for discovering and signing talents in cross-borde merchandise and tourism industries in China is intense, and the availability of suitable and qualified candidates in China is limited. In order to compete for talents, we may need to offer higher compensation, better trainings, more attractive career opportunities and other benefits to our employees, which may be costly and burdensome. There can be no assurance that we will be able to retain a qualified workforce necessary to support our future growth. Furthermore, our ability to train and integrate new employees into our operations may not meet the demands of our growing business. Any of the above issues related to our workforce may materially and adversely affect our operations and future growth.
We may be subject to litigation, allegations, complaints and investigations from time to time arising out of our operations, and our reputation and operations may be adversely affected.
We have not been subject to any material allegations or complaints in the past, but we may be involved in legal and other disputes in the ordinary courses of our business, including allegations against us for potential infringement of third-party copyrights or other intellectual property rights, as well as business customer complaints in relation to our refund policy, the quality of our products, data security and other dissatisfactions. We might also be involved in governmental investigations of our business operation in the future. Any claims against us, with or without merit, could be time-consuming and costly to defend or litigate, divert our management’s attention and resources or harm our brand equity. If a lawsuit or governmental proceeding against us is successful, we may be required to pay substantial damages or fines. We may also lose, or be limited in, the rights to offer some of our content, products and services or be required to make changes to our content offerings or business model. As a result, the scope of our content, product and service offerings could be reduced, which could adversely affect our ability to attract new business customers, harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
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Imposition of trade barriers and taxes may reduce our ability to do business internationally, and the resulting loss of revenue could harm our profitability.
We may experience barriers to conducting business in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, substantial taxes on profits, revenues, assets and payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products, and there can be no assurance that this will not reduce the level of sales that we achieve in such markets, which would reduce our revenues and profits.
We may expand our business through acquisitions, investments or strategic alliances in the future, but we might not be able to successfully pursue synergy from acquisitions or to achieve the benefits we expect from recent and future investments, strategic alliances and acquisitions.
We may form strategic alliances or make strategic investments and acquisitions from time to time to complement and enhance our existing business. We may experience difficulties in integrating our operations with the newly invested or acquired businesses, implementing our strategies or achieving expected levels of revenues, profitability, productivity or other benefits. Moreover, if the businesses we acquire or invest in or our strategic alliances or partnerships do not subsequently generate the anticipated financial performance or if any goodwill impairment test triggering event occurs, we may need to revalue or write down the value of goodwill and other intangible assets in connection with such transactions, which would harm our business, financial condition and results of operations.
In addition, we may not be able to identify appropriate strategic investment or alliance targets when it is necessary or desirable to make such acquisition or investment to remain competitive or to expand our business. Even if we identify an appropriate target, we may not be able to negotiate the terms of the transaction successfully. In the event that we do not have control over the companies in which we only have minority stake, we cannot ensure that these companies will at all times comply with applicable laws and regulations in their business operations. Material noncompliance by our investees may cause substantial harms to our reputation and the value of our investment.
Any failure by us or our business partners to comply with product safety, labor, tax or other laws, or to provide safe conditions for our or their workers may damage our reputation and brand and harm our business.
Our products are subject to regulation by various governmental authorities in China. Such products could be in the future subject to potential recalls and other remedial actions. Product safety, labeling and licensing concerns, including consumer disclosure and warning regarding chemical exposure, may result in recall or suspended offering of products, which in turn could result in a material adverse effect on our operating results.
We procure products from a variety of third-party suppliers, manufacturers and other business partners. If they fail to comply with applicable laws and regulations, we may also face or get involved in litigations, which could increase our legal costs. In addition, other misconduct of our business partners such as failure to provide safe and humane working conditions could harm our reputation and business as well.
Our use of licensed third-party or open source software could negatively affect our ability to provide consistent online experiences.
We use software licensed from third parties. Any interruptions that result from the unavailability of the software licensed from third parties may affect the quality of our services. We may also encounter problems when software licensed from third parties is upgraded, and undetected programming errors could adversely affect the performance of the software we use to provide our services.
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In addition, we use open source software in the applications we have developed to operate our business and will use open source software in the future. We could be required to seek licenses from third parties in order to continue using the open source software we are permitted to use currently, in which case licenses may not be available on terms that are acceptable to us, or at all. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or difficulties in enhancing our operating platforms, which could materially and adversely affect our business and results of operations.
The estimates of market opportunity and forecasts of market growth in this report may prove to be inaccurate. Even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The variables that go into the calculation of our addressable market size are subject to change over time, and there is no assurance that any target business customers covered by our market opportunity estimates will purchase our products at all or generate any particular level of revenue for us. Any expansion in our market depends on a number of factors, including the cost, performance, competition and perceived value associated with our products and services. Even if the market in which we compete meets the size estimates and growth forecasted, our business could fail to grow at similar rates, if at all, due to various factors, including failure to execute our growth plan, ineffective management over operations and adverse impact from negative publicity. Accordingly, the forecasts of market growth should not be taken as indicators of our future growth.
We may be unable to establish and maintain an effective system of internal control over financial reporting, and, as a result, we may be unable to accurately report our financial results or prevent fraud.
We are subject to reporting obligations under the U.S. securities law. The SEC as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, the independent registered public accounting firm auditing the financial statements of a company that is not a non-accelerated filer, emerging growth company or smaller reporting company under Rule 12b-2 of the Exchange Act must also attest to the operating effectiveness of the company’s internal controls.
Failure to achieve and maintain an effective internal control environment could result in our inability to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause our investors to lose confidence in the information we report, which could adversely affect our stock price.
We may incur liabilities that are not covered by insurance.
While we seek to maintain appropriate levels of insurance, not all claims are insurable and we may experience major incidents of a nature that are not covered by insurance. We provide social security insurance including pension, medical insurance, unemployment insurance, maternity insurance, on-the-job injury insurance and housing fund plans through a PRC government-mandated benefit contribution plan for our employees. We do not carry any key-man life insurance, product liability, Directors and Officers Insurance and professional liability insurance. Even if we purchase these kinds of insurance, the insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims. We have not purchased any property insurance or business interruption insurance. We have determined that the costs of insuring for related risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical. We consider our insurance coverage to be sufficient for our business operations in China. We maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that such insurance will continue to be available on acceptable terms or that our insurance coverage will be sufficient or effective under all circumstances and against all liabilities to which we may be subject. If we were to incur substantial losses or liabilities due to fire, explosions, floods, other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected. We could, for example, be subject to substantial claims for damages upon the occurrence of several events within one calendar year. In addition, our insurance costs may increase over time in response to any negative development in our claims history or due to material price increases in the insurance market in general.
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Our past results may not be indicative of our future performance and evaluating our business and prospects may be difficult.
We cannot assure that we will be able to achieve similar growth in future periods and our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. Therefore, you should not rely on our past results or our historical rate of growth as an indication of our future performance.
A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.
The global macroeconomic environment is facing challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa and over the conflicts involving Ukraine, Syria and North Korea. There have also been concerns over regional instability and tension, such as the relationship among China and other Asian countries, which may result in, or intensify potential conflicts in relation to, territorial disputes, and the trade disputes between the United States and China. The outbreak of COVID-19 throughout the world could also result in an economic downturn globally. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.
Economic conditions in China are sensitive to global economic conditions, changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. While the economy in China has grown significantly over the past decades, the growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing down in recent years and may materially decline in the future. We engage in cross border merchandise and tourism business and conduct substantially all of our operations in China; therefore, any deterioration of the PRC economy, decrease in disposable income and fear of a recession may lead to reductions of customers’ demand and their spending on fashion products with us. Any severe or prolonged slowdown in the global or PRC economy may materially and adversely affect our business, results of operations and financial condition.
RISKS RELATED TO DOING BUSINESS IN CHINA
Because all of our operations are in China, our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our shares
As a business operating in China, we are subject to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little notice to us or our shareholders. As a result, the application, interpretation, and enforcement of new and existing laws and regulations in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies or authorities, and inconsistently with our current policies and practices. New laws, regulations, and other government directives in the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions may:
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● | Delay or impede our development, |
| ● | Result in negative publicity or increase our operating costs, | |
| ● | Require significant management time and attention, and | |
| ● | Subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business practices. |
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The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which we conduct our business and could require us to change certain aspects of our business to ensure compliance, which could decrease demand for our products, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject us to additional liabilities. To the extent any new or more stringent measures are required to be implemented, our business, financial condition and results of operations could be adversely affected as well as materially decrease the value of our shares of common and preferred stock.
If the Chinese government chooses to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers. PRC has recently promulgated new rules that require companies collecting or holding large amounts of data to undergo a cybersecurity review prior to listing in foreign countries, a move that will significantly tighten oversight over China-based internet giants. The Measures for Cybersecurity Review (2021 version) was promulgated on December 28, 2021 and became effective on February 15, 2022. These measures specify that any “online platform operators” controlling the personal information of more than one million users which seek to list on a foreign stock exchange are subject to prior cybersecurity review.
Our business belongs to the men’s apparel and tourism industry in China, which does not involve the collection of user data, implicate cybersecurity, or involve any other type of restricted industry. Based on the advice of counsel and our understanding of currently applicable PRC laws and regulations, we are not subject to the review or prior approval of the CAC or the CSRC. Uncertainties still exist, however, due to the possibility that laws, regulations, or policies in the PRC could change rapidly in the future. Any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the CSRC or the CAC could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and could cause the value of such securities to significantly decline or be worthless.
If the Chinese government were to impose new requirements for approval from the PRC Authorities to issue our ordinary shares to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection requirements and similar matters.
On December 24, 2021, the CSRC released the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft for Comments) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments), which were published for public comments only with the comment period expired on January 23, 2022. The Draft Rules Regarding Overseas Listing lay out the filing regulation arrangement for both direct and indirect overseas listing, and clarify the determination criteria for indirect overseas listing in overseas market.
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The Draft Rules Regarding Overseas Listing stipulate that the Chinese-based companies, or the issuer, shall fulfill the filing procedures within three working days after the issuer makes an application for initial public offering and listing in an overseas market. The required filing materials for an initial public offering and listing should include at least the following: record-filing report and related undertakings; regulatory opinions, record-filing, approval and other documents issued by competent regulatory authorities of relevant industries (if applicable); and security assessment opinion issued by relevant regulatory authorities (if applicable); PRC legal opinion; and prospectus.
In addition, an overseas offering and listing is prohibited under any of the following circumstances: (1) if the intended securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (2) if the intended securities offering and listing may constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (3) if there are material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (4) if, in the past three years, the domestic enterprise or its controlling shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (5) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (6) other circumstances as prescribed by the State Council. The Administration Provisions defines the legal liabilities of breaches such as failure in fulfilling filing obligations or fraudulent filing conducts, imposing a fine between RMB 1 million and RMB 10 million, and in cases of severe violations, a parallel order to suspend relevant business or halt operation for rectification, revoke relevant business permits or operational license.
However, as of the date of this Annual Report, the Draft Rules Regarding Overseas Listing have not yet gone into effect, it is still uncertain how PRC governmental authorities will regulate overseas listing in general and whether we are required to obtain any specific regulatory approvals or to fulfill any record-filing requirements. The Draft Rules Regarding Overseas Listing, if enacted, may subject us to additional compliance requirement in the future, and we cannot assure you that we will be able to get the clearance of filing procedures under the Draft Rules Regarding Overseas List on a timely basis, or at all. If we do not receive any required approvals or record-filing or if we incorrectly conclude that approvals or record-filing are not required or if the CSRC or other regulatory agencies promulgate new rules, explanations or interpretations requiring that we obtain their prior approvals or ex-post record-filing for our recent public offering or any follow-on offering, we may be unable to obtain such approvals and record-filing which could significantly limit or completely hinder our ability to offer or continue to offer securities to our investors.
Furthermore, the PRC government authorities may strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers like us. Such actions taken by the PRC government authorities may intervene or influence our operations at any time, which are beyond our control. Therefore, any such action may adversely affect our operations and significantly limit or hinder our ability to offer or continue to offer securities and reduce the value of such securities.
As of the date of this Annual Report, we and our PRC subsidiaries have not been involved in any investigations on cybersecurity review initiated by the Cyber Administration of China or related governmental regulatory authorities, and have not received any requirements to obtain permissions from any PRC authorities to issue our Ordinary Shares to foreign investors or were denied such permissions by any PRC authorities. However, given the current PRC regulatory environment, it is uncertain when and whether we or our PRC subsidiaries, will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded.
We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC or other PRC governmental authorities required for overseas listings. As of the date of this report, except for the potential uncertainties disclosed above, we have not received any inquiry, notice, warning, sanctions or regulatory objection from the CSRC or other PRC governmental authorities. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities.
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Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our operations are located in the PRC. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the PRC could have a material adverse effect on the overall economic growth of the PRC. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in the PRC, which may adversely affect our business and operating results.
Non-compliance with labor-related laws and regulations of the PRC may have an adverse impact on our financial condition and results of operation.
We have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that became effective in January 2008 and its implementing rules that became effective in September 2008 and was amended in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. We believe our current practice complies with the Labor Contract Law and its amendments. However, the relevant governmental authorities may take a different view and impose fines on us.
As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice does not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.
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China’s economic, political and social conditions, as well as changes in any government policies, laws and regulations, could have a material adverse effect on our business.
Substantially all of our operations are located in China and substantially of our net revenues are derived from customers where the contracting entity is located in China. Accordingly, our business, financial condition, results of operations, prospects and certain transactions we may undertake may be subject, to a significant extent, to economic, political and legal developments in China. China’s 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. Although China’s economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the economy in China and could have a material adverse effect on our business.
The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have a negative effect on us. China’s social and political conditions may change and become unstable. Any sudden changes to China’s political system or the occurrence of widespread social unrest could have a material adverse effect on our business and results of operations.
Uncertainties with respect to the PRC legal system could adversely affect us.
Our operating subsidiaries are incorporated under and governed by the laws of the PRC. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters generally. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, the PRC has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in the PRC. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, these regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us. Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in the PRC may be protracted, resulting in substantial costs and diversion of resources and management attention.
Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the report based on foreign laws.
We conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, our current officers reside within China and are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside the PRC. In addition, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in the PRC of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.
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We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
We rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including for services of any debt we may incur.
Our PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, as a Foreign Invested Enterprise, or FIE, are required to draw 10% of its after-tax profits each year, if any, to fund a common reserve, which may stop drawing its after-tax profits if the aggregate balance of the common reserve has already accounted for over 50 percent of its registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are incorporated.
PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of future securities offerings to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce, or MOFCOM or its local branches and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, (i) a foreign loan of less one year duration procured by our PRC subsidiaries is required to be registered with SAFE or its local branches and (ii) a foreign loan of one year duration or more procured by our PRC subsidiaries is required to be applied to the NDRC in advance for undergoing recordation registration formalities. Any medium or long-term loan to be provided by us to our PRC operating subsidiaries, must be registered with the NDRC and the SAFE or its local branches. We may not be able to complete such registrations on a timely basis, with respect to future capital contributions or foreign loans by us to our PRC Subsidiary. If we fail to complete such registrations, our ability to use the proceeds of any future securities offerings and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities. As this circular is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange related rules. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds of future securities offerings to fund our PRC operating subsidiary, to invest in or acquire any other PRC companies through our PRC Subsidiary, which may adversely affect our business, financial condition and results of operations.
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Our business operation may be affected if we are forced to relocate our manufacturing facilities and stores.
We leased the premises for our office located in Shishi and one corporate store. However, none of our lease agreements have been registered with the relevant governmental agencies. As a result, our rights to use and occupy the premises may not be secured if any third parties such as other tenants who have registered their lease agreements challenge us under PRC law. Moreover, while we have taken various measures to verify the ownership of property such as checking utility bills and search government records, most of our landlords have declined to confirm whether they possess the property ownership certificates and land use rights certificates for our properties. As a result, we have been unable to verify whether third parties may assert their ownership rights under PRC law against most of our landlords or challenge most of our leases in the future. If our rights to use the premises are challenged, we may be forced to relocate to other premises. We may not be able to relocate to a suitable premise promptly or lease alternative premises on terms at least as favorable as our existing ones. In addition, relocation costs and interruption of production may have a material adverse effect on our business operation and financial performance.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. It is difficult to predict how long such appreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again. All of our revenues and substantially all of our costs are denominated in Renminbi. We rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the common stock in U.S. dollars. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our Common Stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount.
Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, we primarily rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required, in principle, where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the Common stock.
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Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“M&A Rules”) and Anti-Monopoly Law of the People’s Republic of China promulgated by the Standing Committee of the NPC which became effective in 2008 (“Anti-Monopoly Law”), established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that State Administration for Market Regulation (SAMR) be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators, issued by the State Council in 2008, are triggered. Moreover, the Anti-Monopoly Law requires that transactions which involve the national security, the examination on the national security shall also be conducted according to the relevant provisions of the State. In addition, PRC Measures for the Security Review of Foreign Investment which became effective in January 2021 require acquisitions by foreign investors of PRC companies engaged in military-related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and operations.
Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.
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Some of our shareholders that we are aware of are subject to SAFE regulations, and we expect all of these shareholders will have completed all necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. We cannot assure you, however, that all of these shareholders may continue to make required filings or updates in a timely manner, or at all. We can provide no assurance that we are or will in the future continue to be informed of identities of all PRC residents holding direct or indirect interest in our company. Any failure or inability by such shareholders to comply with SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.
Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
As of the date of this disclosure, The PRC residents have applied for foreign exchange registration under the SAFE Circular 37 and other related rules. Although they are in the process of making foreign exchange registration, they may still face with the above said possible fines in accordance with the PRC Laws.
Failure to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations may subject us to penalties.
Companies operating in China are required to participate in various government-mandated employee benefit contribution plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit contribution plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Companies operating in China are also required to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. We may be subject to late fees and fines in relation to the underpaid employee benefits and under-withheld individual income tax, our financial condition and results of operations may be adversely affected.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Pursuant to the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, promulgated by SAFE in 2012, or SAFE Notices No. 7, PRC citizens and non-PRC citizens who reside in China for a continuous period of no less than one year who participate in any stock incentive plan of an overseas publicly listed company offered to the director, supervisor, senior management and other employees of, and any individual who has labor relationship with its domestic affiliated entities are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of no less than one year and who have been granted stock options became subject to these regulations when our company became an overseas listed company upon the completion of our recent initial public offering. Failure to complete the SAFE registrations for our employee incentive plans after our listing may subject them to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.
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In addition, the State Administration of Taxation, or SAT, has issued certain circulars concerning employee stock options and restricted shares. Under these circulars, our employees working in China who exercise stock options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options or are granted with restricted shares. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.
U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic interests and technologies. There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements, especially as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our facilities by any of these regulators may be limited or prohibited.
If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular applies only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
The tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we would be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we would be required to withhold a 10% tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise shareholders (including the common stockholders) may be subject to PRC tax on gains realized on the sale or other disposition of the common stock, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including the common stockholders) and any gain realized on the transfer of the common stock or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our common stock.
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We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets, as such persons need to determine whether their transactions are subject to these rules and whether any withholding obligation applies.
On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an “Indirect Transfer”, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who pays for the transfer is obligated to withhold the applicable taxes currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
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We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation, and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In the past few years, U.S. publicly traded companies that have substantially all of their operations in China, particularly companies like us have been the subject of intense scrutiny, criticism, and negative publicity by investors, financial commentators, and regulatory agencies, such as the SEC. Much of the scrutiny, criticism, and negative publicity has centered around financial and accounting irregularities and mistakes, lack of effective internal controls over financial accounting, inadequate corporate governance policies or lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have sharply decreased in value and, in some cases, have become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions, and are conducting internal and external investigations into the allegations. It is not clear the effect of this sector-wide scrutiny, criticism, and negative publicity will have on our Company, our business, and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations defending our Company. This situation will be costly, time consuming, and distract our management from growing our company.
The disclosures in our reports and other filings with the SEC and our other public pronouncements will not be subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
Unlike public reporting companies whose operations are located primarily in the United States, however, all of our operations will be located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
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Proceedings instituted by the SEC against five PRC-based accounting firms could result in financial statements being determined to be not in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated, or willfully aided and abetted the violation of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, sanctioning four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of the initial decision. In February 2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the administrative proceeding against all four firms.
If our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unable to find in a timely manner another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements could be determined to not be in compliance with the requirements for financial statements of public companies with a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the SEC’s revocation of the registration of our Common Stock under the Exchange Act, which would cause the immediate delisting of our Common Stock from the NASDAQ Capital Market, and the effective termination of the trading market for our Common Stock in the United States, which would likely have a significant adverse effect on the value of our Common Stock.
Our holding company structure may limit the payment of dividends.
We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depend upon the receipts of dividends or other payments from our operating subsidiaries, other holdings, and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency, and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for conversion of RMB into U.S. dollars may reduce the amount received by the U.S. stockholders upon conversion of dividend payments into U.S. dollars.
Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits to fund certain reserve funds according to the Chinese accounting standards and regulations. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to satisfy certain reserve funds as required by the Chinese accounting standards, we will be unable to pay any dividends.
After-tax profits/losses with respect to the payment of dividends from accumulated profits and the annual appropriation of after-tax profits as calculated pursuant to the Chinese accounting standards and regulations do not result in significant differences as compared to after-tax earnings as presented in our financial statements. However, there are certain differences between PRC accounting standards and regulations and IFRS, arising from different treatment of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.
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The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.
Under PRC law, legal documents for corporate transactions, including agreements and contracts, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with relevant PRC administration for market regulation. A company chop or seal may serve as the legal representation of the company towards third parties even when unaccompanied by a signature.
In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application, which will then be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.
Regulation and censorship of information disseminated over the internet in China may adversely affect our business and reputation and subject us to liability for information displayed on our website.
The PRC government has adopted regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, and the closure of the concerned websites. The website operator may also be held liable for such censored information displayed on or linked to the websites. If our self-owned online store or content is found to be in violation of any such requirements, we may be penalized by relevant authorities, and our operations or reputation could be adversely affected.
RISKS RELATED TO OUR SECURITIES
If we fail to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future debt or equity financing more difficult for us.
Our Common Stock is traded and listed on the Nasdaq Capital Market under the symbol “LLL.” Our Common Stock may be delisted if we fail to maintain certain Nasdaq listing requirements. For instance, companies listed on NASDAQ are subject to delisting for, among other things, failure to maintain a minimum closing bid price per share of $1.00 for 30 consecutive business days.
We cannot ensure you that we will continue to comply with the requirements for continued listing on The NASDAQ Capital Market in the future. If our Common Stock is no longer listed on The NASDAQ Capital Market, our shares would likely trade on the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our shares, further limiting the liquidity of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares. Such delisting from The NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
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If we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in the over-the-counter market.
Delisting from NASDAQ may cause our shares of Common Stock to become the SEC’s “penny stock” rules. The SEC generally defines a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. One such exemption is to be listed on NASDAQ. The market price of our Common Stock is currently higher than $1.00 per share. However, because the daily trading volume in our Common Stock is very low, significant price movement can be caused by the trading in a relatively small number of shares. Therefore, were we to be delisted from NASDAQ, our Common Stock may become subject to the SEC’s “penny stock” rules. These rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii) disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction and (iv) monthly account statements showing the market values of our securities held in the customer’s accounts. A broker would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for shareholders to purchase or sell our shares. Because the broker, not us, prepares this information, we would not be able to assure that such information is accurate, complete or current.
Numerous factors, many of which are beyond our control, may cause the market price of our Common Stock to fluctuate significantly.
There are numerous additional factors, many of which are beyond our control, may cause the market price of our Common Stock to fluctuate significantly. These factors include:
| ● | 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; |
| ● | changes in financial estimates by us or by any securities analysts who might cover our shares; |
| ● | speculation about our business in the press or the investment community; |
| ● | significant developments relating to our relationships with our customers or suppliers; |
| ● | stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in our industries; |
| ● | customer demand for our products; |
| ● | investor perceptions of our industry in general and our company in particular; |
| ● | the operating and stock performance of comparable companies; |
| ● | general economic conditions and trends; |
| ● | major catastrophic events; |
| ● | announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; |
| ● | changes in accounting standards, policies, guidance, interpretation or principles; |
| ● | loss of external funding sources; |
| ● | sales of our shares, including sales by our directors, officers or significant shareholders; and |
| ● | additions or departures of key personnel. |
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Securities class action litigation is often instituted against companies following periods of volatility in their share price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our shares and other interests in our company at a time when you want to sell your interest in us.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and do not anticipate paying any cash dividends on our shares. Accordingly, investors must be prepared to rely on sales of their shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our shares. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors (the “Board”), and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable laws, and other factors the Board deems relevant.
Grants of Awards to Key Employees and Consultants
In order to compete for talents, we may need to offer higher compensation to our key and consultants, including granting awards under our Equity Incentive Plan, which may include the grant of shares of restricted common stocks. Issuance of such shares will cause a deduction in our profit although there is no cash paid out. However, such deduction in profit will make our financial performance looks less attractive to the investor and cause difficulties to raise sufficient capital to support our business.
We are a “foreign private issuer” and have disclosure obligations that are different than those of U.S. domestic reporting companies. Therefore, you should not expect to receive the same information about us as a U.S. domestic reporting company may provide. Furthermore, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to stockholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.
We are a foreign private issuer. As a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or file proxy statements with the SEC. We are also required to file our annual report on Form 20-F with the SEC within four months of our fiscal year end. We are also not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by U.S. domestic reporting companies, our shareholders should not expect to receive all of the same types of information about us and at the same time as information is received from, or provided by, U.S. domestic reporting companies. We are liable for violations of the rules and regulations of the SEC, which do apply to us as a foreign private issuer. Violations of these rules could affect our business, results of operations, and financial condition.
As a foreign private issuer, we are also permitted to rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our securities.
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We are exempted from certain corporate governance requirements of the Nasdaq Stock Market by virtue of being a foreign private issuer. As a foreign private issuer, we are permitted to follow the governance practices of our home country, the Republic of the Marshall Islands in lieu of certain corporate governance requirements of Nasdaq. As result, the standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:
| ● | have a compensation committee and a nominating committee to be comprised solely of “independent directors; and |
| ● | hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end. |
As a result, you may not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.
Future sales or perceived sales of our shares of Common Stock could depress our stock price.
As of the date of this report, we have 7,439,893 shares of Common Stock outstanding. Many of these shares will become eligible for sale in the public market, subject to limitations imposed by Rule 144 under the Securities Act. If the holders of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our Common Stock could decline. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short the Common Stock, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our Common Stock being offered for sale to increase, the market price of our Common Stock would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
Holders of our securities may face difficulties in protecting their interests because we are incorporated under the Republic of the Marshall Islands law.
We are a company incorporated under the laws of the Marshall Islands, and almost all of our assets are located outside the United States. In addition, majority of our directors and officers, and their assets, are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. You may also have difficulty bringing an original action in the appropriate court of the Marshall Islands to enforce liabilities against us or any person based upon the U.S. federal securities laws.
Provisions of our articles of incorporation may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could reduce shareholders’ opportunity to influence management of the Company.
Our Amended and Restated Articles of Incorporation, as amended (the “Restated Articles”) permit our Board to issue up to five million shares of preferred stock with a par value of $0.0001 (the “Preferred Stock”) from time to time, with such rights and preferences as they consider appropriate. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights and redemption rights provisions. The issuance of any preferred stock could reduce the value of our Common Stock. In addition, specific rights granted to future holders of preferred stock, including voting rights and conversion rights, could be used to restrict our ability to merge with, or sell assets to, a third party. As of the date of this Annual Report, the Company has created and designated the following series of the Preferred Stock: (i) Series A Convertible Preferred Stock: (ii) Series B Participating Preferred Stock; (iii) Series C Convertible Preferred Stock; and (iv) Series D Convertible Preferred Stock. Our Chief Executive Officer holds 150,000 shares of Series C Convertible Preferred Stock that are convertible into 750,000 shares of our Common Stock, on a 1 for 5 ratio. The ability of the Board to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent shareholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our Common Stock.
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ITEM 4. INFORMATION ON THE COMPANY
| A. | History and Development of the Company |
We are a Republic of the Marshall Islands Company incorporated under the Marshall Islands Business Corporations Act (“BDA”) on January 26, 2012. We were originally organized under the name “Acquisition Corp.” for the purpose of acquiring through a merger, capital stock exchange, asset acquisition, stock purchase, or similar acquisition transaction, one or more operating businesses or assets.
The address of the Company’s principal executive office is Bin Hai Da Dao No. 270, Lang Qin Wan Guo Ji Du Jia Cun Zong He Lou, Xiu Ying District, Haikou City, Hainan Province 570100, People’s Republic of China
On March 24, 2014, we entered into a share exchange agreement and plan of liquidation (the “Exchange Agreement”), with KBS International, Hongri International, a then wholly owned subsidiary of KBS International and Cheung So Wa and Chan Sun Keung, each an individual and shareholder of KBS International (each, a “Principal Stockholder”). The Exchange Agreement was subsequently amended on June 21, 2014. The transactions contemplated in the Exchange Agreement (the “Share Exchange”) were closed on August 1, 2014. At the closing, we acquired 100% of the issued and outstanding equity interest in Hongri International from KBS International. In exchange, we issued an aggregate of 1,530,497 shares of Common Stock of the Company to KBS International. In addition, on July 29, 2014, we completed a tender offer related to the Share Exchange and redeemed the 332,116 shares of common stock validly tendered and not withdrawn. Pursuant to the Exchange Agreement, KBS International was liquidated and dissolved in August 2014 and the 1,530,497 shares of Common Stock of the Company were distributed to each shareholder of KBS International according to their respective ownership of KBS International. Following the consummation of the Share Exchange, we had a total of 1,694,489 shares of Common Stock outstanding.
On October 31, 2014, we amended our Articles of Incorporation to change our name to KBS Fashion Group Limited.
On February 3, 2017, the Company effected and our Board approved a one-for-fifteen reverse stock split of the Company’s issued and outstanding Common Stock. Our Common Stock began trading on the NASDAQ Stock Market on a split-adjusted basis when the market opened on February 9, 2017.
Acquisition of Flower Crown Holding
On December 9, 2020, we entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Flower Crown Holding, a corporation organized under the laws of the Cayman Islands (the “Flower Crown”), and the shareholders of Flower Crown (each a “FC Shareholder” and collectively the “FC Shareholders”), to acquire all the issued and outstanding ordinary shares of Flower Crown in exchange for the issuance to the FC Shareholders an aggregate of 259,130 shares of our Common Stock (the “Share Exchange”). The Share Exchange transaction was closed on December 21, 2020 and as a result, Flower Crown is now our wholly-owned subsidiary.
Flower Crown is a holding company incorporated on August 7, 2020 in Cayman Islands, which wholly owns Flower Crown (China) Holding Group Co., Limited, a limited company incorporated in Hong Kong on May 24, 2018 (“Flower Crown HK”). Flower Crown HK, in turn, wholly owns all of the share capital of Kim Hyun Technology (Tianjin) Co., Ltd, a wholly foreign-owned enterprise incorporated on July 23, 2020 in China (“Kim Hyun Tianjin” or “WFOE”). Kim Hyun Tianjin, through a series of contractual arrangements, manages and controls our operating entity, Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd, a limited company incorporated on August 4, 2016 in P.R.China (“Jin Xuan Luxury Tourism”). Jin Xuan Luxury Tourism wholly owns two subsidiaries, namely Flower Crown (Hainan) Cross-Border E-Commerce Co., Ltd., a limited company incorporated on July 17, 2020 in P.R.China (“Flower Crown China”), and Beijing Heyang International Travel Service Co., Ltd., a limited company incorporated on March 29, 2018 in P.R.China (“Heyang Travel”).
Concurrently with the conclusion of the Share Exchange Agreement on December 9, 2020, we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Ms. Sun Lei, Chief Executive Officer and a member of the Board, under which Ms. Sun is entitled to an aggregate of 233,217 shares of the Company (the “Purchased Shares”) in exchange for making payments on behalf of the Company for all “Public Company Expenses” as set forth in the Stock Purchase Agreement for the next two years, in the amount of no less than $600,000 and no more than $700,000 (“Stock Purchase”). The Stock Purchase transaction was closed on December 21, 2020.
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Pursuant to the term of the Stock Purchase Agreement, the Purchased Shares are held in escrow by an escrow agent to secure Ms. Sun’s obligations under the Stock Purchase Agreement. As long as Ms. Sun complies with her obligations under the Stock Purchase Agreement, a portion of the Purchased Shares will be released every 6 months in four installments, pursuant to a vesting schedule set forth in the Stock Purchase Agreement. As of the date of this report, 50% of the Purchased Shares were released from escrow under this Stock Purchase Agreement.
Recent Developments
On June 21, 2021, the Company further amended the Restated Articles by filing the Articles of Amendment with the Registrar of the Corporation. This Amendment to the Articles of Incorporation permitted holders of a majority of the total voting power of the outstanding capital stock to take any action that is required or permitted to be taken at a meeting of the shareholders, by written consent.
On October 4, 2021, the Company changed its name from “KBS Fashion Group Limited” to “JX Luxventure Limited” (the “Name Change”) by filing another Articles of Amendment to the Restated Articles with the Registrar of the Corporation reflecting the change of the corporate name of the Company from “KBS Fashion Group Limited” to “JX Luxventure Limited” which became effective upon filing.
Effective December 13, 2021, we reorganized our corporate subsidiary structure in the PRC under Flower Crown Holding (“FLH”). On December 21, 2021, we closed a Shares Exchange Agreement with FLH, which operated its China subsidiaries, Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd. (“JX Hainan Digital”), Beijing Heyang International Travel Service Co., Ltd. (“Beijing Heyang”) and Flower Crown (Hainan) Cross-Border E-Commerce Co., Ltd. (“FCEC”) through a variable interest structure (“VIE”). As a result of the FLH’s China subsidiaries restructuring, we no longer operate those entities through a VIE structure and are now the indirect sole shareholder of JX Hainan Digital and Beijing Heyang. As part of the restructuring, due to the restriction of foreign ownership by the relevant laws and regulations of the People’s Republic of China, namely Provisions on Administration of Foreign Invested Telecommunications Enterprise (外商投资电信企业管理规定), we divested FCEC under a Shares Transfer Agreement with a third party. FCEC represented less than 5% of our total revenues.
The reorganization was approved by the unanimous consent of our Board of Directors and the affirmative vote of the holders of approximately 60.4% of our total issued and outstanding capital stock. Following the reorganization, our corporate structure is now as follows:
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On January 11, 2022, the Board, by unanimous written consent, in accordance with the Company’s Bylaws and the terms of the 2028 Equity Incentive Plan, and the BCA, terminated the Company’s 2018 Equity Incentive Plan and adopted the 2022 JX Luxventure Equity Incentive Plan (the “2022 Plan”), which provides for up to 10,000,000 shares of our Common Stock that may be issued under the 2022 Plan. The 2022 Plan was approved by the holders of 60.4% of the total issued and outstanding capital stock of the Company on the same day.
On February 11, 2022, the Company filed the Registration Statement on Form S-8, in which it registered 4,000,000 shares of our Common Stock issuable under the 2022 Plan. The Registration Statement became effective upon filing.
On April 9, 2022, the Company dismissed its independent registered public accounting firm, WWC, P.C. The Board of Directors of the Company approved the dismissal of WWC, P.C. and approved the engagement of Onestop Assurance PAC as our independent registered public accounting firm, to audit the Company’s financial statements for the year ended December 31, 2021, in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) for foreign private issuers and the PCAOB.
On April 8, 2021, our Board, acting by unanimous written consent, in accordance with Section 35 of the BCA duly adopted the resolutions creating a new series of preferred stock, par value $0.0001 per share (“Preferred Stock”), designated as “Series A Convertible Preferred Stock” and adopted the Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock (the “Certificate of Designation of Series A”) which authorized for issuance 1,500,000 shares of Series A Convertible Preferred Stock and had the initial stated value of US$1.00 per share (“Series A Preferred”).
On March 12, 2021, we announced the authorization and declaration of a dividend distribution of one right (a “Right”) for each outstanding share of the Common Stock of the Company to stockholders of record as of the close of business on March 31, 2021 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one 0.00667 portion of a share of Series B Participating Preferred Stock of the Company (“Series B Participating”) at an exercise price of $50.00.
On September 1, 2021, the Board, acting by unanimous written consent, in accordance with Section 35 of the BCA duly adopted the resolutions creating a new series of Preferred Stock, designated as “Series C Convertible Preferred Stock” and adopted the Certificate of Designation, Preferences and Rights of the Series C Convertible Preferred Stock (the “Certificate of Designation of Series C”) which authorized for issuance 150,000 shares of Series C Preferred Stock and had the initial stated value of US$10.00 per share (“Series C Preferred”).
On October 18, 2021, our Board acting by unanimous written consent, in accordance with Section 35 of the BCA duly adopted the resolutions creating a new series of Preferred Stock, designated as “Series D Convertible Preferred Stock” and adopted the Certificate of Designation, Preferences and Rights of the Series D Convertible Preferred Stock (the “Certificate of Designation of Series C”) which authorized for issuance 100,000 shares of Series D Preferred Stock and had the initial stated value of US$39.00 per share (“Series D Preferred”).
On April 20, 2022, our Board adopted resolutions, by unanimous written consent pursuant to Section 35 of the BCA, in which it determined that the Certificate of Designation of Series A Preferred, the Certificate of Designation of Series B Participating, Certificate of Designation of Series C Preferred, and the Certificate of Designation of Series D Preferred were not filed with the Registrar of Corporations in the Marshall Islands (“Registrar of Corporations”), in accordance with the provisions of sections 35 and 5 of the BCA at the relevant time each Certificate of Designation was approved by the Board, and that it is in the best interests of the Corporation and its stockholders to correct such administrative oversight by filing Certificate of Designation of Series A Preferred, the Certificate of Designation of Series B Participating, the Certificate of Designation of Series C Preferred, and the Certificate of Designation of Series D Preferred with the Registrar of Corporations (collectively, the “Certificates of Designation of Preferred Stock”).
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On April 25, 2022, the Company filed the Certificates of Designation with the Registrar of Corporations under the Company’s former name, KBS Fashion Group Limited (except for the Certificate of Designation of Series D Preferred), and on April 27, 2022, the Company filed with the Registrar of Corporations the First Amended and Restated Certificate of Designation of Series A Preferred, the Amended and Restated Certificate of Designation of Series B Participating, the Amended and Restated Certificate of Designation of Series C Preferred, and the Amended and Restated Certificate of Designation of Series D Preferred, reflecting the Company’s current name “JX Luxventure Limited” and restating all provisions set forth in the Certificates of Designation of Preferred Stock.
On May 10, 2022, the Company filed the Second Amended and Restated Certificate of Designation of Series A Preferred, which amended the timing of the conversion of Series A Preferred into Common Stock and restated all other provisions set forth in the First Amended and Restated Certificate of Designation of Series A Preferred.
The Securities and Exchange Commission, or SEC, maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Our web site address is http://www.jxluxventure.com. Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report.
Principal Capital Expenditures and Divestitures
For the year ended December 31, 2021, 2020, and 2019, our total capital expenditures and divestitures were $3,324,900, $8,494, and $nil, respectively. Such expenditure was mainly used in purchasing properties and vehicles for office use. Our operating cash flow mainly funded these capital expenditures.
| B. | Business Overview |
We operate in the following three lines of business: (1) Menswear; (2) Cross Border Merchandise and 3) Tourism. Our website is www.jxluxventure.com (“Website”).
Menswear
We are a leading casual menswear company in China with a demonstrated track record of designing, marketing, and selling our own line of fashion menswear. Our products include men’s apparel, footwear and accessories, primarily targeting urban males between the ages of 20 and 40 in the Tier II and Tier III cities in China. Tier II cities generally refer to major cities located in each province of China other than the capital city of such province. Tier III cities generally refer to county-level cities in China. Tier III cities that we focus on are the national top 100 county cities identified by the State Statistics Bureau of China each year. These cities are characterized by higher GDP, higher disposable income, better education and better infrastructure as compared with other county-level cities.
Our apparel products include outerwear, knitwear, denim, tops, bottoms, accessories and footwear. Since 2006, we have launched 4,925 collections of new products, each year with a different theme to highlight the current trends in menswear for the season.
We have established a nationwide distribution network covering 11 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2021, this network was comprised of 1 corporate store owned and operated by the company and 29 franchised stores operated by 11 third party distributors or their sub-distributors. Some wholesale distributors sold our products to multi-branded stores and online stores. The number of franchised stores has grown from 7 as of December 31, 2006 to 29 as of December 31, 2021. In the years ended December 31, 2021, 2020 and 2019, sales through our corporate store accounted for 7.4%, 4.7% and 3.5% of our total revenues respectively, and sales through distributors and whole sellers accounted for 92.6%, 87.7% and 62.6% of our revenues, respectively. Total revenue from the corporate store sales for fiscal year 2021 for $0.37 million, compared to $0.45 million for 2020 and $0.56 million for 2019.
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From 2009 through 2021, total net sales decreased from $28.1 million to $4.96 million while the net profit decreased from $9.0 million to $10.08 million. (only apparel business part)
Non-menswear Business
Through acquisition of Flower Crown on December 21, 2020, we added two lines of business to our menswear business: Cross Border Merchandise and Tourism.
On December 30, 2021, our subsidiary, Flower Crown (China) Holding Group Co., Limited. (“Flower Crown”), closed a Global Shopping E-Commerce Open Platform Store Service Agreement (the “Agreement”) with Global Premium Buy (Macau) Limited (“GPBL”). Pursuant to the Agreement, Flower Crown will open stores on GPBL’s platform and engage in product sharing on content platforms operated by GPBL’s affiliates, which include “Tik Tok”, “Dou Yin”, “Xigua” and “Tik Tok Volcano Edition”.
On December 27, 2021, JX Luxventure (Hainan) Digital Technology Co., Ltd., a subsidiary of JX Luxventure Limited, closed a Real Estate Transaction Contract with a non-affiliate, acquiring a piece of commercial real estate of 240 square meters for cross-border operations for the amount of USD $2,338,464 based upon the appraisal report. The transaction was approved by the unanimous consent of our Board of Directors and the affirmative vote of the holders of approximately 60.4% of our total issued and outstanding capital stock.
On February 9, 2022, Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd. (“JX Hainan”), a subsidiary of the Company, entered into and executed a Memorandum of Japanese High-end Life Style Services Strategic Cooperation Agreement (the “Agreement”) with Xin Hua Fund Co., Ltd. (“XHFC”). Pursuant to the Agreement, JX Hainan and XHFC will cooperate to bring high-end Japanese medical treatment, rehabilitation treatment, precision physical examination, anti-aging beauty and other related services to the China market.
On March 10, 2022, Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd. (“JX Hainan”), a subsidiary of the JX Luxventure Limited, entered into and executed a Strategic Cooperation Framework Agreement on Cross-border Supply Chain of Duty Free Merchandize (the “Agreement”) with Aikayun Technology (Hainan) Co., Ltd. (“Aikayun”). Pursuant to the Agreement, JX Hainan will have the exclusive right to distribute cross-border products from Japan in the Hainan Island in the amount up to RMB1,000,000,000.
On March 21, 2022, our PRC subsidiary, Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd. (“JX Hainan”), a subsidiary of JX Luxventure Limited, entered into and executed a Framework Agreement on Strategic Cooperation (the “Agreement”) with Chongqing E-Pet Technology Co., Ltd. (“Chongqing E-Pet”), one of the major operators of online cross-border pet-food shopping platform in China. Pursuant to the Agreement, Chongqing E-Pet will purchase from JX Hainan cross-border pet foods in the amount up to USD60,000,000 to be distributed on the platforms operated by Chongqing E-Pet.
On March 31, 2022, our PRC subsidiary, Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd. (“JX Hainan”), entered into and executed a Framework Agreement on Strategic Cooperation (the “Agreement”) with Ragdoll International Trading Co., Ltd. (“Ragdoll”), an E-commerce platform operator. Pursuant to the Agreement, Ragdoll will purchase from JX Hainan cross-border pet foods in the amount of up to USD30,000,000 to be distributed on the platforms operated by Ragdoll.
Effects of the COVID-19 pandemic
The impact of the ongoing COVID-19 pandemic is severe, widespread and continues to evolve. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures, including quarantines, travel bans, business closures and other heightened restrictions suggested or mandated by governmental authorities or otherwise elected by companies as a preventive measure, have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of our markets. It is impossible to predict all the effects and the ultimate impact of the COVID-19 pandemic, as the situation continues to rapidly evolve. The extent of these impacts on our financial and operating results will be dictated by the length of time that the pandemic and the related counter-measures continue, in addition to individuals’ and companies’ risk tolerance regarding health matters going forward.
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This growth in revenue, especially revenues from our tourism business, has been adversely impacted by COVID-19 pandemic at various times during 2021 as a result of government enforced lockdowns.
Our Revenue Model of Cross-border Merchandise and Tourism
We are a supplier of cross-border merchandise and tourism products (including tourism package and airline tickets) to our business customers, which are operators of online and off-line platforms. Our revenues for the cross-border merchandise and tourism business are generated from 1) supplying Flower Crown Products we globally source from third party to business customers and 2) supplying Heyang Travel Products covering tourism package and airline tickets to business customers.
Our Cross-border Merchandise and Tourism Products
Flower Crown Products
Flower Crown is a supplier of cross-border merchandise to business customers who are operators of online and offline platforms. Our current top three business customers are Chongqing E-Pet Technology Co., Ltd., China International Travel Services (“CITS”) and China Hainan Airline. Flower Crown Products currently include: 1) health care products; 2) personal care products; 3) cosmetics; 4) maternal and child products; 5) pet-related products; 6) universal cuisine and 7) universal household products. We may add more products to our Flower Crown Product portfolio in future. We do not manufacture, develop or produce any Flower Crown Products and all such products sold are from our international manufactures.
We purchased the cross-border merchandise from third party, store them in our warehouse, and then supply them to our business customers. All of the purchases from third party manufacture are non-refundable, thus we assume the all risks in connection with cross-border merchandise purchased.
We have devised an AI based analysis program to identify trends in cross-border merchandise, thus ensuring our business customers have access to the latest in demand merchandise. We also developed a warehouse management software enabling our business customers to see in real time the amount of merchandise in stock. If one of our business customers is unable to sell the full amount of cross-border merchandise supplied by us in one live stream, the other business customers can see the unsold amount and make an order thereof. Utilizing our proprietary technology, we greatly reduced the risks of excess inventory.
Heyang Travel Products of Tourism Package
Heyang Travel is a supplier of luxury travel experience package to online platforms operated by our business customers. Our top three business customers are Trip.com, Flggy.com, and CITS. We purchase time allocation from network of luxury automobiles and yachts, bundle them into one unforgettable high-end luxury experience. All those purchases are non-refundable and we assume all the risks. We supply those high-end luxury experience products to our business customers. In case the end-users of our business customers fail to complete the purchase or make a return, we must take back the products and assumes all risks, including refund of full price.
Heyang Travel Products of reselling of Airline Tickets
Heyang Travel is a supplier of airline tickets to be distributed through our business customers. Presently, our business partners are 51books.com and Beijing Jiuzhou Skyline International Travel Service Co., Ltd.
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Heyang purchases air tickets from airlines on a non-refundable basis and supply those tickets plus value added services to our business customers. We use our proprietary technology to enable our business customers to provide the most competitive rate to its end users. Currently, we offered a lower rate to our business customers so that we can build more transaction volume to enable us to negotiate with our suppliers to get a lower rate in future. Once we get the lower rate from airlines, together with other competitive tourism products we can achieve in other business lines, we will be able to offer our customers more attractive products as a bundle.
Metaverse
Under the leadership of Liu Ze, our Chief Technology Officer, we developed “Little L”, a virtual influencer technology. “Little L” can be deployed on platform operated by our business customers, thus enhancing their end user experience. We received the award for “Best Virtual Human Software Technology Service Provider” award by iiMedia Research for “Little L”.
Description of Property
Properties We Lease
Upon acquisition of Flower Crown on December 21, 2020, we currently lease additional spaces as indicated below:
| Lessor/Rental Cost per month | Lessee | Location | Area (Square Meter) | Annual Rent | Term | Use | ||||||||
| Feng Wu* | Heyang Travel | Room 217, Floor 2, Building 102, North Chaoyang Road, Chaoyang District, Beijing | 56.30 | $ | 14,769 (RMB96,000) | August 20, 2020 to August 19, 2021 | Office | |||||||
| Tianjin Baofu Property Management and Development Co., Ltd | Luxventure (Hainan) Digital Technology (Tianjin ) | Room 1201, Floor 12, Building A, Lingao Creative Industrial Park Phase III, Xiqing District, Tianjin | 178 | $ | 11,077 (RMB72,000) | May 1, 2020 to April 30, 2022 | Office | |||||||
| Lin Yongxue* | Luxventure (Hainan) Digital Technology | 17-3 Luneng Hailan Mansion Villa, Xiuying District, Haikou | 90.12 | $ | 30,769 (RMB200,000) | January 14, 2021 to June 30, 2023 | Office | |||||||
| Lu Liyou* | Luxventure (Hainan) Digital Technology (Shenzhen) | 608, Block A, Jingji Riverside Times, Binhe Avenue, Futian District, Shenzhen | 238 | $ | 59,077 (RMB384,000) | June 8, 2021 to June 7, 2023 | Office | |||||||
| * | Feng Wu, Lin Yongxue and Lu Liyou are not a related party to the Company. |
Non-menswear Business Employees
As of the date of this report, Flower Crown, its subsidiaries and PRC operating entities have a total of 171 employees, including 56 full time employees and 115 part time employees, and have no independent contractors.
As required by regulations in China, we participate in various employee social security plans that are organized by local governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required under Chinese law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We believe that we maintain a good working relationship with our employees and to date, we have not experienced any significant labor disputes.
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The KBS Brand for Menswear Business
We are engaged in a highly competitive industry in which brand image and recognition is critical to attracting customers to purchase our products. We have adopted KBS as a uniform brand name and image for all stores in our distribution network and on all products sold in those stores. The KBS brand was created by Ms. Qinghua Ye in 2006 and registered with the trademark administration authority in 2008. Subsequently, Ms. Ye assigned the KBS trademark to Hongri PRC in 2008. In 2009, Hongri PRC transferred this trademark to France Cock, which then licensed such trademark back to Hongri PRC. Based on our sharp rise in revenue since 2006, we believe that the KBS brand has gained a following in the casual menswear market in the cities where our products are sold.
To promote our brand, we have developed and implemented brand management policies in all of our corporate stores and franchised stores. Our brand management policies set out detailed requirements for store decorations and display of products. This enables us to project a consistent brand image. In addition, each season, our design and product development team develops display concepts, including the presentation of our collections in the stores and the color schemes for the backdrops. We also work closely with our distributors to supervise the daily operations of franchised stores through unscheduled visits to ensure that our brand management policies are properly followed.
We may suspend the supply of our products or terminate distribution agreements in the event that any of our distributors or their sub-distributors consistently fails to comply with our brand management policies.
Our Menswear Products
Our apparel products include cotton and down jackets, sweaters, shirts, T-shirts, jeans and trousers. Accessories include shoes, bags, socks and caps. In 2020, the suggested retail prices of our products ranged from RMB299 to RMB1,699 (approximately $43 to $246) for our apparel products and RMB319 to RMB1699 (approximately $46to $246) for our accessory products. Since 2006, we have launched 5,164 collections of new products, each year with a different theme to highlight the current trends in menswear for the season.
Our Menswear Design
We believe one of our key strengths is our internal design and product development team, which designs products that reinforce our brand image. Major parts of our products are designed by our internal design and product development team with the collaboration of Korean designers. As of December 31, 2021, our design and product development team consisted of 14 members, including one senior designer with over five years of working experience. Final design concepts are approved by Mr. Keyan Yan, who has more than 29 years of experience in the industry. All of the other designers are graduates of professional design schools in China. We believe that our design and product development team is innovative and passionate and that the individual experience of each of our designers helps bring new and exciting products to our customers. Our design and product development team conceptualizes each season’s collections through an interactive process, taking into account our brand strategy, product image and market feedback, drawing inspirations from domestic and international fashion trends and collaborating with both our suppliers and distributors to fine-tune our designs. In particular, we collaborate with our suppliers to develop a variety of materials and fabrics for our products. We also involve distributors in our product selection process to take advantage of their market intelligence, which helps us to adapt to constantly changing customer preferences in local markets. Our designers also attend various domestic and international fashion shows to keep abreast of the latest fashion trends.
Starting from year 2015, design of our products comes from three channels. In addition to designing products by our in-house staff, we outsource to certain reputable designers. From time to time, our original design manufacturers, or ODMs also will directly sell their designed products to us.
In a typical year, we design and make around 1,500 prototypes. After the initial product selection, internal cost analysis of approved prototypes and final selection by distributors at the sales fairs, we eventually select approximately 750 designs for mass production. Final design of all of our products will be approved by our Chairman, Mr. Yan.
Our Menswear Distribution Network
We have established a nationwide distribution network consisting of corporate stores and franchised stores covering 11 of China’s 32 provinces and centrally administered municipalities.
Menswear Corporate Stores
As of December 31, 2021, we owned and operated 1 corporate store with the floor area of approximately 120 square meters. As part of our corporate strategy, we closed 17 corporate stores in last few years because of the low profitability of certain corporate stores. In the years ended December 31, 2021, 2020 and 2019, sales through our corporate stores accounted for 7.4%, 4.7% and 3.5% of our total revenues, respectively.
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We directly own and operate our corporate store. This direct control enables us to have closer relationship with our ultimate customers and better understanding of market trends and consumer preferences. Required capital for opening of each store depends on the location and area of the designated store. On average, the renovation cost per store is around $67,000 and the first year of rent payment is around $140,000 including premium paid to the previous owner. Rental period varies from two to five years. The total capital required to open a new store is generally around $207,000 per store. Once negotiation of rent is concluded, it takes one to two months to open up a store. We usually open up stores right before a peak season, such as labor holiday in May, National holiday in October and Chinese New Year in January/February. On average, new stores break even after one to three months of operation.
We currently have one standard designs for our corporate stores located in Fujian Province. They were considered as flagship stores for our distributors’ reference. Because in year 2016 and 2015 we closed some corporate stores, the inventories of these stores were cleared through promotion exhibitions we held in the third-tier cities at lower prices.
For corporate stores opened in second tier cities, we normally have a higher aesthetic standard compared with corporate stores in third and fourth tier cities. We generally locate our corporate stores at street level to access high pedestrian flow. Normally, we will sell in-season stock in our second-tier city corporate stores. Our second-tier city corporate stores are also designed to showcase our marketability to potential distributors so as to induce them to join our distributorship. For stores opened in the third and fourth tier cities, we normally sell some of our slow-moving or off-season stock at a discount due to our awareness of the generally lesser amount of disposable income available to residents of these cities. During certain times of the year, such as the New Year, Chinese New Year and Labor Day, we will organize promotional discounts together with our franchised stores to attract more customers and increase our stock turnover.
Menswear Franchised Stores
We sell a substantial amount of our products to our franchised distributors who in turn sell them to retail customers through KBS branded retail stores operated by our distributors or their sub-distributors. Since 2013, we have also been selling products to 3 provincial distributors without their own stores, or the no-store distributors, on a trial basis. We do not have any ownership in, or controlling relationship with, these franchised stores, but we have entered into distribution agreements with them in the Company’s standard form, pursuant to which we require distributors and their sub-distributors to sell only KBS products in these stores. Distributors are responsible for selecting and ordering products from us and overseeing the sales in the stores operated by them and their sub-distributors. By selling directly to our distributors, we can recognize revenues upon delivery to our distributors and delegate the distribution responsibilities to our distributors. This allows us to distribute our merchandise to a wide geographic area and penetrate markets by leveraging the local market knowledge of our distributors and their sub-distributors. This also minimizes our inventory and sales risks while allowing us to allocate our resources to our core competitive strengths of design, brand management and product development. We believe that our cooperation with distributors has enabled us to expand our business and accelerate our sales growth at much lower costs and operational risk and achieve brand recognition throughout China.
We have been building up our selected franchised distributor network since 2007. As of December 31, 2021, we had 11 franchised distributors who operated 29 retail stores directly or through their sub-distributors, all of which were stand-alone stores, which were typically located in commercial centers, including department stores or shopping malls, in their cities. All these distributors have worked with us for about 1 to 10 years. We have not encountered any material dispute or financial difficulty with our key distributors. The average floor area of each retail store was approximately 80 square meters as of December 2021. The number of retail stores has grown significantly in recent years from 7 as of December 31, 2006, with the aggregate floor area increasing from 560 square meters as of December 31, 2006 to 2,417 square meters as of December 31, 2021. In the years ended December 31, 2021, 2020 and 2019, sales through our distributors accounted for 92.6%, 87.7% and 62.6% of our revenues, respectively.
During each of the fiscal years ended December 31, 2019, 2020 and 2021, we had 0,0 and 2 customers exceeding 10% of our net sales.
Sales generated by our five best-performing franchised distributors accounted for approximately 50.4%,38.9%, and 38.4% of our revenues in the years ended December 31, 2021, 2020 and 2019, respectively. Those top distributors have been with us since 2007 or 2008 and have grown organically with us. At the same time, we are exploring more distributors in other regions including relatively small distributors to grow with their businesses. Although we rely on distributors for the sales and marketing of our products, we believe our business is not substantially dependent on any individual distributor.
We are highly selective in appointing distributors. We select our distributors based on a number of criteria, including experience in the menswear retail industry, sales channels, business resources, brand promotion capabilities and ability to help us implement our broader business strategies. We maintain good relationships with many regional or local distributor candidates which we identify through our internal research and external referrals but only appoint a handful of them to become our distributors. We evaluate the relevant experience of the distributor candidates in operating retail stores, their financial condition and sources of funding required for the establishment of a regional distribution network and their ability to develop a network of retail stores in the designated distribution region of a given distributor before we make any appointment.
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Once appointed, each distributor must enter into a distribution agreement with us. We do not own any interest in any of our distributors, their sub-distributors or the retail stores they operate. The distribution agreements we typically enter into with distributors do not allow us to be involved in the daily operating, financing or other activities of the distributors, except that distributors need to comply with our brand management policies and pricing and store management guidelines. Key terms of our standard distribution agreement include:
| ● | Product Exclusivity. Our distributors are required to sell only our products at KBS branded retail outlets managed by them or authorized retailers. |
| ● | Geographic Coverage. Distributors are granted exclusive rights to distribute our products (directly and indirectly through their sub-distributors) in the retail stores within the specified geographic area with no overlapping of distributors within our distribution network. However, we retain the right to operate direct stores anywhere regardless of whether we have appointed distributors there. |
| ● | Duration. The distribution agreements generally have an initial term of one year and are renewable at our discretion after taking into account factors such as compliance with our brand management policies and sales performance. |
| ● | Distributor Pricing. Distributors agree to order our products at a discount from our suggested retail prices. The discounted wholesale prices to distributors are classified into the following three categories: provincial distributor at a discount of 35% of retail price, district distributor is 30% of retail price and the wholesale distributor is 25% of retail price. |
| ● | Minimum Purchase Requirement. Each of our distributors is customarily expected to purchase a minimum amount of our products for each trade fair held biannually according to their present and expected distribution network. The minimum is typically RMB800,000 (approximately $110,000) for each store. |
| ● | Payment and Delivery. Normally, we expect distributors to pay us RMB0.5 million (approximately $74,000) to RMB1 million (approximately $148,148) as a deposit upon placing an order. Upon delivery of the orders, we will deduct amounts on deposit from the purchase price. For new and small district distributors, we normally require them to pay the balance before the delivery of its products. We may also accept payment on credit terms to the extent requested by distributors experiencing working capital difficulties or encouraging them to order more. The amount and duration of credit granted to each distributor will depend on its financial position and creditworthiness. We handle the arrangements for delivery of our products, but the distributors are normally expected to bear the related costs and expenses. |
| ● | Return of Products. We will only accept product returns from distributors for quality reasons and only if the distributors followed our standard procedures in processing the returned products. So far, we have not experienced any product returns due to expressed quality reasons. |
| ● | Retail Pricing. Other than at times when we launch promotional campaigns or adjust our strategies, distributors must adopt, and are required to procure their sub-distributors to adopt, our suggested retail prices for products. Distributors must obtain our consent before launching any distributor specific special offers. |
| ● | Brand Management. Distributors must comply with our brand management policies and store management guidelines. We may impose penalties, forfeiture of deposit, suspend supply of products and terminate the agreement in the event of any breach of such policies. |
| ● | Termination. We may generally terminate the distribution agreements and seek indemnification in the event of breach by distributors. In the event of some types of breach, we may not terminate the agreement but have other remedies. For example, if a distributor fails to order all products provided for under the distributorship agreement, we may instead impose forfeiture of deposit or withhold certain benefits. |
When opening new retail stores, our distributors conduct research on the market potential of the proposed retail sites, after which they will provide us with an application for opening a new retail store. In reviewing applications, we consider factors including the store location, store layout, available area, market opportunities, competitors and estimated sales. We conduct selected on-site investigations to verify applications filed by our distributors. Our retail stores are generally located in convenient retail locations in their respective cities and thus benefit from high volumes of pedestrian traffic.
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Effective monitoring of distributors and their retail stores is critical to our success. We have a team in our marketing, sales and distribution department to monitor our distributors’ and their sub-distributors’ performance, who conduct on-site inspections of selected retail stores each quarter without prior notice to ensure compliance with our store management guidelines. According to the results of our inspections, we, from time to time, make suggestions to our distributors with respect to the opening or closure of their retail stores. Distributors also need to submit to us their annual/ semi-annual plans to estimate their orders for the next season and their plan to improve the performance of existing retail stores or expand by opening new retail stores. This reporting system enables us to access up-to-date sales projections of our distributors and their sub-distributors, which reflects the overall level of retail sales of our products. It also provides us with the expansion plan of each distributor which helps us prepare our overall development plan in a more accurate manner.
We invite our distributors, as well as a select number of their sub-distributors and retail store managers, to attend our sales fairs, which are held twice a year. During the sales fairs, we discuss with our distributors and their sub-distributors the upcoming product line. Apart from participating in two sales fairs each year, our distributors visit us from time to time and contact us as necessary, which allows us to have access to updated market information. We also provide training for distributors and their sub-distributors in the areas of sales techniques, customer service and product knowledge, typically prior to the launch of our new collections each year. We believe that these investments help to improve the operations of the sales network and provide additional value-added services to retain our distributors and their sub-distributors.
The following table lists by region the number of retail stores operated by distributors and sub-distributors as of December 31, 2021:
| Location | As of December 31, 2021 | |||
| Fujian | 5 | |||
| Guangdong | 2 | |||
| Guangxi | 2 | |||
| Jiangsu | 3 | |||
| Anhui | 2 | |||
| Chongqing | 4 | |||
| Tianjin | 3 | |||
| Hebei | 4 | |||
| Sichuan | 4 | |||
| Total | 29 | |||
Menswear Pricing Policy
We sell our products to our distributors at uniform discounts from our suggested retail prices. We have a suggested retail price policy that applies to all our stores to help maintain brand image, ensure consistent pricing levels from region to region and prevent price competition among our distributors. In determining our pricing strategies, we take into account market supply and demand, production cost and the prices of our competitors’ similar products. Our sales representatives collect and record the retail prices of our products sold by our retailers. We analyze the information collected and engage in discussions with our distributors to ensure that they follow our pricing policy. See “—Franchised Stores” above.
Menswear Production
Originally located in Shishi City in Fujian Province and started production in 2006, our production facility is currently located in Taihu City in Anhui Province, China. The facility currently has a production capacity of 2 million pieces of clothes per year. This production facility mainly produces OEM products for famous sportswear producers. In 2019, 2020 and 2021, we produced about 1.02 million, 0.15 million and 0 million units at the operating capacity of 51%, 7.39% and 0%.
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Since 2011, we have been negotiating with the local government to acquire land use rights for our current facility consisting of 110,557 square meters. We obtained a portion of such land use rights for two parcels of land of 7,405 square meters and 2,440 square meters in March 2012 and May 2012, respectively, and have finished the construction of 8,572 square meters of staff dormitories and 22,292 square meters as workshop buildings and offices. We started to use the dormitory and factory in year 2015 and moved into the offices at the beginning of 2016. Due to the local government’s need for additional time to conclude negotiations with local residents over appropriate resettlement terms, the construction of the adjacent facility on the third parcel of land has been delayed. While we cannot guarantee when and whether the construction of the adjacent facility on the third parcel of land will be eventually completed, we believe we will be in a better position to schedule our construction plan once we acquire the land use right of the third parcel of land. Once completed, our total production capacity of the facility is expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per year.
All of the products produced by our ODM and OEM contract manufacturers bear the brand name KBS. As of December 31, 2021, we had 3 ODM contract manufacturers and 3 OEM contract manufacturers. Our sourcing strategy is based upon the quality of fabrics and workmanship that our customers expect from the KBS brand. The costs of our outsourced production amounted to approximately $3.75 million, $4.25 million and $5.38 million for years ended December 31, 2021, 2020 and 2019, respectively, accounting for approximately 89.2%, 50.2% and 27.3% of our total cost of sales in the respective periods.
As of December 31, 2021, our principal ODM and OEM contract suppliers included the following:
| No. | ||
| 1 | Shishi Pei Er Di Clothing Co. Ltd | |
| 2 | Fujian Si Fu Tu clothing develop Co. Ltd | |
| 3 | Jinjiang Hua Lun Shi Jia clothing Co.Lt | |
| 4 | Shishi Si Hai Long Clothing develop Co.Ltd |
We are not materially reliant on any single ODM or OEM contract supplier.
Menswear Inventory Management
We recognize that controlling the level of inventory is important to our overall operational efficiency and cost control. Based on the purchase orders our distributors and the department store chains place at our biannual sales fairs, we are able to anticipate the demand for our products in advance and plan ahead for our own manufacturing and the orders we will be required to place with our ODM and OEM contract manufacturers. We generally plan purchases of raw materials and place manufacturing orders with our ODM and OEM contract manufacturers immediately after each of our two seasonal sales fairs, usually in May for our autumn and winter products and in October for our spring and summer products, where we confirm sales orders with our distributors and department store chains. This enables us and our ODM and OEM contract manufacturers to have sufficient time, ranging from two to eight weeks, to produce the products and provide our products suitable for a specific season to our distributors and department store chains on a just-in-time basis so as to minimize our inventory levels. The alternative way to control cost is when if we have chance to buy materials which the price is much lower than market price, we will buy it in advance and give to OEM contract manufactures use our material to produce.
Menswear Quality Control
Product quality control is a critical aspect of our business. Our dedicated quality control team performs various quality inspection and testing procedures, including random sample testing at different stages of our production process, to ensure that our products meet or exceed the expectations of our consumers. We also perform routine product inspections on every batch of our products and sample testing to ensure consistent quality of our products, including semi-finished and finished products.
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We have implemented a centralized system for procurement and inspection of raw materials and ancillary components to help ensure a stable and high quality supply. Those materials and components that fail to meet our tests may be returned to the suppliers for replacement. Our quality control team also carries out quality control procedures on the products produced by our ODM and OEM contract manufacturers. We conduct on-site inspections of our ODM and OEM contract manufacturers before we enter into business relationships with them. We also send our in-house quality control staff on-site to our ODM and OEM contract manufacturers to monitor the entire production process. The initial product inspections are performed on-site by our staff before these products are shipped to our headquarters for further inspection and storage in our warehouse. We also provide technical training to ODM and OEM contract manufacturers to assist them with quality control of the production processes and inspect pre-production samples and finished products from ODM and OEM contract manufacturers. We have not encountered any material disruptions to our business as a result of the failure of any of our ODM and OEM contract manufacturers to meet our quality standards.
In order to further improve the quality of our products and shorten our delivery cycle, we intend to increase our control over the manufacturing process and production cycle of our ODM and OEM contract manufacturers, primarily by requiring our ODM and OEM contract manufacturers to implement stricter and more comprehensive quality control procedures, which cover each stage of the production process, from raw material selection and procurement to finished products packaging and delivery. We also intend to apply more stringent standards for inspecting products manufactured for us by our ODM and OEM contract manufacturers.
Menswear Marketing and Advertising
We have conducted multi-channel marketing campaigns to advertise our products to our target customers through advertising in newspapers, magazines, the Internet, and billboards, and organizing regular and frequent in-store marketing activities and road shows.
We have implemented strict requirements on our distributors with respect to the display and promotion of our products to ensure consistent branding and enhance marketing results. Our distributors are required to ensure that our marketing strategies are implemented at the retail outlets managed or authorized by them, including displaying our products according to our specifications and using our billboard advertisements. We also assign sales representatives to monitor the in-store displays of our products at various retail outlets on a regular basis to help ensure that our retailers have followed our product display policies.
For the years ended December 31, 2021, 2020 and 2019, our total advertising and promotional expenses amounted to approximately $1.15 million, $1.23million and $0.29 million, respectively, which accounted for approximately 23.3%, 12.9%,1.9% of our revenues in the respective periods.
Menswear Competition
The menswear industry in China is a fragmented industry. Competition mainly comes from local market players such as Exceed, Xiniya, Zuoan and Cabbeen. We believe that we differentiate ourselves by providing more fashionable, younger-looking and leisure products, and competitive pricing without giving up the casual feel of our products.
We compete primarily on the basis of product design, brand recognition, operational efficiency and a low-cost structure. Some of our domestic competitors have a stronger customer base, greater resources and more industry expertise than us. However, we believe that we can continue to successfully compete with our local competitors due to our unique product designs.
Intellectual Property
Our business is dependent on a combination of trademarks, domain names, trade names, trade secrets and other proprietary rights in order to protect our intellectual property rights.
We currently have the licenses to use one registered trademarks in the PRC. The registered trademarks on which we have licenses are the following:
| Trademark | Registration No. | Valid Term | ||
| KBS | 4342760 | Jan 1, 2019 - August 28, 2028 |
We believe that above trademarks provide significant value as they are important for marketing and building brand recognition. We are not aware of any third party currently using trademarks similar to our trademarks in the PRC on the same products.
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Upon acquisition of Flower Crown, we have applied for a lot of trademarks, all of which are pending approval by the Trademark Office of China National Intellectual Property Administration (“Trademark Office”). Set forth below is a detailed description of our trademarks:
| Country | Trademark | Trademark No. | Trademark Name | Trademark Application Date | Trademark Classes | Trademark Owner | Trademark Term | Trademark Status |
| China |  |
51872718 | Bu Fan Xing Jing | 12/04/2020 | 35 | Beijing Heyang | Approved | |
| China |  |
50933195 | 11/03/2020 | 35 | Flower Crown (Hainan) | Approved | ||
| China |  |
50941310 | Quanqiu Yixianghui | 11/03/2020 | 35 | Flower Crown (Hainan) | Approved | |
| China |  |
49572627 | Jinxuan Pinlv | 09/08/2020 | 41 | Jinxuan Luxury Tourism | Approved | |
| China | |
49572624 | Jinxuan Pinlv | 09/08/2020 | 43 | Jinxuan Luxury Tourism | Approved | |
| China |  |
49567840 | 09/08/2020 | 35 | Jinxuan Luxury Tourism | Approved | ||
| China |  |
49580237 | LUXVENTFURE | 09/08/2020 | 43 | Jinxuan Luxury Tourism | Approved | |
| China | |
49563070 | 09/08/2020 | 41 | Jinxuan Luxury Tourism | Approved | ||
| China | |
49592112 | LUXVENTFURE | 09/08/2020 | 41 | Jinxuan Luxury Tourism | Approved | |
| China | |
49563061 | 09/08/2020 | 43 | Jinxuan Luxury Tourism | Approved | ||
| China | |
49563090 | LUXVENTFURE | 09/08/2020 | 35 | Jinxuan Luxury Tourism | Approved | |
| China | |
49572631 | Jinxuan Pinlv | 09/08/2020 | 39 | Jinxuan Luxury Tourism | Approved | |
| China | |
49583228 | Jinxuan Pinlv | 09/08/2020 | 35 | Jinxuan Luxury Tourism | Approved | |
| China | |
49593405 | 09/08/2020 | 39 | Jinxuan Luxury Tourism | Approved | ||
| China | |
49580225 | LUXVENTURE | 09/08/2020 | 39 | Jinxuan Luxury Tourism | Approved |
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| Country | Trademark | Trademark No. | Trademark Name | Trademark Application Date | Trademark Classes | Trademark Owner | Trademark Term | Trademark Status |
| Hong Kong | |
305384304 | 09/08/2020 | Approved | ||||
| Hong Kong | |
305384313 | Jinxuan Pinlv | 09/08/2020 | Approved | |||
| Hong Kong | |
305384322 | LUXVENTURE | 09/08/2020 | Approved | |||
| Macao | |
N/173434(304) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173435(975) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173436(747) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173437(132) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173438(333) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173439(206) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173440(834) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173441(540) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173442(418) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173443(343) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173444(867) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Macao | |
N/173445(578) | 09/18/2020 | Jinxuan Luxury Tourism | Approved | |||
| Taiwan | |
109063176 | Jinxuan Pinlv | 09/10/2020 | 35 | Jinxuan Luxury Tourism | Approved | |
| Taiwan | |
109063175 | Jinxuan Pinlv | 09/10/2020 | 39 | Jinxuan Luxury Tourism | Approved | |
| Taiwan | |
109063173 | Jinxuan Pinlv | 09/10/2020 | 43 | Jinxuan Luxury Tourism | Approved |
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| Country | Trademark | Trademark No. | Trademark Name | Trademark Application Date | Trademark Classes | Trademark Owner | Trademark Term | Trademark Status |
| Taiwan | |
109063186 | LUXVENTURE | 09/10/2020 | 41 | Jinxuan Luxury Tourism | Approved | |
| Taiwan | |
109063178 | 09/10/2020 | 41 | Jinxuan Luxury Tourism | Approved | ||
| Taiwan | |
109063177 | 09/10/2020 | 43 | Jinxuan Luxury Tourism | Approved | ||
| Taiwan | |
109063183 | 09/10/2020 | 39 | Jinxuan Luxury Tourism | Approved | ||
| Taiwan | |
109063184 | 09/10/2020 | 35 | Jinxuan Luxury Tourism | Approved | ||
| Taiwan | |
109063187 | LUXVENTURE | 09/10/2020 | 39 | Jinxuan Luxury Tourism | Approved | |
| Taiwan | |
109063188 | LUXVENTURE | 09/10/2020 | 35 | Jinxuan Luxury Tourism | Approved | |
| Taiwan | |
109063174 | Jinxuan Pinlv | 09/10/2020 | 41 | Jinxuan Luxury Tourism | Approved | |
| Taiwan | |
109063185 | LUXVENTURE | 09/10/2020 | 43 | Jinxuan Luxury Tourism | Approved |
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Our Competitive Strengths
We believe that the following competitive strengths enable us to compete effectively in and capitalize on the growing casual menswear industry in China.
| ● | There is a sizable market for our products. We believe that we have a sizeable potential market. Our target menswear customers are male middle-class consumers in the 20-40 age range. According to the 2019 National Economic and Social Development Statistical Bulletin, the population in China between 16-59 years-old was approximately 900 million. Our target group falls into this category and is estimated to be more than 200 million people. As a result of the growing affluence in the PRC and increased purchasing power of the PRC population, we believe that PRC consumers are becoming more willing and able to purchase casual menswear. In addition, we believe that the purchasing decision of PRC consumers is becoming more predicated upon brand image, product design and style, rather than just price considerations. With rising affluence and improvement in lifestyle, we also believe the overall Chinese population is generally growing more brand name conscious and style oriented and has shown a propensity for increased spending on casual menswear. |
| ● | We have a strong focus on design and product development. We believe that our in-house menswear design and product development capabilities allow us to create unique products that appeal to our customers. We have established a strong in-house design and product development team of 14 employees as of December 31, 2021. Our team identifies new fashion trends by attending fashion shows and exhibitions as well as by drawing from creative ideas in magazines and other media. Each spring and fall, we carefully plan and create a new product line for our fall/winter and spring/summer collections of 727 SKU that encompasses our full range of product offerings, including outerwear, tops, bottoms and accessories. We introduce new design elements into our product lines each season. With our highly skilled and creative team of designers, we have extensive experience in creating unique designs to meet the preferences and needs of our target customer base. |
| ● | Our trademarked brand has earned a following in China. Our menswear brand was developed in 2006. Our marketing concept is “French origin, Korean design and made for Chinese.” Our customers are middle-class consumers in the 20-40 age range. We believe that their products’ concept, marketing, design and packaging fully match with the pro-western attitude and lifestyles of their target customers. We believe the KBS brand is essential to our success to penetrate to the casual menswear market in China. |
| ● | We have an extensive and well-managed nationwide distribution network. Our menswear business has an extensive distribution network throughout China. As of December 31, 2021, we had 1 KBS branded corporate store and 29 franchised stores across 11 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2019, we had 1 KBS branded corporate store and 29 franchised stores across 9 of China’s 32 provinces and centrally administered municipalities. The KBS branded corporate stores are required to sell only our products. We have been building up our selected menswear distributor network since 2007. As of December 31, 2020, we had 11 distributors operating 29 franchised stores. As of December 31, 2019, we had 11 distributors operating 29 franchised stores. All of our distributors have been working with us from 1 to 10 years. We select our distributors based on a number of criteria, including experience in the menswear retail industry, sales channels, business resources, brand promotion capabilities and ability to help us implement our broader business strategies. Our distributors help us respond to changing consumer tastes in a timely manner by providing regular feedback on our products at our semi-annual sales fairs and frequent communications. The financial resources of our distributors allow us to expand our retail network with less working capital investment from us than would be required for establishing direct stores, as our distributors are responsible for the store rentals and cost of inventory in their stores. We sold a substantial amount of our products through our distributors, which have allowed us to distribute our products to a wide geographic area and penetrate markets by leveraging the local market knowledge of our distributors and their sub- distributors. We believe that our distribution network has enabled us to expand our business and increase our sales efficiently and with less operational risk. This model has also minimized our operational risk because we typically start production after we receive orders from our distributors. We believe that using a distribution network to sell a substantial amount of our KBS products has enabled us to devote our resources to our core competitive strengths of design, brand management and product development. |
| ● | We have an experienced management team. Our management team has extensive R&D, marketing and financial experience, led by our interim Chief Financial Officer , Mr. Keyan Yan. Mr. Yan has over 30 years of experience in the apparel industry and also has developed a differentiated product by international cooperation with a Korean designer. After working in the garment industry for more than 16 years, Mr. Yan acquired and developed the KBS brand. With his strong understanding of the apparel industry, Mr. Yan has successfully established this brand name in the market. We are committed to attract and retain top management level executives who we believe are and will continue to be the driving force behind our product development and growth. |
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We have a strong technology support for our business customers.
Under the leadership of Liu Ze, our Chief Technology Officer, we developed “Little L”, a virtual influencer technology. “Little L” can be deploy on platform operated by our business customers, thus enhancing their end user experience. We received the award for “Best Virtual Human Software Technology Service Provider” award by iiMedia Research for “Little L”. |
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Our Growth Strategy
We intend to further strengthen our market position in the casual menswear market in China by implementing the following strategies:
| ● | We plan to continue to raise the profile of the KBS brand through enhanced advertising and promotional activities. We believe that the strong association of KBS brand for our menswear business with our concept of “French origin, Korean design and made for Chinese” has helped drive our brand positioning and customers’ receptivity to our products. We intend to further build our brand and deliver a consistent brand image from product design to sales and marketing. We seek to promote and enhance our presence in China’s casual menswear market by continuing to adopt proactive marketing strategies and produce high quality, well- designed casual menswear for our target market. In particular, we aim to increase awareness of our brand through: (1) multi-channel advertising strategies through national television, fashion magazines, billboards and other media channels; (2) further assisting our distributors’ regional advertising efforts; (3) distinctive store and product launch campaigns, including special events for new product launches and large-scale grand opening events for new stores, particularly new corporate stores; (4) update of the decoration and layout of a number of existing stores which have been in operation for years to improve the shopping experience; (5) participation in fashion shows; and (6) sponsorships of selected high-impact events. We believe that these advertising and promotional activities will help to further strengthen brand awareness in our target market and enhance customer loyalty. |
| ● | We plan to expand and build upon our design and product development capabilities. We intend to further strengthen our design and product development capabilities by accelerating the commercialization of design concepts, expanding our product offerings and continuing to develop what we believe is unique casual menswear. We plan to further invest in design and product development and expand our design and product development team by attracting talented designers, either domestic or international, and training young graduates from leading fashion design institutes. We believe that combining western fashion design experience with our local designer’s understanding of the China market and aesthetic will enable us to create fashionable yet popular casual menswear for consumers in China. We also intend to cooperate with our suppliers to develop new materials and fabrics which we believe will give customers a unique fashion product and create new market opportunities. We believe that our focus on designing unique and quality casual menswear will allow us to maintain our competitiveness and help to enhance our sales and overall profitability. |
| ● | We plan to expand our sales and distribution network. We hope to expand our sales and distribution network to penetrate new geographic markets, further gaining market share in existing markets and accessing a broader range of business customers. We will continue to expand our sales network, leveraging our local and international resources to quickly enter new markets, while also minimizing requirements for capital outlay. We plan to focus on luxury brands and concentrate on high-end business customers and increase our presence in both new and existing markets. |
| ● | We plan to enhance our ability to attract, incentivize and retain talented professionals. We believe our success greatly depends on our ability to attract, incentivize and retain talented professionals. With a view to maintaining and improving our competitive advantage in the market, we plan to implement a series of initiatives to attract additional and retain mid- to high-level personnel, including formulating a market-oriented employee compensation structure and implementing a standardized multi-level performance review mechanism. |
| ● | We plan to explore ways to incorporate blockchain and its related application into our business. We hired Liu Ze, an expert in blockchain, artificial intelligence and internet of all things as our Chief Technology Officer. Our CTO will be responsible to set up our blockchain strategy and explore ways to incorporate blockchain into our business. |
Insurance
We do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure. See “Risk Factors—Risks Related to Our Business—We have limited insurance coverage in China and may not be able to recover insurance proceeds if we experience uninsured losses.”
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Regulation
Because our primary operating subsidiaries are located in China, we are subject to China’s national and local laws detailed below. We believe that we are in material compliance with all registrations and requirements for the issuance and maintenance of all licenses required by the governing bodies and that all license fees and filings are current. This section summarizes the major PRC regulations relating to our business.
Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued the HFCAA Determination report, according to which the PCAOB sets forth a list of PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong that the PCAOB is unable to inspect or investigate completely. The Company’s auditor, Onestop Assurance PAC, is based in Singapore, and therefore is not affected by this mandate by the PCAOB. Whether the PCAOB will be able to conduct inspections of our auditor, including but not limited to inspection of the audit working papers related to us, in the future is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor’s, control. For the details of the risks associated with the enactment of the HFCAA, see “3.D. Risk Factors-Risks Relating to Doing Business in China- Recent developments with respect to audits of China-based companies also create uncertainty about the ability of our current auditor to fully cooperate with the PCAOB’s inspection requests without the approval of the relevant PRC authorities.”
Regulations Relating to Foreign Investment
Investment activities in the PRC by foreign investors are mainly governed by the Guidance Catalog of Industries for Foreign Investment (2017 revision), or the Catalog, which was promulgated jointly by MOFCOM and the National Development and Reform Commission, or the NDRC, on June 28, 2017 and entered into force on July 28, 2017. The Catalog divides industries into four categories in terms of foreign investment, which are “encouraged,” “restricted,” and “prohibited,” and all industries that are not listed under one of these categories are deemed to be “permitted.” Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, foreign investment in restricted category projects is subject to government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.
In June 2019, the Ministry of Commerce and the National Development and Reform Commission promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List, effective July 30, 2019. On March 15, 2019, the Standing Committee of the National People’s Congress passed the Foreign Investment Law of PRC, which took effect on January 1, 2020. The Law of the People’s Republic of China on China-Foreign Equity Joint Ventures, the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, and the Law of the People’s Republic of China on China-Foreign Contractual Joint Ventures were replaced at the same time. On December 26, 2019, the Regulation on the Implementation of the Foreign Investment Law of the PRC, was issued by the State Council and came into force on January 1, 2020. The Foreign Investment Law of PRC adopts the management system of the negative list for foreign investment. A foreign investor may not invest in a field which is prohibited by the foreign investment access negative list from investment. To invest in a field restricted by the foreign investment access negative list from investment, a foreign investor shall meet the investment conditions set out in the negative list.
Regulations Relating to Product Quality
The principal legal provisions governing product liability are set forth in the PRC Product Quality Law, which was promulgated in February 1993 by the SCNPC and amended in July 2000 and August 2009.
The PRC Product Quality Law stipulates the responsibilities and obligations of product sellers and producers. Violations of the PRC Product Quality Law may result in the imposition of fines. In addition, the seller or producer may be ordered to suspend its operations, and its business license may be revoked. There may also be criminal liability in serious cases.
According to the PRC Product Quality Law, consumers or other victims who suffer injury or property losses due to product defects may demand compensation from the manufacturer as well as the seller. After compensating the consumer, the seller may recover the corresponding amount from the manufacturer if the manufacturer is responsible for the product defects, and vice versa.
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Regulations Relating to Consumer Protection
The principal legal provisions for the protection of consumer interests are set forth in the Law of the PRC on Protection of Consumer Rights and Interests, or the Consumer Protection Law, which was promulgated in October 1993 amended in October 2013. The Consumer Protection Law sets forth standards of behavior that businesses must observe in their dealings with consumers.
Violations of the Consumer Protection Law may result in the imposition of fines. In addition, the violating entity may be ordered to suspend its operations, and its business license may be revoked. There may also be criminal liability in serious cases.
According to the Consumer Protection Law, if the legal rights and interests of a consumer are violated during the purchase or use of goods, the consumer may seek compensation from the seller. If the manufacturer or an upstream distributor is responsible, after compensating the consumer, the seller may recover the corresponding amount from the manufacturer or the upstream distributor. Consumers or other persons who suffer personal injury or property damages due to defects in products may seek compensation from the manufacturer as well as the seller. After compensating the consumer, the seller may recover the corresponding amount from the manufacturer if the manufacturer is responsible for the product defects, and vice versa.
Regulations Related to Trademarks
The PRC Trademark Law, adopted in 1982 and revised in 2001 and 2013, protects the proprietary rights to registered trademarks. The Trademark Office under the State Administration of Industry and Commerce handles trademark registration and grants a term of ten years to registered trademarks and another ten years to trademarks as requested upon expiry of the prior term. Trademark license agreements and transfer agreements must be filed with the Trademark Office for record.
Regulations Relating to Environmental Matters
Our facilities are subject to various governmental regulations related to environmental protection. We use a myriad of chemicals in our operations and produce emissions that could pose environmental risks. Our manufacturing facilities are subject to various pollution control regulations with respect to noise, water and air pollution and the disposal of waste and hazardous materials, including, China’s Environmental Protection Law, Law of the People’s Republic of China on Appraising of Environment Impacts, China’s Law on the Prevention and Control of Water Pollution and its implementing rules, China’s Law on the Prevention and Control of Air Pollution and its implementing rules, China’s Law on the Prevention and Control of Solid Waste Pollution, and China’s Law on the Prevention and Control of Noise Pollution. We are subject to periodic inspections by local environmental protection authorities.
We did not incur material costs in environmental compliance in fiscal years 2020, 2019 and 2018. We believe we are in material compliance with the relevant PRC environmental laws and regulations. We are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.
Regulations Related to Employment
The PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may constitute criminal offences.
On December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees as determined by the Ministry of Human Resources and Social Security. Additionally, dispatched workers are only permitted to engage in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees and dispatched workers). The Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees prior to March 1, 2016.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. The enterprise may be ordered to pay the full amount within a deadline if it fails to make adequate contributions to various employee benefit plans and may be subject to fines and other administrative sanctions.
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Regulations Relating to Foreign Exchange
Regulations on Foreign Currency Exchange
Under the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations issued by the State Administration of Foreign Exchange and other relevant PRC government authorities, payment of current account items in foreign currencies, such as trade and service payments, payment of interest and dividends can be made without prior approval from the State Administration of Foreign Exchange by following the appropriate procedural requirements. By contrast, the conversion of RMB into foreign currencies and remittance of the converted foreign currency outside the PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires prior approval from the State Administration of Foreign Exchange or its local office.
On February 13, 2015, the State Administration of Foreign Exchange promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, effective from June 1, 2015, which cancels the requirement for obtaining approvals of foreign exchange registration of foreign direct investment and overseas direct investment from the State Administration of Foreign Exchange. The application for the registration of foreign exchange for the purpose of foreign direct investment and overseas direct investment may be filed with qualified banks, which, under the supervision of the State Administration of Foreign Exchange, may review the application and process the registration.
The Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise was promulgated on March 30, 2015 and became effective on June 1, 2015. According to this Circular, a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests (or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange bureau (bank) at the place of registration. The Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts was promulgated and became effective on June 9, 2016. According to this Circular, enterprises registered in PRC may also convert their foreign debts from foreign currency into Renminbi on self-discretionary basis. This Circular provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self—discretionary basis, which applies to all enterprises registered in the PRC. This Circular reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make loans for related enterprises unless it is within the business scope or to build or to purchase any real estate that is not for the enterprise own use with the exception for the real estate enterprise.
On January 26, 2017, the State Administration of Foreign Exchange promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, which stipulates several capital control measures with respect to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to this Circular, domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure for outbound investment.
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Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
The State Administration of Foreign Exchange issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, which became effective in July 2014, to replace the Circular of the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip Investments by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign exchange matters in relation to the use of special purpose vehicles by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Circular 37 defines a “special purpose vehicle” as an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” is defined as direct investment in China by PRC residents or entities through special purpose vehicles, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. Circular 37 stipulates that, prior to making contributions into a special purpose vehicle, PRC residents or entities be required to complete foreign exchange registration with the State Administration of Foreign Exchange or its local branch. In addition, the State Administration of Foreign Exchange promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which amended Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified banks rather than the State Administration of Foreign Exchange in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to special purpose vehicles but had not obtained registration as required before the implementation of the Circular 37 must register their ownership interests or control in the special purpose vehicles with qualified banks. An amendment to the registration is required if there is a material change with respect to the special purpose vehicle registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary or limit our PRC subsidiary’s ability to increase their registered capital or distribute profits.”
Regulations on Stock Incentive Plans
The State Administration of Foreign Exchange promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous rules issued by the State Administration of Foreign Exchange in March 2007. Pursuant to the Stock Incentive Plan Notice and other relevant rules and regulations, PRC residents participating in stock incentive plan in an overseas publicly-listed company are required to register with the State Administration of Foreign Exchange or its local branches and follow certain other procedures. Participants of a stock incentive plan who are PRC residents must conduct the registration and other procedures with respect to the stock incentive plan through a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company or another qualified institution appointed by the PRC subsidiary. In addition, the PRC agent is required to update the relevant registration should there be any material change to the stock incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of the PRC residents who have the right to exercise the employee stock options, apply to the State Administration of Foreign Exchange or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee stock options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents prior to distribution to such PRC residents.
We have initially adopted an equity incentive plan in 2018, under which we have the discretion to award incentives and rewards to eligible participants. On January 11, 2022, our Board terminated the initial equity incentive plan and adopted a new equity incentive plan (the “2022 Plan”). We have advised the recipients of awards under our equity incentive plan to handle relevant foreign exchange matters in accordance with the Stock Incentive Plan Notice. However, we cannot guarantee that all employee awarded equity-based incentives can successfully register with SAFE in full compliance with the Stock Incentive Plan Notice. See “Risk Factors—Risks Related to Doing Business in China—Any failure to comply with PRC regulations regarding employee share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
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Regulations on Dividend Distribution
Distribution of dividends of foreign investment enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and amended in 2000 and 2016, respectively, and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990 and amended in 2001 and 2014, respectively. Under these regulations, foreign investment enterprises in the PRC may distribute dividends only out of their accumulative profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, no less than 10% of the accumulated profits of the foreign investment enterprises in the PRC are required to be allocated to fund certain reserve funds each year unless these reserves have reached 50% of the registered capital of the enterprises. A PRC company is not permitted to distribute any profits until any losses from previous fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year. Under our current corporate structure, our Marshall Islands holding company may rely on dividend payments from Hongri PRC, which is a wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. Limitation on the ability of our other PRC subsidiaries to make remittance to Hongri PRC and on the ability of Hongri PRC to pay dividends to us could limit our ability to access cash generated by the operations of those entities. See “Risk Factors—Risks Related to Doing Business in China—We rely to a significant extent on dividends and other distributions on equity paid by our principal operating subsidiary to fund offshore cash and financing requirements.”
Regulations Relating to Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and the State Administration of Foreign Exchange, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009. These regulations, among other things, require that (i) PRC entities or individuals obtain approval from the Ministry of Commerce before they establish or control a special purpose vehicle overseas, provided that they intend to use the special purpose vehicle to acquire their equity interests in a PRC company at the consideration of newly issued share of the special purpose vehicle, or Share Swap, and list their equity interests in the PRC company overseas by listing the special purpose vehicle in an overseas market; (ii) the special purpose vehicle obtains approval from the Ministry of Commerce before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company by Share Swap; and (iii) the special purpose vehicle obtains China Securities Regulatory Commission approval before it lists overseas. See “Risk Factors—Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission may be required in connection with this offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.”
Regulations Relating to Taxation
Dividend Withholding Tax
In March 2007, the National People’s Congress enacted the Enterprise Income Tax Law which became effective on January 1, 2008 and amended on February 24, 2017. According to Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Pursuant to the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, issued on January 29, 2008 and supplemented and revised on February 29, 2008, and the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, which became effective on December 8, 2006 and applicable to income derived in any year of assessment commencing on or after April 1, 2007 in Hong Kong and in any year commencing on or after January 1, 2007 in the PRC, such withholding tax rate may be lowered to 5% if a Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by PRC tax authorities and holds at least 25% of the equity interest in that particular PRC subsidiary at all times within the 12-month period immediately prior to the distribution of the dividends. Furthermore, pursuant to the Announcement on Issues concerning “Beneficial Owners” in Tax Treaties issued on February 3, 2018 by the State Administration of Taxation, when determining the status of “beneficial owners,” a comprehensive analysis may be conducted through materials such as articles of association, financial statements, records of capital flows, minutes of board of directors, resolutions of board of directors, allocation of manpower and material resources, the relevant expenses, functions and risk assumption, loan contracts, royalty contracts or transfer contracts, patent registration certificates and copyright certificates, etc. However, even if an applicant has the status as a “beneficiary owner,” if the competent tax authority finds necessity to apply the principal purpose test clause in the tax treaties or the general anti-tax avoidance rules stipulated in domestic tax laws, the general anti-tax avoidance provisions shall apply.
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Enterprise Income Tax
In December 2007, the State Council promulgated the Implementing Rules of the Enterprise Income Tax Law, which became effective on January 1, 2008. The Enterprise Income Tax Law and its relevant implementing rules (i) impose a uniform 25% enterprise income tax rate, which is applicable to both foreign-invested enterprises and domestic enterprises (ii) permits companies to continue to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces new tax incentives, subject to various qualification criteria.
The Enterprise Income Tax Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore be subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The implementing rules further define the term “de facto management body” as the management body that exercises substantial and overall management and control over the production and operations, personnel, accounts and properties of an enterprise. If an enterprise organized under the laws of jurisdiction outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and with respect to gains derived by its non-PRC enterprise shareholders from transfer of its shares.
On October 17, 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Under Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to Bulletin 37, the withholding party shall declare and pay the withheld tax to the competent tax authority in the place where such withholding party is located within seven days from the date of occurrence of the withholding obligation. Both Bulletin 37 and Bulletin 7 do not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
See “Risk Factors—Risks Related to Doing Business in China—We and our existing shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.”
Value-Added Tax
In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax. Pursuant to this Pilot Plan and the relevant notice, value added tax at a rate of 6% is generally imposed, on a nationwide basis, on the revenue generated from the provision of service in lieu of business tax in the modern service industries. Value added tax of a rate of 6% applies to revenue derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input value added tax paid on taxable purchases against the output value added tax chargeable on the modern services provided.
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| C. | Organizational Structure |
See “—A. History and Development of the Company—Corporate Structure” above for details of our current organizational structure.
| D. | Property, Plants and Equipment of Menswear Business |
The Company has established a nationwide distribution network covering 11 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2021, this network was comprised of one corporate store owned and operated by us and 29 franchised stores operated by 11 third-party distributors or their sub-distributors.
Relocated from Shishi City, Fujian, China in March 2011, our company’s production facility is currently located in Taihu City in Anhui Province, China. The facility has a production capacity of 2 million pieces per year and we move in upon the completion of phase 2 in year 2015. By relocating from the coastal area to Anhui Province, our new facility takes advantage of lower labor costs and a more stable labor supply. We manufacture a variety of menswear products, including, jeans, shirts, suits and socks. Because of its variety and complexity in the production process, these products require special sewing machines and workmanship, which we currently do not possess. As a result, the Company is not yet able to produce KBS branded products and has outsourced its KBS branded product manufacturing to other established ODM and OEM manufacturers in the Fujian and Zhejiang regions. The Company has completed the second phase construction of its new factory at the end of 2014. The second phase has an annual production capacity of 5 million pieces subject to our purchasing additional equipment. Currently Anhui factory mainly produces OEM orders and some international orders.
Our production facility consists of total 110,557 square meters of land. We obtained a portion of such land use rights for two parcels of land of 7,405 square meters and 2,440 square meters in May 2012 and have finished the construction of 8,572 square meters of staff dormitories and 22,292 square meters as workshop buildings and offices. We started to use the dormitory and factory in year 2015 and moved into the offices at the beginning of 2016. Due to the local government’s need for additional time to conclude negotiations with local residents over appropriate resettlement terms, the construction of the adjacent facility on the third parcel of land has been delayed. We believe we will be in a better position to schedule our construction plan once we acquire the land use right of the third parcel of land. Once the construction of the new production facilities is completed, our total production capacity of the facility is expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per year.
As of December 31, 2021, we lease the premises for our sole remaining corporate store. We have undertaken various measures to verify the lessors’ rights to the property leased to us in respect of its stores. In China, all land is owned by the State or other governmental bodies, and “ownership” is generally evidenced by a land use rights certificate. We rent some stores that were located in rural areas where land use rights are held collectively by villages and records regarding the ownership of land use rights are frequently not kept. In these cases, the company has confirmed our ability to lease the stores through communications with village authorities, and has reviewed electricity and water bills to confirm utilities are being paid by the parties leasing the premises to us. Based on the results of these efforts, we believe the risk of third party claims against our leases of these stores is relatively small and the measures taken by our company are sufficient to verify the land use rights for all of its stores.
In addition, the property used as our head office and corporate store is leased from a related party, whose ownership of the property has been verified by our company. We paid RMB 720,000 as annual rent for the existing corporate store during each of the fiscal years 2019, 2020 and 2021. The total area of this 1 corporate store is 120 square meters. The sales of the store for the most recent three fiscal years are shown below:
| Area | Sales in fiscal year 2019 (USD) | Sales in fiscal year 2020 (USD) | Sales in fiscal year 2021 (USD) | |||||||||
| Shishi Corporate Store | 561,391 | 447,223 | 367,367 | |||||||||
| Total: | 561,391 | 447,223 | 367,367 | |||||||||
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not required.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
We operate two lines of business, menswear business and non-menswear business, which includes cross-border merchandise and tourism.
Menswear business
We are engaged in the design, development, marketing and sale of casual menswear in China, including apparel and accessories, which we market under the KBS brand. The KBS brand was developed in 2006. Before 2012, we were engaged in the design, development, marketing and sale of fashion sportswear in China. Since our products feature a unique and stylish design that is more fashionable than traditional sportswear, as well as quality fabrics and materials and the sportswear market was becoming more and more competitive, in late 2011 we turned our focus on casual menswear market which has higher profit margin. KBS’s apparel products include cotton and down jackets, sweaters, shirts, T-shirts, Jeans and trousers. Accessories include shoes, bags, belts and caps. In 2021, the suggested retail prices of KBS’s products ranged from RMB319 to RMB1,599 (approximately $49 to $263) for its apparel products and RMB29 to RMB299 (approximately $4.49 to $46) for its accessory products. KBS holds new products launch events twice every year, one in spring and the other in autumn. Since 2006, we have launched about 5164 collections of new products, each year with a different theme to highlight the current trends for the season. KBS’s marketing concept is “French origin, Korean design and made for Chinese.” KBS’s customers are male middle-class consumers in the 20-40 age range, primarily located in tier two and tier three cities in China. The company has adopted “KBS” as a uniform brand name, which stands for “Keep Best Style”, and KBS are designed by us for a uniform look and feel that fits our brand image, with in-store displays that accentuate the quality and style of our products across all stores in our distribution network and on all products sold in those stores. We believe that the KBS brand has become a recognized brand name in the cities where their products are sold.
We have established a nationwide distribution network, currently covering 11 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2020, this network was comprised of 1 corporate store owned and operated by us and 29 franchised stores operated by 11 third-party distributors or their sub-distributors. The number of stores grew significantly from 1 corporate store and 7 franchised stores as of December 31, 2006 to 31 corporate stores as of December 31, 2012 and 96 franchised stores as of December 31, 2013, and decreased to 84 stores as of December 31, 2014. With the softening of economic growing in China and fierce competition from our competitors, our network only has 1 corporate store and 29 franchised stores as of December 31, 2021.
KBS also acts as an original design manufacturer, or ODM, upon request. Income from such services accounted for 0%, 7.6% and 33.9% of revenue for the years ended December 31, 2021, 2020 and 2019, respectively.
Relocated from Shishi City, Fujian, China in March 2011, KBS’s production facility is currently located in Taihu City in Anhui Province, China. The company believes that the shortage of labor and rising wage expectations in China, especially in the coastal area, could have a material impact on our operations as well as its suppliers’ cost of manufacturing. By relocating from the coastal area to inland Anhui Province, our new facility takes advantage of lower labor costs and a more stable labor supply. Since the company’s original production team was not ready to produce the new style KBS products, KBS has outsourced its product manufacturing to other established ODM manufacturers. As such, KBS’s own production facility in Taihu mainly takes OEM orders from other companies including Hangzhou Zhi Yin Apparel Clothes Co., Ltd and Hangzhou Yiyuan Apparel Co., Ltd. Our production facility in Taihu, Anhui Province includes three parcels of land with a total area of 110,557 square meters. We have obtained land use rights for two parcels of land with an area of 9,845 square meters in 2012 and have finished the construction of 8,572 square meters of staff dormitories and 22,292 square meters as workshop buildings and offices. We started to use the dormitory and factory in year 2015 and moved into the offices at the beginning of 2016. Due to the local government’s need for additional time to conclude negotiations with local residents over appropriate resettlement terms, the construction of the adjacent facility on the third parcel of land has been delayed. We believe we will be in a better position to schedule our construction plan once we acquire the land use right of the third parcel of land. Once the government settles with the local residents, the phase 3 and 4 can be continued. Once completed, our total production capacity of the facility is expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per year. We do not necessarily rely on our own production facility to satisfy the demand of our products as we may outsource some or all of the production work to various ODM and OEM manufacturers in China.
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Non-Menswear Business
The Company’s Non-menswear business operation, which includes cross-border merchandise and tourism, commenced in fourth quarter of 2020 as result of acquisition of Flower Crown Holding. The non-menswear business in 2020 includes packaged travel service and cross-board merchandise, which generate a revenue of $1,335,443. During 2021, the Company started airline tickets business to enhance its tourism supplying network and capability.
Recent Developments
The ongoing coronavirus pandemic that first surfaced in China and is spreading globally has had a material adverse effect on our business. All of our operating subsidiaries and employees are located in China. During the first quarter of 2020, we scaled back operations, as our employees worked remotely or at premises in shifts for limited periods of time in response to nationwide lockdowns and quarantines. We only resumed full operations since late March. The pandemic has also depressed customers’ demand for our products and services, since during the first half year of 2020, businesses across China largely suspended or reduced operations.
Although the COVID-19 situation is getting better in China since 2020, the extent of the impact of COVID-19 on the Company’s results of operations and financial condition will depend on the virus’ future developments, including the duration and spread of the outbreak and the impact on the Company’s customers, which are still uncertain and cannot be reasonably estimated at this point of time. We will continue to monitor and mitigate developments affecting our workforce, our customers, and the public at large. See “Risk Factors—Risks Related to Our Business—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus (COVID-19).”
On January 24, 2021, we entered into a Debt Exchange Agreement with Keyan Yan, our interim Chief Financial Officer and a member of our Board of Directors. Under the Debt Exchange Agreement, we satisfied outstanding debts owed to Mr. Yan in the amount of $809,552 in exchange for the issuance to Mr. Yan of 674,626 shares of our Common Stock (the “Exchange Shares”), representing a conversion price of $1.20 per share, which was closed on or about February 9, 2021. Upon issuance of the Exchange Shares, the outstanding debts owed to Mr. Yan were deemed satisfied and paid in full, and Mr. Yan released us from all claims arising from or related to the satisfied debts.
On April 8, 2021, we offered and sold to a single accredited investor 1,500,000 shares of our newly-designated Series A Preferred in a transaction exempt from registration requirements of the Securities Act pursuant to Rule 506(b) of Regulation D. On April 25, 2022, we filed the Certificate of Designation of Series A Preferred with the Registrar of Corporations; on April 27, 2022 we filed the First Amended and Restated Certificate of Designation of Series A Preferred, and on May 10, 2022, we filed the Second Amended and Restated Certificate of Designation of Series A Preferred. As stated in the Second Amended and Restated Certificate of Designation of Series A Preferred, all shares of Common Stock issuable upon conversion of the Series A Preferred are subject to a two-year lock-up agreement running from the date of the sale. On May 11, 2022, 260,000 shares of the Series A Preferred were converted into 260,000 shares of our Common Stock without additional consideration.
On March 12, 2021, we announced the authorization and declaration of a dividend distribution of one right (a “Right”) for each outstanding share of Common Stock of the Company to stockholders of record as of the close of business on March 31, 2021 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one 0.00667 portion of a share of Series B Participating Preferred Stock of the Company at an exercise price of $50.00 (the “Exercise Price”). The complete terms of the Rights are set forth in a Preferred Stock Rights Agreement (the “Rights Agreement”), dated as of March 11, 2021, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.
Our Board of Directors adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires 15% or more of the Company’s Common Stock without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or to discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business combination approved by our Board.
On September 3, 2021, we offered and sold an aggregate of 150,000 of Series C Convertible Preferred Stock (“Series C”) for aggregate proceeds of $1,500,000 to our Chief Executive Officer.
On November 1, 2021, we offered and sold an aggregate of 100,000 shares of Series D Preferred to the accredited investor for the aggregate proceed of $3,900,000. On May 2, 2022, the investor converted 20,000 shares of Series D Preferred into 260,000 shares of Common Stoc without additional consideration.
On April 9, 2022, the Company dismissed its independent registered public accounting firm, WWC, P.C. The Board of Directors of the Company approved the dismissal of WWC, P.C. and approved the engagement of Onestop Assurance PAC as our independent registered public accounting firm, to audit the Company’s financial statements for the year ended December 31, 2021, in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) for foreign private issuers and the PCAOB.
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| A. | Operating Results |
Our operating results are primarily affected by the following factors:
| ● | Growth of China’s menswear industry. With approximately one-fifth of the world’s population and a fast-growing gross domestic product, China represents a significant growth opportunity for a wide variety of retail goods, including apparel. The enhanced living standards and increased disposable income that has resulted from the vibrant economic growth has driven the rapid development of the men’s apparel market in China in recent years. China is currently one of the world’s largest men’s apparel markets. As a leading provider of casual menswear in China, we believe we are well positioned to capitalize on the favorable economic, demographic and industry trends in this sector. |
| ● | Brand recognition. We derive all of our revenues from sales of the KBS branded products in China, and our success depends on the market perception and acceptance of the KBS brand and the culture, lifestyle and images associated with this brand. Market acceptance of our brand may affect the selling prices and market demand for our products, the profit margin of us can achieve, and our ability to grow. |
| ● | Ratio of franchised stores to corporate stores in our sales network. The ratio of franchised stores to corporate stores in terms of floor area in our sales network affects our results of operations in a given period. The franchised stores operated by our distributors have been and will continue to be the main contributor to our revenue for the foreseeable future. Under the distribution business model, we sell directly to our distributors and recognize revenues upon delivery of our products to them. Such distribution network has enabled us to accelerate sales growth at a much lower cost than opening direct stores and has limited our inventory and sales risks. Corporate stores operated by us, on the other hand, despite incurring more significant capital expenditures as compared with franchised stores, allow us more control over our brand and the consumer’s shopping experience, which are important factors for the overall success of our business. In addition, our corporate store sales generally have a higher gross profit margin than sales to distributors because we are able to sell the products at retail prices directly to the end-consumers and because we recognize expenses relating to our corporate stores as selling and distribution expenses. Therefore, the ratio of franchised stores to corporate stores in our sales network will affect our gross profit margin. |
| ● | Product offering and pricing. Our success depends on our ability to identify, originate and define menswear trends as well as to anticipate, gauge and react to changing consumer demands for menswear in a timely manner. Most of our products are subject to changing consumer preferences and fashion trends that cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly, and our future success depends in part on our ability to anticipate and respond to these changes. |
| ● | Our ability to maintain and expand our brand portfolio or maintain and enhance our brand recognition, We mainly depend on our brand portfolio to scale our business, attract and retain our brand partners and customers. Our Luxventure portfolio seamlessly connected various brands from our suppliers. Although we have devoted significant resources to and incurred large amount of expenses on sourcing, maintaining, promoting and expanding our brands, we cannot assure you that these efforts will be successful. In addition, maintaining and enhancing the recognition of our brands are also key to our success, which could be affected by various factors, including the effectiveness of our brand marketing strategy, publicity about our business, quality of products offered under the brands as well as preference of consumers, certain of which are beyond our control. Any failure to maintain and expand our brand portfolio or maintain and enhance our brand recognition could have a material and adverse effect on our business, results of operations and prospects. | |
Flexibility and sustainability of our product supply chain. Our success largely depends on our ability to consistently gauge customers’ tastes and market trends, provide a balanced assortment of merchandise and source brands that satisfies customer demands in a timely manner. Our failure to anticipate, identify or react appropriately and timely to changes in customer preferences, tastes and market trends or economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability. In addition, failure to respond to changing customer preferences and trends in brand could negatively impact our brand image with our customers and result in diminished brand loyalty, and thus harm the prospects of our business. | ||
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The ability to develop, upgrade and apply our technologies to support and expand our business. We rely on our technology infrastructure and operating systems to carry out the key aspects of our business, including identifying market trends in brands, selecting and partnering with quality brand partners, assisting in product designs for our private label brands, forecasting customers’ demands, supporting our product supply chain, enabling effective marketing and distribution, and refining customer services. We use third party social media platforms to promote our products. If we are unable to leverage third party social media platforms to effectively attract followers and convert them into active buyers, if there is any change, disruption or discontinuity in the features and functions of such social media platforms, our ability to acquire new consumers and our financial condition may suffer.
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Financial Statement Presentation
Menswear Business:
Revenue. During the periods covered by this section, we generated revenue from sales of our menswear products.
Cost of sales. During the periods covered by this section, our cost of sales primarily consisted of the costs of our outsourcing cost, raw materials, labor and overhead. We did not have any inward or outward freight charges as these charges are borne by our distributors and suppliers.
Gross profit and gross margin. For the periods covered by this section, our gross profit is equal to the difference between our net sales and cost of sales. Our gross margin is equal to the gross profit divided by net sales. Our gross margin may not be comparable to those of other retail entities since some retail entities include all of their distribution network costs in cost of sales and others, like us, include these expenses in another statement of operations line item.
Administrative expenses. For the periods covered by this section, general and administrative expenses consisted primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations.
Selling expenses. For the periods covered by this section, our selling and marketing expenses consisted primarily of compensation and benefits to our sales and marketing staff, store rent, business travel, coordination with distributor marketing and promotions, transportation costs and other sales related costs.
Non-menswear business
Revenue. During the periods covered by this section, we generated revenue from a) sales of cross-border merchandise and b) tourism products, which covers tourism package and airline ticket sale (including related services).
Cost of sales. Cost of sales for non-menswear business primarily consisted of (a) the purchased costs of products online sold in connection with the revenue from cross-border merchandise, (b) the cost to purchase tourism supply up front and cancelling cost if any, and (c) the cost for outsourcing the travelling work to certain travel agencies
Gross profit and gross margin. For the periods covered by this section, our gross profit is equal to the difference between our net sales and cost of sales. Our gross margin is equal to the gross profit divided by net sales.
Administrative expenses. For the periods covered by this section, general and administrative expenses consisted primarily of compensation and benefits to our general management, finance and administrative staff, rental costs, office supplies, utilities, and other expenses incurred in connection with general operations.
Comparison of Fiscal Years Ended December 31, 2021, 2020, and 2019
The following table sets forth key components of our results of operations, for the years ended December 31, 2020, 2019, and 2018, both in U.S. dollars and as a percentage of or revenue.
| Year ended December 31, 2021 | Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||||||||||||||
| Amount | % of Sales | Amount | % of Sales | Amount | % of Sales | |||||||||||||||||||
| Revenue | 59,001,641 | 10,876,149 | 16,465,562 | |||||||||||||||||||||
| Cost of sales | (57,421,814 | ) | -97 | % | (8,377,731 | ) | -77 | % | (10,714,519 | ) | -65 | % | ||||||||||||
| Gross profit (loss) | 1,579,827 | 3 | % | 2,498,418 | 23 | % | 5,757,043 | 35 | % | |||||||||||||||
| Operating expenses | 0 | |||||||||||||||||||||||
| Distribution and selling expenses | (3,399,328 | ) | -6 | % | (4,258,504 | ) | -39 | % | (1,094,391 | ) | -7 | % | ||||||||||||
| Administrative expenses | (9,166,191 | ) | -15 | % | (3,439,815 | ) | -32 | % | (3,478,258 | ) | -21 | % | ||||||||||||
| Total operating expenses | (12,565,519 | ) | -21 | % | (7,698,319 | ) | -71 | % | (4,572,649 | ) | -28 | % | ||||||||||||
| Other income | 406,493 | 1 | % | 418,638 | 4 | % | 291,582 | 2 | % | |||||||||||||||
| Other gains and losses | (9,108,459 | ) | -15 | % | (2,380,594 | ) | -22 | % | (1,064,588 | ) | -6 | % | ||||||||||||
| (Loss) Profit from operations | (19,687,658 | ) | -33 | % | (7,161,858 | ) | -66 | % | 405,388 | 2 | % | |||||||||||||
| Finance costs | (58,726 | ) | -1 | % | (62,383 | ) | -1 | % | (67,203 | ) | 0 | % | ||||||||||||
| (Loss) Profit before tax | (19,746,384 | ) | -33 | % | (7,224,241 | ) | -66 | % | 338,185 | 2 | % | |||||||||||||
| Income tax | (17,469,099 | ) | 4 | % | 1,556,824 | 14 | % | (442,590 | ) | -3 | % | |||||||||||||
| Loss for the year | (37,215,483 | ) | -29 | % | (5,667,417 | ) | -52 | % | (104,405 | ) | -1 | % | ||||||||||||
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For the year ended December 31, 2021, total revenue increased by 446% to $59.01 million from $10.88 million in 2020. In December 2020, the Company acquired Flower Crown, which contributed two new segments, cross-border merchandise sales and tourism. Those two segments contributed revenue of $54.04 or 91% of total revenue of the Company in 2021, compared to $1.34 million or 12.3% of the total revenue of the Company in 2020. After deducting the increment of the two segments revenue, the Company’s menswear business in 2021 decreased by 44% to $4.96 million from $9.54 million in 2020.
A breakdown of revenue, percentage of revenue and percentage of gross margin by segment of the menswear business for the respective periods is as follows:
| Distribution network | Corporate stores | OEM | Consolidated | |||||||||||||||||||||||||||||||||||||||||||||
| By | Year ended December 31, | Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| business | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Sales to external customers | 4,593,325 | 8,366,144 | 10,308,309 | 367,367 | 446,834 | 571,403 | - | 727,797 | 5,585,850 | 4,960,693 | 9,540,776 | 16,465,562 | ||||||||||||||||||||||||||||||||||||
| Segment | 4,593,325 | 8,366,144 | 10,308,309 | 367,367 | 446,834 | 571,403 | - | 727,797 | 5,585,850 | 4,960,693 | 9,540,776 | 16,465,562 | ||||||||||||||||||||||||||||||||||||
| % of Sales | 92.6 | % | 87.7 | % | 63.0 | % | 7.4 | % | 4.7 | % | 3.0 | % | 7.6 | % | 34.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||
| Segments gross margins | 680,241 | 2,053,733 | 3,268,945 | 74,701 | 175,165 | -319,706 | - | 102,955 | 2,162,393 | 754,942 | 2,335,752 | -5,751,043 | ||||||||||||||||||||||||||||||||||||
| Gross margin rate | 14.8 | % | 24.5 | % | 32.0 | % | 20.3 | % | 39.2 | % | 56.0 | % | 14.1 | % | 39.0 | % | 15.2 | % | 24.4 | % | 35.0 | % | ||||||||||||||||||||||||||
Segment sales - menswear
For the year ended December 31, 2021, total revenue decreased by 48% to $4.96 million from $9.54 million in 2020. Total revenue of year 2020 decreased by 42% to $9.54 million from $9.54 million in 2019. The Company reports financial and operating results in three segments: distributor network, corporate stores and OEM.
Distributor Network —Revenue from the Company’s distributor network in year 2021 decreased by 45% to $4.59 million from $8.37 million in 2020 primarily due to 1) business operation suspended of some distributor in response to regional wide lockdown and quarantines; 2) the customer orders decreased because the coronavirus pandemic has depressed customers’ demand for our products and services.
There was a decrease of revenue from the Company’s distributor network in year 2020 decreased by 19% to $8.37 million from $10 million in 2019 primarily due to 1) business operation suspended during first quarter of 2020 when china was in response to nationwide lockdown and quarantines; 2) the customer orders decreased because the coronavirus pandemic has depressed customers’ demand for our products and services. The distributor segment accounted for 92.6% of the total revenue in 2021, compared to 87.7% and 63% during years 2020 and 2019, respectively.
In year 2021, gross profit margin for the company’s distributor network decreased to 14.8% from 24.5% for year 2020 due to company strategy to reduce inventory level and promoted price on these inventory sales to distributors and wholesalers; the promotion campaign caused lower gross profit margin compare to year 2020 and the average sale price to distributors decreased for about 10% of retail price compared to the old price policy;
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In year 2020, gross profit margin for the company’s distributor network decreased to 24.5% from 32% for year 2019 due to company strategy change to same sale price to distributors and wholesalers, the sale price to distributors decreased for about 5% of retail price compared to the old price policy;
The Company’s distributor network currently consists of 14 distributors in 11 provinces. Most of these distributors, either directly or through their sub-distributors, operate KBS-branded stores. Some wholesale distributors sold the products to multi-branded stores and online stores. As of December 31, 2021, distributors operated a total of 29 KBS-branded stores, primarily in second and third tier cities. KBS products distributed to the fourth and fifth tier cities are primarily sold in multi-branded department stores.
Corporate Stores — Total revenue from corporate store sale for fiscal year 2021 was $0.37 million, compared to $0.45 million for year 2020. In 2021, sales from corporate store decreased as compared to 2020 because the coronavirus pandemic has depressed customers’ demand for our products and services, the customers trend to choose cost-effective clothing.
Total revenue from corporate store sale for fiscal year 2020 was $0.45 million, compared to $0.57 million for year 2019. In 2020, sales from corporate store decreased as compared to 2019 because 1) business operation suspended during first quarter of 2020 when China was in response to nationwide lockdown and quarantines; 2) the coronavirus pandemic has depressed customers’ demand for our products and services,
As of December 31, 2021, we operated 1 corporate store which was located in Fujian. Total revenue from corporate store sales of 2021 decreased as compared to 2020 because of low demand during coronavirus pandemic.
The corporate store segment contributed 7.4% of total revenue in 2021, compared to 4.7% of 2020 and 3% of 2019. Gross profit margin for the Company’s corporate store was 20.3% in 2021, compared to 39.2% in 2020 and 56% in 2019. The margin decrease in 2021 is primarily because there were stimulate sales for reducing inventory level in year 2021 compared to 2019; The margin decrease from 2019 to 2020 is primarily because there were more stimulate sales in year 2020 compared to 2019;
OEM — The OEM segment is comprised of products that are designed by the customers but manufactured by us. Revenue from the OEM segment decreased by $0.73 million to 0 for year ended December 31, 2021, compared to $0.73 million for year ended December 31, 2020 due to the company terminated OEM business started from July of 2020 because the high labor cost and decreased demand after COVID 19;
Revenue from the OEM segment decreased by $4.86 million to $0.73 million for year ended December 31, 2020, compared to $5.59 million for year ended December 31, 2019 due to the business suspension in first Q1 of year 2020 and less customer orders resulting from pandemic impact. Therefor the company terminated OEM business started from July of 2020; Gross profit margin decreased to 14% from 39% of year 2019.
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Our revenues from sales of OEM represented 0%, 24.5% and 34%, respectively, of our total revenues for years ended December 31, 2021, 2020 and 2019.
Segment revenue – Non-menswear
In December 2020, we acquired Flower Crown, a subsidiary with two segment business at the time of the acquisition, which are tourism and cross-border merchandise. The consolidated financial statements for the year ended December 31, 2020 includes 1 month operation result of Flower Crown. The two segments are presented as below
| Tourism | Cross border merchandise revenue | |||||||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||||||
| By business | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||
| Sales to external customers | 51,818,166 | 991,929 | - | 2,222,782 | 343,445 | - | ||||||||||||||||||
| Segment revenue | 51,818,166 | 991,929 | - | 2,222,782 | 343,445 | - | ||||||||||||||||||
| Segment gross margins/(loss) | 541,889 | 96,577 | - | 305,822 | 69,988 | - | ||||||||||||||||||
| Gross margin rate | 1 | % | 9.7 | % | 13.7 | % | 20.3 | % | ||||||||||||||||
In 2021, the revenue of non-menswear segment increased to $51.82 million by 5082% from $1.0 million in 2020. The increase mainly due to following factors: 1) the revenue in 2020 only included 1 month of operation result of Flower Crown; and 2) Flower Crown started its airline tickets business in 2021, which contributed a revenue of $51.20 million.
In 2021, the revenue for cross-border merchandise sub-segment increase to $2.2 million by 547% from $0.34 million in 2020. The increase of revenue is mainly due to the reason that the revenue in 2020 only included 1 month of operation result. If compared to the projected result of 2020’s revenue, the revenue for cross-border merchandise sub-segment in 2021 decreased by 46%.
Cost of sales and gross profit rate
Cost of sales for menswear business comprises of purchasing materials, labor costs for personnel employed in production, depreciation of non-current assets used for production purpose, outsourced manufacturing cost, taxes and surcharges and water and electricity.
Cost of non-menswear business primarily consisted of (a) the purchased costs of products sold in connection with the revenue from cross-border merchandise, (b) the cost to purchase tourism supply up front and cancelling cost if any, and (c) the cost for outsourcing the travelling work to certain travel agencies.
Our cost of sales increased from $8.37 million in year 2020 to $57.42 million in year 2021. The increase was mainly due to the increase of cost in connection with the increasing travel segment’s revenue in year 2021 compared to 2020
The gross profit rate decreased from 23% in year 2020 to 2.6% in year 2021 due to 1) the lower gross margin in 2021 for menswear business as explained above; 2) the new business of airline tickets with gross margin at 1% which contributed $51.2 million or 86.7% of total revenue in 2021. The Company’s strategy is to build up tourism supply chain network so that can be a tailored one-stop tourism online platform eventually. As a result, a competitive supply resources, including the airline tickets, are essential to the strategy. To reach such goal, the Company connected to different airlines and tried to create more transaction volume in order to achieve a higher discount rates from the airline companies. As a result, the gross margin for this sector may be higher once the volume is higher enough or more overseas airline tickets can be sold once Covid-19 impact to tourism is reduced.
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Our cost of sales decreased from $11 million in year 2019 to $8.37 million in year 2020. The decrease was mainly due to the decrease in apparel business sector sales in year 2020 compared to 2019.
The gross profit rate decreased from 35% in year 2019 to 23% in year 2020 due to 1) company strategy change to same sale price to distributors and wholesalers, the sale price to distributors decreased for about 5% of retail price compared to the old price policy; 2) there were more stimulate corporate store sales in year 2020 compared to 2019; 3) lower profit margin of OEM segments due to higher unit amortized fixed fee due to less customers’ orders resulting from pandemic impact.
Administrative expenses
Administrative expenses increased by $5.73 million or 60% to $9.17 million for year 2021 from $3.44 million for year 2020. The change was mainly due to 1) increase of the company’s share-based compensation paid to vendors, employees, officers and directors of the company in year 2021; and 2) increase of such expenses for Flower Crown’s business by $2.09 million or 1300% compared to $0.15 million in 2020 for 1 month’s operation result.
Administrative expenses decreased by $0.4 million or 1% to $3.44 million for year 2020 from $3.48 million for 2019. The change was mainly due to 1) decrease of the company’s share-based compensation paid to officers and directors of the company in year 2020; and 2) adjustment of compensation of our overall staff to stimulate the staff’s working enthusiasm.
Distribution and selling expenses
The selling and distribution expenses decreased by $0.86 million or 20% to $3.40 million for the year ended December 31, 2021 from $4.26 million for the year ended December 31, 2020, primarily due to 1) the increase in special Covid-19 related subsidies to our distributors and necessary advertising expenses in 2020 of $2.2 million, while no such subsidies in 2021; 2) by netting off the effect of increase of selling and distribution expenses of Flower Crown business of $1.4 million as compared to 1 month operation result in 2020.
The selling and distribution expenses increased by $3.15 million or 290% to $4.26 million for the year ended December 31, 2020 from $ 1.1 million in 2019, primarily due to due to the increase in special Covid-19 related subsidies to our distributors and necessary advertising expenses. The apparel and fashion industry has faced enormous challenges during the Covid-19 pandemic. With store closures, overall consumer demand has plummeted, resulting in weak sales and tight cash flow for our distributors. In order to ease their burden and help their business sustain, we increased the special subsidies to the distributors who have good credits to support their operations during the difficult time.
The advertisement expenses of apparel business sector of 2020 increased for 73.4%% in year 2020 compared to year 2019 and it accounted for 12.9%, 1.9% and 6.6% of total apparel business sales for 2020, 2019 and 2018, respectively.
Other gains and losses
Other gains and losses in 2021 mainly consist of 1) bad debt provision of $5.2 million for menswear’s doubtful accounts as compared to $2.3 million in 2020; and b) impairment of property and land use right in menswear’s segment of $3.8 million as compared to $nil in 2020.
Other gains and losses increased by $1.3 million, or 124%, to -$2.4 million for the year ended December 31, 2020 from -$1.1 million for year 2019. The increase was mainly due to the impairment loss on outdated account receivables as a result of its long period of overdue.
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Profit for the year
We had a loss of $37.2 million in 2021 as compared to a loss of $5.7 million for 2020, representing an increase of loss of $31.5 million or 453%. Net margin was -63% for the year ended December 31, 2021, compared to -52% for the year ended December 31, 2020.
We had a loss of $5.7 million in 2020 as compared to a loss of $0.1 million for 2019, representing a decrease of profit of $5.6 million or 5348%. Net margin was -52% for the year ended December 31, 2020, compared to -1% for the year ended December 31, 2019.
Loss for the year increased from 2020 to 2021 mainly due to the following reasons: (1) increment expenses for newly started tourism business while the gross profit from the segments were not able to cover the expenses yet; (2) decrease in revenues of menswear business compared to year ended December 31, 2020 due to decreasing demand from ending customers and termination of OEM segment business started from July of year 2020 which resulted from decreased customer orders; (3) impairment for long-lived assets and provision for doubtful accounts for menswear business due to its shrink trend totaling $9 million; (4) significant valuation allowance of deferred tax assets of $21 million.
Profit for the year decreased from 2019 to 2020 mainly due to the following reasons: (1) increase in special Covid-19 related subsidies to our distributors and necessary advertising expenses. (2) decrease in revenues compared to year ended December 31, 2019 result from pandemic impact; and (3) termination of OEM segment business started from July of year 2020 which resulted from decreased customer orders; 4) business suspension during first quarter of year 2020;
| B. | Liquidity and Capital Resources |
As of December 31, 2021, we had cash and cash equivalents of $16,621,290. Our cash and cash equivalents consist of cash on hand and cash in the banks. We believe that our current levels of cash and cash equivalent and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. To date, we have financed our operations primarily through net cash flow from operations. Our cash flows are driven by key performance indicators including the number of orders placed by distributors, number of outlets that each distributor operates the pricing of our products, sales of our corporate stores, and the collect portion of account receivable. Currently there is only minimal cash held by offshore subsidiaries and there is no need for these subsidiaries to transfer cash to Hongri PRC.
The following table provides detailed information about our net cash flow for all financial statement periods presented in this report:
| Fiscal Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Net cash provided by (used in) operating activities | $ | (7,775,819 | ) | $ | (6,520,790 | ) | $ | (558,804 | ) | |||
| Net cash provided by (used in) investing activities | (3,279,171 | ) | 607,414 | 332,513 | ||||||||
| Net cash provided by (used in) financing activities | 6,958,971 | 846,854 | 57,089 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (4,096,019 | ) | (5,066,462 | ) | (169,200 | ) | ||||||
| Effects of exchange rate change in cash | 389,643 | (1,067,274 | ) | (236,423 | ) | |||||||
| Cash and cash equivalents at beginning of the period | 16,621,290 | 20,620,478 | 21,026,103 | |||||||||
| Cash and cash equivalent at end of the period | $ | 12,914,914 | $ | 16,621,290 | $ | 20,620,478 | ||||||
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Operating Activities
The net cash provided by operating activities consists of profit before tax, as adjusted by finance costs, change in fair value of warrant liabilities, interest income, shared based compensation, bad debt allowance, depreciation of property, plant and equipment, amortization of prepaid lease payment and trademark, amortization of subsidies prepaid to distributors, amortization of prepayment and premiums under operating leases, provision(Reversal) of inventory obsolescence, provision of impairment loss in prepayments, loss(gain) on disposal of property, plant and equipment, deferred income tax, which include trade and other receivables, prepayment and deferred expenses, inventory, trade and other payables.
Net cash used in operating activities in fiscal year 2021 was $7.78 million, compared with net cash used in operating activities of $6.5 million in the year ended December 31, 2020. The cash outflow in 2021 is mainly resulted from net loss of $37.2 million by netting off bad debt provision and impairment of $9.1 million, and stock-based compensation of $4.4 million, deferred tax assets net decrease of $17.5 million, adding the effect of increase of receivables of $3.3 million and other working capital changes effects.
Net cash used in operating activities in fiscal year 2020 was $6.52 million, compared with net cash provided by operating activities of $0.56 million in the year ended December 31, 2017. The change is mainly due to the increase of provision of outdated account receivable; the increase of deferred tax due to the loss of fiscal year 2020 and the increase in special Covid-19 cash related subsidies.
Investing Activities
Net cash used in investing activities in fiscal year 2021 was $3.3 million, compared with $0.61 million net cash provided by investing activities in 2020. The net cash used in investing activities in 2021 mainly resulted from acquiring property, plants and equipment of $3.3 million.
Net cash provided by investing activities in fiscal year 2020 was $0.61 million, compared with $0.33 million net cash provided by investing activities in 2019. The net cash provided in investing activities in 2020 was cash from acquisition of subsidiaries.
Financing Activities
Net cash generated from financing activities in fiscal year 2021 was $6.95 million, compared with $0.857 million net cash generated in financing activities in 2020.
Net cash generated from financing activities in 2021 were primarily due to proceeds of US$1,500,000 raised from the sale of our Series A Preferred in April 2021 to a single investor, US$1,500,000 raised from the sale of our Series C Preferred in September 2021 to our Chief Executive Officer; and $3,900,000 raised from the sale of the Series D Convertible Preferred Stock to a single investor on November 1, 2021. All sale of shares of Preferred Stock were exempt from registration requirements of the Securities Act.
Net cash generated in financing activities in 2020 was mainly consisted of some advance from a related party.
Net cash provided in financing activities in fiscal year 2019 was $0.057 million, compared with $0.26 million net cash used by financing activities in 2018. It mainly consisted of some advances from related parties.
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Loans, Other Commitments, Contingencies
As of December 31, 2021, we had an outstanding bank loan from Anhui Taihu Rural Commercial Bank Co. Ltd. in an amount of $1,180,656. Currently, the loan has a one-year term from April 26, 2021 to April 25, 2022 with an annual interest rate of 5.39% and is renewable annually. The loan has been guaranteed by Taihu County Financing Guaranty Co., Ltd. As of the reporting date, the loan has been repaid. We may, however, in the future, require additional cash resources due to changing business conditions, implementation of our strategy to expand our business or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy the capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
| C. | Research and Development, Patents and Licenses, Etc. |
Our industry is characterized by rapid technological change, evolving industry standards and changing customer demands. These conditions require continuous expenditures on product research and development to enhance existing products create new products and avoid product obsolescence. See Item 3 “Key Information—D. Risk Factors—If we are unable to develop competitive new products and service offerings our future results of operations could be adversely affected,” —“If we are unable to keep pace with the rapid technological changes in our industry, demand for our products and services could decline which would adversely affect our revenue,” and —“Our technology may become obsolete which could materially adversely affect our ability to sell our products and services.” For a detailed analysis of research and development costs, see Item 5.A. “Operating Results—Results of Operations—Research and development expenses”.
| D. | Trend Information |
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2021 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
| E. | Off-Balance Sheet Arrangements |
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
| F. | Tabular Disclosure of Contractual Obligations |
The table below shows our material contractual obligations as of December 31, 2021.
| Payments Due by Period | ||||||||||||
| Less than 1 year | 2-5 years | More than 5 years | ||||||||||
| Contractual Obligations | ||||||||||||
| Construction Obligations | $ | 69,399,168 | - | - | ||||||||
| Operating Lease Obligations | $ | 113,095 | 330,856 | 1,993,837 | ||||||||
| Total | $ | 69,512,263 | 330,856 | 1,993,837 | ||||||||
Anhui Factory Construction Contract
On November 20, 2010, Hongri PRC entered into an agreement with a third party for the construction of a new plant with a total size of 110,557 square meters, at Taihu City, Anhui at a consideration of RMB 690 million (equivalent to approximately $104 million). This is the frame contract for the construction of Anhui factory and round estimation. By December 31, 2016 we had already paid about $37.75 million in total on the phase 1, 2, 3 of construction based on detailed phase contract and the balance of construction cost of the Anui factory need to be determined based on the timely budget on every phase. The majority of funds for construction expenses came from the cash balance on the account as of December 31, 2021.
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Anhui Land Use Right Acquisition Contract
On September 2, 2010, Hongri PRC entered into an agreement with a third party to acquire a land use right in relation to the development of factories in Taihu City, Anhui Province, at a total consideration of RMB 43 million (approximately $6.3 million). Full consideration was paid in September 2010. There are three parts of the land. The Company has obtained land use rights certificates for the first parcel of land with 7,405 square meters on March 19, 2012, and the second parcel of land with 2,440 square meters on May 26, 2012. The Company is currently in the process of obtaining the land use right certificate for the third parcel of the land with 100,712 square meters.
Except as set forth above, we have no other material long-term debt, capital or operating lease or fixed purchase obligations.
Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the apparel industry and continually maintain effective cost controls in operations.
Seasonality
Our business, like that of many retailers, is seasonal. Historically, we have realized more of our revenue and earnings in the fourth quarter, which includes the majority of the holiday shopping season, than in any other fiscal quarter.
Critical Accounting Policies
The preparation of financial statements is in conformity with IFRS as issued by the IASB. It requires the Company’s management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. The Company has identified certain accounting policies that are significant to the preparation of Company’s financial statements. These accounting policies are important for an understanding of the Company’s financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. The Company believes the following critical accounting policies involve the most significant estimates and judgments used in the preparation of the Company’s financial statements.
Revenue recognition
Revenue from contracts with customers
Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which the Company will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved. Currently, the Company’s contracts do not include such variable amount.
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When the contract contains a financing component which provides the customer a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the Company and the customer at contract inception. When the contract contains a financing component which provides the Company a significant financial benefit for more than one year, revenue recognized under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in IFRS 15. Currently, the Company’s contract with its customers do not include financial benefit for more than one year.
Nature and timing of satisfaction of performance obligations for each of the revenue streams are as follows:
Revenue from the sale of goods
Performance obligation is satisfied at the point in time when control of the asset is transferred to the customer, generally on delivery and acceptance of the goods. The Company presents revenues from such transactions on a gross basis in the consolidated statements of comprehensive loss, as the Company acts as a principal to take inventory risks of these goods.
Revenue from the sale of Tourism Package
Performance obligation is satisfied when the tourism package is completed, generally when the tour group successfully returned from the tour destination to the place of origination. The Company presents revenues from such transactions on a gross basis in the consolidated statements of comprehensive loss, as the Company acts as a principal to provide a package of tourism services and take a full obligation to provide such services even if the suppliers are not able to deliver service.
Revenue from reselling of airline-ticket
The Company is a reseller of air-ticket, it provides value add services to its customers including guaranteed flight replacement and other financial benefits. The revenue is recognized when performance obligation has been satisfied, which could be significantly after the ticket sale. The Company recognizes gross revenue with an expense from the cost of purchasing from the supplier.
Other income
Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Rental income is recognized on a time proportion basis over the lease terms.
Dividend income is recognized when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Company and the amount of the dividend can be measured reliably.
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Value added tax (VAT)
Current standard Output VAT in effect is 13% of product sales, according to existing tax laws. The remaining balance of output VAT, after subtracting the deductible input VAT of the period, is VAT payable.
| Period | Standard VAT rate in effect | |||
| April 1, 2019 - Current | 13 | % | ||
| May 1, 2018 – March 31, 2019 | 16 | % | ||
| Earlier | 17 | % | ||
The output VAT rate for service revenue is 6% and subject to reduction in accordance with relevant tax regulations.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale.
All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
Retirement benefit costs
Pursuant to the relevant regulations of the PRC government, the Group’s subsidiaries located in the PRC participate in a local municipal government retirement benefits scheme (the “Scheme”), whereby they contribute a prescribed percentage of the basic salaries of their employees to the Scheme to fund their retirement benefits. Once the Scheme has been funded via contributions by the Group’s participating subsidiaries, the local municipal government takes responsibility for the retirement benefits obligations of all existing and future retired employees of those subsidiaries located in the PRC; accordingly, the only obligation of the Group with respect to the Scheme is to pay the on-going required contributions as long as the employees maintain employment with the Group. There are no provisions under the Scheme whereby forfeited contributions may be used to reduce future contributions. These plans are considered defined contribution plans. The Group has no legal or constructive obligations to pay further contributions after its payment of the fixed contributions into the pension schemes. Contributions to pension schemes are recognized as an expense in the period in which the related service is performed.
Taxation
The tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case the tax is also recognized in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
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The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
Store pre-opening cost
Store pre-opening cost was the start-up activity costs incurred prior to opening a new store, mainly including leasing, leasehold improvements, payroll and supplies. The accounting policies for leasing and leasehold improvements were as below. Other store pre-opening costs were directly charged to expenses when occurred.
Leasing
IFRS 16 Leases requires lessees to recognise assets and liabilities for most leases based on a ‘right-of-use model’ which reflects that, at the commencement date, a lessee has a financial obligation to make lease payments to the lessor for its right to use the underlying asset during the lease term. The lessor conveys that right to use the underlying asset at lease commencement, which is the time when it makes the underlying asset available for use by the lessee.
IFRS 16 defines a lease term as the noncancellable period for which the lessee has the right to use an underlying asset including optional periods when an entity is reasonably certain to exercise an option to extend (or not to terminate) a lease.
Under IFRS 16 lessees may also elect not to recognise assets and liabilities for leases with a lease term of 12 months or less. In such cases a lessee recognises the lease payments in profit or loss on a straight-line basis over the lease term. The exemption is required to be applied by class of underlying assets. Lessees can also make an election for leases for which the underlying asset is of low value. This election can be made on a lease-by-lease basis. For leases where the Group is the lessee, the lease term is either cancelable or no longer than 12 months, so the Group has elected not to record the leased assets.
Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors continue to classify leases as either operating or finance leases using similar principles as in IAS 17. IFRS 16 did not have any significant impact on leases where the Group is the lessor.
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Leasehold improvements
Leasehold improvements, principally comprising costs of office buildings and shops renovation, are held for administrative and selling purposes. Leasehold improvements are initially measured at cost and amortized systematically over its useful life.
Property, plant and equipment
Property, plant and equipment (“PPE”) including buildings held for use in the production or supply of goods or services, or for administrative purposes other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.
Depreciation is provided to write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.
Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is de-recognized.
The Group as lessor
Rental income from operating leases is recognized in profit or loss on a straight-line basis over the term of the relevant lease.
Land use rights
Land use rights are stated at cost less accumulated amortization and accumulated impairment losses. Cost represents consideration paid for the rights to use the land on which various plants and buildings are situated for periods varying from 20 to 50 years.
Amortization of land use rights is calculated on a straight-line basis over the period of the land use rights.
Inventories
Inventories are stated at the lower of cost and net realizable value. Costs of inventories are determined using the weighted average method. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
Financial instruments – investments and other financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient of not adjusting the effect of a significant financing component, the Group initially measures a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 in accordance with the policies set out for “Revenue recognition”.
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In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
Subsequent measurement
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at amortized cost (debt instruments)
The Group measures financial assets at amortized cost if both of the following conditions are met:
| ● | The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows. |
| ● | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognized in the income statement when the asset is derecognized, modified or impaired.
Financial assets at fair value through other comprehensive income (debt instruments)
The Group measures debt instruments at fair value through other comprehensive income if both of the following conditions are met:
| ● | The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling. |
| ● | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
For debt instruments at fair value through other comprehensive income, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the income statement and computed in the same manner as for financial assets measured at amortized cost. The remaining fair value changes are recognized in other comprehensive income. Upon derecognition, the cumulative fair value change recognized in other comprehensive income is recycled to the income statement.
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Financial assets at fair value through other comprehensive income (equity investments)
Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity investments designated at fair value through other comprehensive income when they meet the definition of equity under HKAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to the income statement. Dividends are recognized as other income in the income statement when the right of payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Group and the amount of the dividend can be measured reliably, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in other comprehensive income. Equity investments designated at fair value through other comprehensive income are not subject to impairment assessment.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at fair value through other comprehensive income, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.
Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the income statement. This category includes derivative financial instruments and structured bank deposits.
A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in the income statement. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.
A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.
Financial instruments – impairment of financial assets
The Group recognizes an allowance for ECLs for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
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General approach
ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available without undue cost or effort, including historical and forward-looking information.
The Group considers a financial asset in default when contractual payments are 120 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Debt instruments at fair value through other comprehensive income and financial assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for trade receivables which apply the simplified approach as detailed below.
| Stage 1 – | Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month ECLs | |
| Stage 2 – | Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs | |
| Stage 3 – | Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance is measured at an amount equal to lifetime ECLs | |
Simplified approach
For trade receivables that do not contain a significant financing component or when the Group applies the practical expedient of not adjusting the effect of a significant financing component, the Group applies the simplified approach in calculating ECLs. Under the simplified approach, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
For trade receivables that contain a significant financing component and lease receivables, the Group chooses as its accounting policy to adopt the simplified approach in calculating ECLs with policies as described above.
Financial instruments – derecognition of financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:
| ● | the rights to receive cash flows from the asset have expired; or |
| ● | the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. |
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When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Financial instruments – financial liabilities
Initial recognition and measurement
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The Group’s financial liabilities include trade payables, other payables, financial liabilities included in accruals and interest-bearing bank borrowings.
Subsequent measurement
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the effective interest rate amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance costs in the income statement.
Financial instruments – derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in the income statement.
Financial instruments – offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
| G. | Safe Harbor |
See “Introductory Notes—Forward-Looking Information.”
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
| A. | Directors and Senior Management |
The following table sets forth certain information regarding our directors and senior management, as well as employees upon whose work we are dependent, as of the date of this annual report.
| NAME | AGE | POSITION | ||||
| Keyan Yan | 49 | Interim Chief Financial Officer and Director | ||||
| Sun Lei | 38 | Chief Executive Officer and Director | ||||
| Li Hui Dan | 40 | Chairman and Director | ||||
| Baojun Zhu | 45 | Independent Director | ||||
| Mu Ruifeng | 58 | Independent Director | ||||
| Jin Yan | 52 | Independent Director | ||||
| He Long Hai | 43 | Independent Director | ||||
Mr. Keyan Yan. Mr. Yan, age 49, has been our director since the closing of the Share Exchange on August 1, 2014 and our Interim Chief Financial Officer since December 21, 2020. Mr. Yan has over 17 years of senior management experience. He served as Chairman and Chief Executive Officer of KBS International between March 2011 and August 2014. From 1994 to present, Mr. Yan has served as general manager of Hongri PRC. Prior to joining us, Mr. Yan served as workshop manager, production manager and marketing manager of Zhenshi Knitting Factory in Shishi, China from 1989-1994. Mr. Yan obtained a certificate of corporate management from Xiamen University in 1992.
Ms. Sun Lei. Ms. Sun, age 38, has been our Chief Executive Officer and a director of our board since December 21, 2020. She is an expert in management operation and an avid world traveler. She was: i) the CEO of a family-owned conglomerate and, during her tenure, fully revamped its operation and expanded its business operation through mergers and acquisitions; ii) formed a partnership with Richemont International Group in Paris; and iii) founded Jinxuan Luxury Tourism Group in 2016, engaging in the operation of global high-end business jets, luxury brand yachts and automobiles. In addition to her rich experience in luxury goods management, Ms. Sun is also an E-Commerce entrepreneur. Ms. Sun Lei graduated from Emlyon Business School in France with a Bachelor’s degree in business administration, a Master’s Degree in economics and a Master’s degree in finance. She also studied at School of Economics and Management of Tsinghua University.
Mr. Li Hui Dan. Mr. Li, age 40, has been our Chairman and a director of our board since December 21, 2020. He is the founder of Baofu (Beijing) Holding Co., Ltd (“Baofu”). For the past fifteen (15) years, Mr. Li successfully expanded its business into real estate, import and export, fin-tech and medical sectors. Baofu currently operates more than 15 companies. Mr. Li received his MBA degree from University of Hawaii.
Baojun Zhu, age 54, was appointed as a member to our Board and a member of the Audit Committee on May 3, 2022. He has over 20 years of experience in the hospitality industry. He is currently the Chairman of Baoxuan Group Co., Ltd, Vice President of China Hospitality Association, Vice President of Chinese Cuisine Association. Mr. Zhu received award for Outstanding Meritorious Personage in Chinese hotel industry. Mr. Zhu acquired a range of expertise in business based upon his over 20 years in the business world. The Board determined that Mr. Zhu is an independent director within the meaning of the NASDAQ listing rules.
Mr. Mu Ruifeng. Mr. Mu, age 58, has been the independent director of our board since October 25, 2020. He is the founder of Xinruifeng Property Marketing Management Co., Ltd. and Xinruifeng Investment Group Co., Ltd. He is currently serving as the general manager and chairman of the board of those two companies. In addition, Mr. Mu also is the vice president of the Overseas Chinese Chamber of Commerce and a Hong Kong, Macao and Taiwanese specially invited member of the Foreign Affairs Committee. Mr. Mu is also an investor in Touch Stone Investment Pty, Ltd., a fund based in Australia focusing on the real estate market since 2015. Mr. Mu has acquired a range of expertise in business based upon his over 30 years in the business world. In addition, Mr. Mu was appointed by the board of directors as the Chair of the Audit Committee. Our board of directors has also determined that Mr. Mu is an “audit committee financial expert”.
Mr. Jin Yan. Mr. Jin, age 52, has been the independent director of our board since October 25, 2020. He has over 20 years of marketing experience in the entertainment industry. He is also a well-known entertainment agent, having represented superstars such as Andy Lau for almost ten years. Mr. Jin is currently the president of Zhongshi Culture Communication Co., Ltd, which he founded in 2015. Mr. Jin was also appointed as a member of the Audit Committee of the Company.
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Mr. He Long Hai, age 42, has been the independent director of our board since December 16, 2021. He has over 20 years of experience in management. He has served as manager and chief inspector of Xstep China Co., Ltd. from 2002-2010. From 2010-2015, he served as General Manager for Hang Zhou Zhuan Ji Commerce Co., Ltd, and from 2015 to present, he served as General Manager for Guang Dong Sun lin Xiu Shen Shen Tai Technology Co., Ltd.
Our Board currently consists of seven (7) members. Each director will serve until the next annual meeting of shareholders of the Company or until removed by other actions, in accordance with the Company’s bylaws.
Li Hui Dan and Sun Lei are spouses. No other family relationship exists between any of the persons named above.
| B. | Compensation |
For the year ended December 31, 2021, we paid an aggregate of approximately $18,670 in cash as compensation to our directors and executive officers as a group. We do not set aside or accrue any amounts for pension, retirement or other benefits for our directors and senior management. However, we reimburse our directors for out-of-pocket expenses incurred in connection with their services in such capacity.
For the year ended December 31, 2021, we granted under our 2018 Equity Incentive Plan, then in effect, an aggregate of 550,000 shares of our Common Stock to our executive officers directors as compensation for their services. Each share had he value of $3.86.
The grants to the Company’s executive officers and directors were as follows:
| ● | Keyan Yan, Interim Chief Financial Officer and Director, was granted 150,000 shares; |
| ● | Sun Lei, CEO and Director, was granted 200,000 shares |
| ● | Huidan Li, Chairman and director, was granted 200,000 shares |
The total compensation to Directors and Executives as a group is as follows:
| Directors and Executives | Shares issued | Total compensation (including cash) | ||||||
| Yan Keyan | 150,000 | 597,669 | ||||||
| Sun Lei | 200,000 | 772,001 | ||||||
| Li Huidan | 200,000 | 772,000 | ||||||
| 550,000 | 2,141,670 | |||||||
2018 Equity Incentive Plan
On December 24, 2018, the Board of Directors of the Company adopted the 2018 Equity Incentive Plan, or the 2018 Plan, pursuant to which the Company could offer up to two million (2,000,000) shares of Common Stock as equity incentives to its directors, employees and consultants. Such number of shares is subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, stock splits, stock dividends, or other change in the corporate structure of the Company affecting the shares issuable under the 2018 Plan. As of December 31, 2021, we have granted 2,000,0000 shares of Common Stock under the 2018 Plan.
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2022 Equity Incentive Plan
On January 11, 2022, we terminated the 2018 equity incentive plan and adopted the new equity incentive plan (the “2022 Plan”). We have advised the recipients of awards under our equity incentive plan to handle relevant foreign exchange matters in accordance with the Stock Incentive Plan Notice. However, we cannot guarantee that all employee awarded equity-based incentives can successfully register with SAFE in full compliance with the Stock Incentive Plan Notice
The following paragraphs summarize the terms of our 2022 Plan.
Purpose. The purposes of the 2022 Plan are to promote the long-term growth and profitability of the Company and its affiliates by stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are selected to be participants, aligning the long-term interests of participants with those of shareholders, heightening the desire of participants to continue in working toward and contributing to our success, attracting and retaining the best available personnel for positions of substantial responsibility, and generally providing additional incentive for them to promote the success of our business through the grant of awards of or pertaining to our Common Stock. The 2022 Plan permits the grant of ISOs, NSOs, Restricted Shares, Restricted Share Units, Share Appreciation Rights, Performance Units and Performance Shares as the administrator of the 2022 Plan may determine.
Administration. The 2022 Plan is administered by our Board. The administrator has the authority to determine the specific terms and conditions of all awards granted under the 2022 Plan, including, without limitation, the number of shares of common stock subject to each award, the price to be paid for the shares and the applicable vesting criteria. The administrator has the discretion to make all other determinations necessary or advisable for the administration of the 2022 Plan.
Eligibility. NSOs, Restricted Shares, Restricted Share Units, Share Appreciation Rights, Performance Units and Performance Shares may be granted to employees, directors or consultants either alone or in combination with any other awards. ISOs may be granted only to employees of the Company, and of any parent or subsidiary.
Shares Available for Issuance Under the 2022 Plan. Subject to adjustment as described below, (a) the maximum aggregate number of shares that may be issued under the 2022 Plan is 10,000,000 shares of Common Stock, (b) to the extent consistent with Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), Subject to the certain provisions of the 2022 Plan, including but not limited to, the reorganizations, combinations, mergers, to the extent consistent with Section 422 of the Code, up to an aggregate of ten million (10,000,000) shares may be issued as ISOs under the 2022 Plan; only employees of the Company or any parent or subsidiary shall be eligible for the grant of ISOs; for awards denominated in Shares and satisfied in cash, the maximum Award to any individual participant of the 2022 Plan in the aggregate in any one fiscal year of the Company shall not exceed the Fair Market fair market value of one million (1,000,000) shares on the Grant Date. The number and class of shares available under the 2022 Plan are subject to adjustment in the event of certain reorganizations, mergers, combinations, recapitalizations, share splits, share dividends, or other similar events which change the number or kind of shares outstanding.
Transferability. Unless otherwise provided in the 2022 Plan or otherwise determined by the administrator, an award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the participant, only by the participant. However, the administrator may, at or after the grant of an award other than an ISO, provide that such award may be transferred by the recipient to a “family member” (as defined in the 2022 Plan); provided, however, that any such transfer is without payment of any consideration whatsoever and that no transfer shall be valid unless first approved by the administrator, acting in its sole discretion, and as required by our Restated Articles . If the administrator makes an award transferable, such award will contain such additional terms and conditions as the administrator deems appropriate.
Termination of, or Amendments to, the 2022 Plan. The Board may at any time amend, alter, suspend or terminate the 2022 Plan, provided that the Company will obtain shareholder approval of any 2022 Plan amendment to the extent necessary and desirable to comply with applicable Laws. No amendment, alteration, suspension or termination of the 2022 Plan will impair the rights of any participant, unless mutually agreed otherwise between the participant and the administrator, which agreement must be in writing and signed by the participant and the Company. Termination of the 2022 Plan will not affect the administrator’s ability to exercise the powers granted to it hereunder with respect to awards granted prior to the date of such termination.
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The 2022 Plan will terminate ten years following the date it was adopted by the Board, unless sooner terminated by the Board.
Employment Agreements
With the exception of Sun Lei, we have not entered into any fixed compensation arrangements with any of our existing and newly-appointed directors.
On June 22, 2021, we entered into an Employment Agreement with Sun Lei, our Chief Executive Officer. Under the Employment Agreement, Sun Lei shall receive a cash compensation of USD1.00 and, based upon our annual revenues as reported in our 2021 annual report, stock compensation as follows: (i)10,000 shares of ordinary stock for revenue of USD10,000,000; (ii) 100,000 shares of ordinary stock for revenue of USD20,000,000; (iii) 250,000 shares of ordinary stock for revenue of USD30,000,000; (iv) 500,0000 shares of ordinary stock for revenue of USD40,000,000; and (v) 1,000,000 shares of ordinary stock for revenue of USD50,000,000. The Employment Agreement has a term of 1 year and has been approved by the board of directors of the Company and by the written consent of majority of the shareholders of the Company.
| C. | Board Practices |
Our board of directors currently consists of seven members, namely Keyan Yan, Sun Lei, Li Hui Dan, Mu Ruifeng, Jin Yan, Baojun Zhu and He Long Hai.
The Board has established the Audit Committee, which is comprised entirely of independent directors. From time to time, the Board may establish other committees.
Audit Committee
Our Audit Committee is currently composed of three members: Baojun Zhu, Mu Ruifeng, and Jin Yan. Our Board of Directors determined that each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership. Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Mu Ruifeng serves as Chair of the Audit Committee.
Our Board of Directors has determined that Mr. Mu Ruifeng is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.
The Audit Committee oversees our accounting and financial reporting processes and the audits of the financial statements of our Company. The Audit Committee is responsible for, among other things:
| ● | the appointment, compensation, retention and oversight of the work of the independent auditor; |
| ● | reviewing and pre-approving all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed by the independent auditor; |
| ● | reviewing and approving all proposed related-party transactions; |
| ● | discussing the interim and annual financial statements with management and our independent auditors; |
| ● | reviewing and discussing with management and the independent auditor (a) the adequacy and effectiveness of the Company’s internal controls, (b) the Company’s internal audit procedures, and (c) the adequacy and effectiveness of the Company’s disclosure controls and procedures, and management reports thereon; |
| ● | reviewing reported violations of the Company’s code of conduct and business ethics; and |
| ● | reviewing and discussing with management and the independent auditor various topics and events that may have significant financial impact on the Company or that are the subject of discussions between management and the independent auditors. |
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| D. | Employees |
As of December 31, 2021, we employed 415 full-time employees. The following table sets forth the number of our full-time employees by function.
| Function | Number of Employees | |||
| Management and Administration | 59 | |||
| Marketing, Sales and Distribution | 47 | |||
| Design and Product Development | 50 | |||
| Production | 118 | |||
| Procurement, Warehousing and Logistics | 70 | |||
| Quality and Assurance | 40 | |||
| IT R&D | 31 | |||
| TOTAL | 415 | |||
We believe that we have maintained a satisfactory working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting staff for company’s operations. None of company’s employees is represented by a labor union.
Our employees in China participate in a state pension plan organized by Chinese municipal and provincial governments. In addition, the company is required by Chinese law to cover employees in China with various types of social insurance. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China— Our failure to fully comply with PRC laws relating to social insurance and housing accumulation fund may expose it to potential administrative penalties.”
| E. | Share Ownership |
The following table sets forth information regarding beneficial ownership of each class of our voting securities as of May 13, 2022 (i) by each person who is known by us to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group.
| Name | Office, If Any | Title of Class |
Amount and Nature of Beneficial Ownership(1) |
Percent of Class(2) |
||||||||
| Officers and Directors | ||||||||||||
| Keyan Yan | Interim Chief Financial Officer and Director | Common Stock | 1,528,946 | 20.5 | % | |||||||
| Huidan Li | Chairman | Common Stock | 300,000- | * | 4% | |||||||
| Sun Lei | Chief Executive Officer and Director | Common Stock | 643,113 | (3) | 17 | (4)% | ||||||
| Baojun Zhu | Director | Common Stock | 0 | * | ||||||||
| Mu Ruifeng | Director | Common Stock | 100,000 | 1.3 | % | |||||||
| Jin Yan | Director | Common Stock | 100,000 | 1.3 | % | |||||||
| He Long Hai | Director | Common Stock | 0 | * | ||||||||
| All current officers and directors as a group (7 persons named above) | Common Stock | 2,672,059 | (3) | 41.9 | (4)% | |||||||
| 5% Security Holders | ||||||||||||
| None | ||||||||||||
| * | Less than 1% |
| (1) | Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our Common Stock. |
| (2) | As of May 13, 2022, a total of 7,439,893 shares of Commons Stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the denominator. |
| (3) | Does not include 750,000 shares of Common Stock issuable upon conversion of Series C Convertible Preferred Stock. Except for Sun Lei, our Chief Executive Officer that holds 150,000 shares of Series C Convertible Preferred Stock, each of which has five (5) votes per share on as-converted basis, none of our directors and officers have voting rights that differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in our change in control. |
| (4) | Percentage is based upon Ms. Lei’s sole voting power over 1,393,133 shares of Common Stock, including 750,000 shares of Common Stock (five votes for each 150,000 shares of Series C Convertible Preferred Stock on as-converted basis). |
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| A. | Major Shareholders |
Please refer to Item 6 “Directors, Senior Management and Employees—E. Share Ownership.”
| B. | Related Party Transactions |
From time to time, the Company and its all subsidiaries borrowed money from our Chairman and Chief Executive Officer, Mr. Keyan Yan, to pay for Company expenses. These amounts are interest-free, unsecured and repayable on demand. In years 2020,2019 and 2018, Mr. Yan paid all the Company expenses in connection with the Company’s Nasdaq continued listing and SEC reporting out of his pocket. As of December 31, 2020, 2019 and 2018, the balance of the amounts we borrowed from Mr. Yan was $826,422, $560,165 and $485,302, respectively.
On January 24, 2021, we entered into a Debt Exchange Agreement with Keyan Yan, our interim Chief Financial Officer and a member of our Board of Directors. Under the Debt Exchange Agreement, we satisfied outstanding debts owed to Mr. Yan in the amount of $809,552 in exchange for the issuance to Mr. Yan of 674,626 shares of our Common Stock (the “Exchange Shares”), representing a conversion price of $1.20 per share. Upon issuance of the Exchange Shares, the outstanding debts owed to Mr. Yan were deemed satisfied and paid in full, and Mr. Yan released us from all claims arising from or related to the satisfied debts.
On September 1, 2021, we sold 150,000 shares of our Series C Convertible Preferred Stock (the “C Preferred Stock”) for the total subscription proceeds of $1,500,000 to Sun Lei, our Chief Executive Officer and a member of our board. Our Series C Convertible Preferred Stock features a stated value of $10.00 and is convertible to shares of our Common Stock at any time after 6 months from the date of issue on a 1 for 5 rate. Series C Convertible Preferred Stock votes together with Common Stock on an as-if-converted basis, which is not exercisable for one year, has no special dividend rights, and ranks equally to our Common Stock with respect to rights upon liquidation. All shares of Common Stock issuable upon conversion of the Series C Preferred Stock are subject to a one-year lock-up agreement running from the initial closing of the financing. Our offer and sale of the Series C Preferred Stock was exempt under Rule 506(b) under Regulation D, as it did not involve any general solicitation or advertising and was made to an accredited investor within the meaning of Rule 501 under Regulation D. This transaction has been approved by the board of directors of the company and by written consent of majority of the shareholders of the company.
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| C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8. FINANCIAL INFORMATION
| A. | Consolidated Statements and Other Financial Information |
Financial Statements
We have appended consolidated financial statements filed as part of this report. See Item 18 “Financial Statements.”
Legal Proceedings
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are currently not party to any legal or arbitration proceedings, including those relating to bankruptcy, receivership or similar proceedings and those involving any third party, which may have, or have had in the recent past, significant effects on our financial position or profitability.
Dividend Policy
To date, we have not paid any cash dividends on our shares. As a Marshall Islands company, we may only declare and pay dividends except when the corporation is insolvent or would thereby be made insolvent or when the declaration or payment would be contrary to any restrictions contained in our Restated Articles. Dividends may be declared and paid out of surplus only; but in case there is no surplus, dividends may be declared or paid out of the net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. We currently anticipate that we will retain any available funds to finance the growth and operation of our business and we do not anticipate paying any cash dividends in the foreseeable future. Additionally, our cash held in foreign countries may be subject to certain control limitations or repatriation requirements, limiting our ability to use this cash to pay dividends.
| B. | Significant Changes |
No significant change has occurred since the date of our consolidated financial statements filed as part of this annual report.
ITEM 9. THE OFFER AND LISTING
| A. | Offer and Listing Details |
Our Common Stock is listed on the NASDAQ Capital Market and trade under the symbol “LLL”. Between January November 3, 2014 and October 7, 2021, our Common Stock was traded on the NASDAQ Capital Market under the symbol “KBSF.”
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On February 3, 2017, a special shareholder meeting was held at the Company’s headquarters in China and at the meeting, our shareholders approved a proposal to grant discretionary authority to the Board of Directors of the Company to effect a reverse stock split of issued and outstanding shares of Common Stock at a ratio within the range from one-for-two up to one-for-twenty; and determine whether to pay in cash the fair value of fractions of a share of Common Stock as of the time when those entitled to receive such fractions are determined or to entitle shareholders to receive, in lieu of any fractional share, the number of shares of Common Stock rounded up to the next whole number. On February 3, 2017, after the special shareholder meeting, our Board of Directors approved a one-for-fifteen reverse stock split of the Company’s issued and outstanding Common Stock. In addition, in lieu of issuing any fractional share, the Board of Directors decided that shareholders are entitled to receive the number of shares of Common Stock rounded up to the next whole number. Our Common Stock began trading on the NASDAQ Stock Market on a split-adjusted basis when the market opened on February 9, 2017.
Approximate Number of Holders of Our Securities
On May 13, 2022, there were approximately 343 shareholders of record of our Common Stock and 3 holders of record of our Preferred Stock. Certain of our securities are held in nominee or street name so the actual number of beneficial owners of our securities is greater than the number of record holders set forth above.
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
See our disclosures above under “A. Offer and Listing Details.”
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
| A. | Share Capital |
Our Amended and Restated Articles of Incorporation, as amended, authorize the Company to issue up to 155,000,000 shares with a par value of $0.0001, consisting of 150,000,000 shares of Common Stock and 5,000,000 shares of Preferred stock. As of date of this report, 7,439,893 shares of Common Stock are issued and outstanding and 1,470,000 of Preferred Stock are issued and outstanding, consisting of 1,240,000 shares of Series A Preferred; 150,000 shares of Series C Preferred, and 80,000 shares of Series D Preferred.
| B. | Memorandum and Articles of Association |
The following represents a summary of certain key provisions of our articles of incorporation and bylaws. The summary does not purport to be a summary of all of the provisions of our articles of incorporation and bylaws. For more complete information you should read our amended and restated articles of incorporation, as amended, and bylaws, each listed as an exhibit to this report.
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We were incorporated in the Marshall Islands on January 26, 2012 under the Marshall Islands Business Corporations Act (“BCA”). The purpose of the Company is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the BCA. Our amended and restated articles of incorporation, as amended, and bylaws do not impose any limitations on the ownership rights of our stockholders.
Description of Common Stock
Each outstanding share of Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Upon our dissolution, liquidation or winding up of the affairs of the Company, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders or our Common Stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of Common Stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities.
Preferred Stock.
Our Board of Directors is authorized, without any further vote or action by our stockholders, to issue up to 5,000,000 shares of preferred stock in different classes and series and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the common stock, at such times and on such other terms as they think proper. Our Board of Directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.
Designations of our Preferred Stock.
Series A Convertible Preferred Stock
On April 8, 2021, our Board of Directors, acting by unanimous written consent, in accordance with Section 35 of the BCA, duly adopted the resolutions creating a new series of preferred stock, par value $0.0001 per share (“Preferred Stock”), designated as “Series A Convertible Preferred Stock” and adopted the Certificate of Designations of the Series A Convertible Preferred Stock (the “Certificate of Designations of Series A”) which authorized for issuance 1,500,000 shares of Series A Convertible Preferred Stock and had the stated initial stated value of US$1.00 per share (the “Series A Preferred”). On April 8, 2021, the Company offered and sold 1,500,000 shares of the Series A Preferred to a single investor for total subscription proceeds of $1,500,000. On April 20, 2022, our Board adopted resolutions, by unanimous written consent, pursuant to Section 35 of the BCA, in which it determined that the Certificate of Designation of Series A”) was not filed with the Registrar of Corporations, in accordance with the provisions of sections 35 and 5 of the BCA at the time the Certificate of Designation of Series A Preferred was approved by the Board, and that it is in the best interests of the Corporation and its stockholders to correct the file the Certificate of Designation of Series A Preferred with the Registrar of Corporations, to correct an administrative oversight. On April 25, 2022, the Company filed the Certificate of Designations of Series A Preferred with the Registrar of Corporations under the Company’s former name, KBS Fashion Group Limited, and on April 27, 2022, the Company filed with the Registrar of Corporations the First Amended and Restated Certificate of Designations of Series A, reflecting the Company’s current name “JX Luxventure Limited” and restating all provisions set forth in the Certificate of Designations of Series A Preferred. Pursuant to this unanimous written consent dated April 20, 2022, the Board of Directors ratified and confirmed to treat the investor that purported to have been issued 1,500,000 shares of Series A economically, as if such holder (the “Holder”) has been the holder of 1,500,000 shares of Series A since April 8, 2021, the date of the purported issuance of Series A Preferred, rather than the date of the filing of the Certificate of Series A Preferred and the First Amended and Restated Certificate of Series A Preferred with the Registrar of Corporations. On May 10, 2022, the Company filed with the Registrar of Corporations the Second Amended and Restated Certificate of Designation of Series A Preferred. As set forth in the Second Amended and Restated Certificate of Series A Preferred, it features a stated value of $1.00 and is convertible to shares of our Common Stock at any time from the date of issue. Conversions are limited, however, such that no conversion may made to the extent that the number of shares of Common Stock to be issued pursuant to such conversion, when aggregated with all other shares of Common Stock owned by the Holder at such time, would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 9.99% of our then issued and outstanding shares of Common Stock. Series A Convertible Preferred Stock votes together with holders of shares of Common Stock on an as-if-converted basis, has no special dividend rights, and ranks equally to our common stock with respect to rights upon liquidation. All shares of Common Stock issuable upon conversion of the Series A Preferred are subject to a two-year lock-up agreement running from the initial closing of the financing. Our offer and sale of the Series A Preferred was exempt under Rule 506(b) under Regulation D, as it did not involve any general solicitation or advertising and was made to an accredited investor within the meaning of Rule 501 under Regulation D. On May 10, 2022, the Holder converted 260,000 shares of Series A Preferred into 260,000 shares of Common Stock. On the date of this Report, there are 1,240,000 shares of Series A Preferred issued and outstanding.
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Series B Participating Preferred Stock and Rights Dividend
On March 12, 2021, we announced the authorization and declaration of a dividend distribution of one right (a “Right”) for each outstanding share of Common Stock, par value $0.0001 per share, of the Company to stockholders of record as of the close of business on March 31, 2021 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one 0.00667 portion of a share of Series B Participating Preferred Stock, par value $0.0001 per share (the “Preferred Stock”), of the Company at an exercise price of $50.00 (the “Exercise Price”). The complete terms of the Rights are set forth in a Preferred Stock Rights Agreement (the “Rights Agreement”), dated as of March 11, 2021, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.
Our Board of Directors adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires 15% or more of the Company’s Common Stock without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or to discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business combination approved by our Board. On April 20, 2022, our Board adopted resolutions, by unanimous written consent, pursuant to Section 35 of the BCA, in which it determined that the Certificate of Designation of Series B Participating Preferred Stock was not filed with the Registrar of Corporations, in accordance with the provisions of sections 35 and 5 of the BCA at the time the Certificate of Designation of Series B Participating Preferred Stock was approved by the Board, and that it is in the best interests of the Corporation and its stockholders to correct the file the Certificate of Designation of Series B Participating Preferred Stock with the Registrar of Corporations, to correct an administrative oversight. On April 25, 2022, the Company filed the Certificate of Designation of Series B Participating Preferred Stock with the Registrar of Corporations under the Company’s former name, and on April 27, 2022, we filed the Amended and Restated Certificate of Designation of Series B Participating Stock with the Registrar of Corporations reflecting the Company’s current name.
Series C Convertible Preferred Stock
On September 1, 2021, our Board, acting by unanimous written consent, in accordance with Section 35 of the BCA, duly adopted the resolutions creating a new series of Preferred Stock, designated as “Series C Convertible Preferred Stock” and adopted the Certificate of Designations of the Series C Convertible Preferred Stock (the “Certificate of Designations of Series C”) which authorized for issuance 150,000 shares of Series C Convertible Preferred Stock and had the stated initial stated value of US$10.00 per share (the “Series C Preferred”). On September 1, 2021, the Company sold 150,000 shares of the Series C Preferred for total subscription proceeds of $1,500,000 to Sun Lei, our Chief Executive Officer and a member of our board. Our Series C Convertible Preferred Stock features a stated value of $10.00 and is convertible to shares of our Common Stock at any time after 6 months from the date of issue. On April 20, 2022, our Board adopted resolutions, by unanimous written consent, pursuant to Section 35 of the BCA, in which it determined that the Certificate of Designation of Series C Preferred was not filed with the Registrar of Corporations, in accordance with the provisions of sections 35 and 5 of the BCA at the time the Certificate of Designation of Series C Preferred was approved by the Board, and that it is in the best interests of the Corporation and its stockholders to correct the file the Certificate of Designation of Series C Preferred with the Registrar of Corporations, to correct an administrative oversight. Pursuant to this unanimous written consent dated April 20, 2022, the Board of Directors ratified and confirmed to treat the investor that purported to have been issued 150,000 shares of Series C economically, as if such holder (the “Holder”) has been the holder of 150,000 shares of Series C Preferred since September 1, 2021, the date of the purported issuance of Series C Preferred, rather than the date of the filing of the Certificate of Series C Preferred and the Amended and Restated Certificate of Series C Preferred with the Registrar of Corporations. On April 25, 2022, the Company filed the Certificate of Designation of Series C Preferred with the Registrar of Corporations under the Company’s former name, and on April 27, 2022, we filed the Amended and Restated Certificate of Designation of Series C Preferred with the Registrar of Corporations reflecting the Company’s current name.
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As stated in our Amended and Restated Certificate of Designation of Series C Preferred, each share of Series C Series C Preferred is convertible into 5 shares of Common Stock. Series C Preferred votes together with holders of Common Stock on an as-if-converted basis, which is not exercisable for one year, has no special dividend rights, and ranks equally to our Common Stock with respect to rights upon liquidation. All shares of Common Stock issuable upon conversion of the Series C Preferred are subject to a one-year lock-up agreement running from the initial closing of the financing. Our offer and sale of the Series C Preferred was exempt under Rule 506(b) under Regulation D, as it did not involve any general solicitation or advertising and was made to an accredited investor within the meaning of Rule 501 under Regulation D.
Series D Convertible Preferred Stock
On October 18, 2021, our Board acting by unanimous written consent, in accordance with Section 35 of the BCA, duly adopted the resolutions creating a new series of Preferred Stock, designated as “Series D Convertible Preferred Stock” and adopted the Certificate of Designations of the Series D Convertible Preferred Stock (the “Certificate of Designations of Series D”) which authorized for issuance 100,000 shares of Series D Convertible Preferred Stock and had the stated initial stated value of US$39.00 per share (the “Series D Preferred”). On November 1, 2021, the Company offered and sold 100,000 shares of Series D Preferred to an accredited investor for the total gross proceeds of $3,900,000, in reliance upon Section 4(a)(2) of the Securities Act. On April 20, 2022, our Board adopted resolutions, by unanimous written consent, pursuant to Section 35 of the BCA, in which it determined that the Certificate of Designation of Series D Preferred was not filed with the Registrar of Corporations, in accordance with the provisions of sections 35 and 5 of the BCA at the time the Certificate of Designation of Series D Preferred was approved by the Board, and that it is in the best interests of the Corporation and its stockholders to correct the file the Certificate of Designation of Series D Preferred with the Registrar of Corporations, to correct an administrative oversight. Pursuant to this unanimous written consent dated April 20, 2022, the Board of Directors ratified and confirmed to treat the investor that purported to have been issued 100,000 shares of Series D Preferred economically, as if such holder (the “Holder”) has been the holder of 100,000 shares of Series D Preferred since November 1, 2021, the date of the purported issuance of Series D Preferred, rather than the date of the filing of the Certificate of Series D Preferred and the Amended and Restated Certificate of Series D Preferred with the Registrar of Corporations. On April 25, 2022, the Company filed the Certificate of Designation of Series D Preferred with the Registrar of Corporations, and on April 27, 2022, we filed the Amended and Restated Certificate of Designation of Series D Preferred with the Registrar of Corporations. As stated in the Amended and Restated Certificate of Designation of Series D Preferred, shares of Series D Preferred vote together with holders of shares of Common Stock on an as-if-converted basis; have no special dividend right, ranks equal to the Common Stock with respect to rights upon liquidation and are convertible into shares of Common Stock on a 1 do 13 basis at any time following the issuance. However, the conversion is limited to the extent that no conversion may occur if the number of shares of Common Stock to be issued pursuant to such conversion, when aggregated with all other shares of Common Stock owned by the holder of such shares at such time, would result in the holder beneficially owning (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules thereunder) in excess of 9.99% of the then issued and outstanding shares of Common Stock. On May 2, 2022, the Holder converted 20,000 shares of Series D Preferred into 260,000 shares of Common Stock.
Directors
The business and affairs of the Company are managed by or under the direction of our Board of Directors.
Our directors are elected by the holders of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled to vote generally in the election of directors (“Voting Stock”). Our Restated Articles provide that cumulative voting shall not be used to elect directors. Each director will be elected to serve until the next annual meeting of shareholders and until his/her successor shall have been duly elected and qualified, except in the event of his/her death, resignation, removal or the earlier termination of his/her term of office.
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Any director or the entire Board of Directors may be removed at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the total voting power of the Voting Stock entitled to vote thereon or with cause by directors constituting at least two-thirds of the entire Board.
Vacancies in the Board of Directors occurring by death, resignation, the creation of new directorships, the failure of the shareholders to elect the whole board at any annual election of directors, or, except as herein provided, for any other reason, including removal of directors for cause, may be filled either by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, at any special meeting called for that purpose or at any regular meeting of the Board. Vacancies occurring by removal of directors without cause may be filled only by vote of the shareholders.
Shareholder Meetings
Annual stockholder meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Under our Restated Articles, special meetings may be called by the board of directors, or by the secretary of the Company requested by stockholders representing certain amount of voting power. Our board of directors shall give not less than 15 days and not more than 60 days prior written notice of a shareholders’ meeting to each shareholder of record entitled to vote thereat and to each shareholder of record who, by reason of any action proposed at such meeting would be entitled to have his/her shares appraised if such action were taken, and the notice shall include a statement of that purpose and to that effect.
Our bylaws provide that a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are shareholders present in person or by proxy representing not less than a majority of the votes of the shares issued and outstanding and entitled to vote on resolutions of shareholders to be considered at the meeting.
If a quorum is present, the affirmative vote of a majority of the shares of stock represented at the meeting will be the act of the shareholders. At any meeting of shareholders, each shareholder entitled to vote any shares on any manner to be voted upon at such meeting shall be entitled to one vote on such matter for each such share. Any action required or permitted to be taken at a meeting, may be taken without a meeting if a consent in writing setting forth the action so taken, is signed by all the shareholders entitled to vote with respect to the subject matter thereof.
Dissenters’ Rights of Appraisal and Payment.
Under the BCA, our stockholders have the right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation. In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed appraiser.
Stockholders’ Derivative Actions
Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.
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Indemnification of Officers and Directors
The BCA authorizes corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties. Our Restated Articles include a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest extent permitted by law. We must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain employees for some liabilities.
The limitation of liability and indemnification provisions in our Restated Articles and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
| C. | Material Contracts |
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4 “Information on the Company,” Item 5 “Operating and Financial Review and Prospects—F. Tabular Disclosure of Contractual Obligations,” Item 7 “Major Shareholders and Related Party Transactions,” or filed (or incorporated by reference) as exhibits to this annual report or otherwise described or referenced in this annual report.
| D. | Exchange Controls |
Marshall Islands Exchange Controls
Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to nonresident holders of our shares.
BVI Exchange Controls
There are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our common stock or on the conduct of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our common stock. BVI law and our memorandum and articles of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote our common stock.
PRC Exchange Controls
Regulations on Foreign Currency Exchange
Under the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations issued by SAFE and other relevant PRC government authorities, payment of current account items in foreign currencies, such as trade and service payments, payment of interest and dividends can be made without prior approval from SAFE by following the appropriate procedural requirements. By contrast, the conversion of RMB into foreign currencies and remittance of the converted foreign currency outside the PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, requires prior approval from SAFE or its local office.
On February 13, 2015, SAFE promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment, effective from June 1, 2015, which cancels the requirement for obtaining approvals of foreign exchange registration of foreign direct investment and overseas direct investment from SAFE. The application for the registration of foreign exchange for the purpose of foreign direct investment and overseas direct investment may be filed with qualified banks, which, under the supervision of SAFE, may review the application and process the registration.
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The Circular of the SAFE on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise, or SAFE Circular 19, was promulgated on March 30, 2015 and became effective on June 1, 2015. According to SAFE Circular 19, a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests (or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange bureau (bank) at the place of registration. The Circular of the SAFE on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, was promulgated and became effective on June 9, 2016. According to SAFE Circular 16, enterprises registered in PRC may also convert their foreign debts from foreign currency into Renminbi on self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self—discretionary basis, which applies to all enterprises registered in the PRC. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make loans for related enterprises unless it is within the business scope or to build or to purchase any real estate that is not for the enterprise own use with the exception for the real estate enterprise.
On January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to SAFE Circular 3, domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure for outbound investment.
Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which became effective in July 2014, to replace the Circular of the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip Investments by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. SAFE Circular 37 defines a SPV as an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” is defined as direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 stipulates that, prior to making contributions into an SPV, PRC residents or entities be required to complete foreign exchange registration with SAFE or its local branch. In addition, SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which amended SAFE Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified banks rather than SAFE in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
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PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary or limit our PRC subsidiary’s ability to increase their registered capital or distribute profits.”
Regulations on Stock Incentive Plans
SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, or the Stock Incentive Plan Notice, in February 2012, replacing the previous rules issued by SAFE in March 2007. Pursuant to the Stock Incentive Plan Notice and other relevant rules and regulations, PRC residents participating in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and follow certain other procedures. Participants of a stock incentive plan who are PRC residents must conduct the SAFE registration and other procedures with respect to the stock incentive plan through a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company or another qualified institution appointed by the PRC subsidiary. In addition, the PRC agent is required to update the relevant SAFE registration should there be any material change to the stock incentive plan, the PRC agent or other material changes. The PRC agent must, on behalf of the PRC residents who have the right to exercise the employee stock options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee stock options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents prior to distribution to such PRC residents.
We initially adopted an equity incentive plan in 2018 under which we have the discretion to award incentives and rewards to eligible participants. On January 11, 2022, we terminated the 2018 equity incentive plan and adopted the new equity incentive plan (the “2022 Plan”). We have advised the recipients of awards under our equity incentive plan to handle relevant foreign exchange matters in accordance with the Stock Incentive Plan Notice. However, we cannot guarantee that all employee awarded equity-based incentives can successfully register with SAFE in full compliance with the Stock Incentive Plan Notice. See “Risk Factors—Risks Related to Doing Business in China—Any failure to comply with PRC regulations regarding employee share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
Regulations on Dividend Distribution
Distribution of dividends of foreign investment enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and amended in 2000 and 2016 respectively, and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990 and amended in 2001 and 2014 respectively. Under these regulations, foreign investment enterprises in the PRC may distribute dividends only out of their accumulative profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, no less than 10% of the accumulated profits of the foreign investment enterprises in the PRC are required to be allocated to fund certain reserve funds each year unless these reserves have reached 50% of the registered capital of the enterprises. A PRC company is not permitted to distribute any profits until any losses from previous fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year. Under our current corporate structure, our BVI holding company may rely on dividend payments from IST, which is a wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. Limitation on the ability of our consolidated VIEs to make remittance to IST and on the ability of IST to pay dividends to us could limit our ability to access cash generated by the operations of those entities. See “Risk Factors—Risks Related to Doing Business in China—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business”
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| E. | Taxation |
The following is a general summary of the material Marshall Islands, Hong Kong, BVI, PRC and U.S. federal income tax consequences relevant to an investment in our shares of common stock, sometimes referred to collectively in this summary as our “securities”. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of jurisdictions other than the Marshall Islands, Hong Kong, the BVI, the PRC and the United States. We recommend that you consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our securities.
Marshall Islands Taxation
The following are the material Marshall Islands tax consequences of our activities to us and to our stockholders of investing in our Common Stock. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding tax or income tax will be imposed upon payments of dividends by us to our stockholders or proceeds from the disposition of our Common Stock, provided such stockholders are not residents in the Marshall Islands. There is no tax treaty between the United States and the Republic of the Marshall Islands.
BVI Taxation
The BVI does not impose a withholding tax on dividends paid to us by our BVI subsidiary, nor does the BVI levy any capital gains or income taxes on us or our BVI subsidiary. However, our BVI subsidiary is required to pay the BVI government an annual license fee based on the number of shares it is authorized to issue.
There is no income tax treaty or convention currently in effect between the United States and the BVI.
Hong Kong Taxation
Our Hong Kong subsidiaries, under the current laws of Hong Kong, are subject to profits tax of 16.5%. No provision for Hong Kong profits tax has been made as our Hong Kong subsidiaries have no taxable income.
PRC Taxation
We are a holding company incorporated in the Marshall Islands, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s jurisdiction of incorporation and China to reduce such rate.
Under the Arrangement between the Mainland and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below. However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to be received by us and ultimately by shareholders.
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According to the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner” may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations as manufacturing, distribution and management. As our Hong Kong holding companies are controlling companies and are not engaged in substantial business operations, they could be considered as conduit companies by tax authorities and we do not expect them to be a beneficial owner.
In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
U.S. Federal Income Taxation
The following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of our securities. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation. The discussion applies only to holders that hold their securities as capital assets (generally property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based on the Code, income tax regulations promulgated thereunder, judicial positions, published positions of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion is general in nature and is not exhaustive of all possible tax considerations, nor does the discussion address any state, local or foreign tax considerations or any U.S. tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations, that may be applicable to particular holders.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
| ● | banks, insurance companies or other financial institutions; |
| ● | persons subject to the alternative minimum tax; |
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| ● | tax-exempt organizations; |
| ● | controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid United States federal income tax; |
| ● | certain former citizens or long-term residents of the United States; |
| ● | dealers in securities or currencies; |
| ● | traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; |
| ● | persons that own, or are deemed to own, more than five percent of our capital stock; |
| ● | holders who acquired our stock as compensation or pursuant to the exercise of a stock option; or |
| ● | persons who hold our shares as a position in a hedging transaction, “straddle,” or other risk reduction transaction. |
For purposes of this discussion, a U.S. holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) it has a valid election in effect under applicable law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our shares.
As a result of consummation of the Share Exchange, (i) we acquired substantially all the properties of KBS International, a U.S. corporation, and (ii) the former shareholders of KBS International held at least 80 percent of our Common Stock by reason of having held stock of KBS International. Accordingly, under Section 7874 of the Code, we are treated for U.S. federal tax purposes as a U.S. corporation and, among other consequences, are subject to U.S. federal income tax on our worldwide income. This discussion assumes that Section 7874 of the Code continues to apply to treat us as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal of Section 7874 of the Code), we were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences described herein could be materially and adversely affected.
U.S. Federal Income Tax Consequences for U.S. Holders
Distributions
In the event that distributions are paid on our common stock, the gross amount of such distributions will be included in the gross income of the U.S. holder as dividend income on the date of receipt to the extent that the distribution is paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends will be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders, including individuals, may be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules are complex, and their application in connection with Section 7874 of the Code and the Agreement Between the Government of the United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
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To the extent that dividends paid on our Common Stock exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return of tax basis on our Common Stock, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated as gain from the disposition of those common stock. Because Section 7874 of the Code has applied to treat us as a U.S. corporation only since the consummation of the Share Exchange in 2014, we may not be able to demonstrate to the IRS the extent to which a distribution on our common stock exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), in which case all of such distribution will be treated as a dividend for U.S. federal income tax purposes.
Sale or Other Disposition
U.S. holders of our Common Stock will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of common stock equal to the difference between the amount realized for the common stock and the U.S. holder’s tax basis in the common stock. This gain or loss generally will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax rates if the common stock has been held for more than one year. The deductibility of capital losses is subject to limitations. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale or other disposition of common stock. However, the foreign tax credit rules are complex, and their application in connection with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
Unearned Income Medicare Contribution
Certain U.S. holders who are individuals, trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains from the sale or other disposition of shares of stock. U.S. holders should consult their own advisors regarding the effect, if any, of this rule on their ownership and disposition of our Common Stock.
U.S. Federal Income Tax Consequences for Non-U.S. Holders
Distributions
The rules applicable to non-U.S. holders for determining the extent to which distributions on our Common Stock, if any, constitute dividends for U.S. federal income tax purposes are the same as for U.S. holders. See “–U.S. Federal Income Tax Consequences for U.S. Holders– Distributions.”
Any dividends paid to a non-U.S. holder by us are treated as income derived from sources within the United States and generally will be subject to U.S. federal income tax withholding at a rate of 30% of the gross amount of the dividends, or at a lower rate provided by an applicable income tax treaty if non-U.S. holders provide proper certification of eligibility for the lower rate (usually on IRS Form W-8BEN or W-8BEN-E). Dividends received by a non-U.S. holder that are effectively connected with such holder’s conduct of a U.S. trade or business (and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the U.S.) are exempt from such withholding tax, provided that applicable certification requirements are satisfied. In such case, however, non-U.S. holders will be subject to U.S. federal income tax on such dividends, net of certain deductions, at the rates applicable to U.S. persons. In addition, corporate non-U.S. holders may be subject to an additional branch profits tax equal to 30% or such lower rate as may be specified by an applicable tax treaty on dividends received that are effectively connected with the conduct of a trade or business in the United States.
If non-U.S. holders are eligible for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, such non-U.S. holders may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.
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Sale or Other Disposition
Except as described below for a reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, any gain realized by a non-U.S. holder upon the sale or other disposition of our Common Stock generally will not be subject to U.S. federal income tax unless:
| ● | the gain is effectively connected with the conduct of a trade or business in the United States by such non- U.S. holder, and, if an income tax treaty applies, is attributable to a permanent establishment maintained by such non-U.S. holder in the U.S.; |
| ● | the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and certain other conditions are met; or |
| ● | We are or have been a “U.S. real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period during which the holder has held our Common Stock. |
Non-U.S. holders whose gain is described in the first bullet point above will be subject to U.S. federal income tax on the gain derived from the sale, net of certain deductions, at the rates applicable to U.S. persons. Corporate non-U.S. holders whose gain is described in the first bullet point above may also be subject to the branch profits tax described above at a 30% rate or lower rate provided by an applicable income tax treaty. Individual non-U.S. holders described in the second bullet point above will be subject to a flat 30% U.S. federal income tax rate on the gain derived from the sale, which may be offset by U.S.-source capital losses, even though such non-U.S. holders are not considered to be residents of the United States.
A corporation will be a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50 percent of the aggregate of its real property interests (U.S. and non-U.S.) and its assets used or held for use in a trade or business. Because we do not currently own significant U.S. real property, we believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock are regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if a non-U.S. holder actually or constructively holds more than 5% of such regularly traded common stock at any time during the applicable period that is specified in the Code.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when applicable, will impose a U.S. federal withholding tax of 30% on payments of dividends on, and (for dispositions after December 31, 2018) gross proceeds from dispositions of, our common stock that are held through “foreign financial institutions” (which is broadly defined for this purpose and in general includes investment vehicles) and certain other non-U.S. entities unless various U.S. information reporting and due diligence requirements (generally relating to ownership by U.S. persons of certain interests in or accounts with those entities) have been satisfied or an exemption applies. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. U.S. Holders should consult their tax advisers regarding the effect, if any, of the FATCA provisions on their particular circumstances.
Information Reporting and Backup Withholding
Payments of dividends or of proceeds on the disposition of stock made to a holder of our Common Stock may be subject to information reporting and backup withholding at a current rate of 24% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S. status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in the holder’s country of residence.
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Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
| F. | Dividends and Paying Agents |
Not applicable.
| G. | Statement by Experts |
Not applicable.
| H. | Documents on Display |
We have filed this annual report on Form 20-F with the SEC under the Exchange Act. Statements made in this report as to the contents of any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information filed by us with the SEC including this report, may be inspected and copied at the public reference room of the SEC at 100 F Street, N.E., Washington D.C. 20549. You can also obtain copies of this report by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330. In accordance with NASDAQ Stock Market Rule 5250(d), we will also post this annual report on Form 20-F on our website at www.kbsfashion.com.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
| I. | Subsidiary Information |
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
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Foreign Exchange Risk
While our reporting currency is the U.S. dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $3.0 million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2019. As of December 31, 2020, our accumulated other comprehensive loss was $(3.5) million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July 2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.
Inflation
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
| A. | Debt Securities |
Not applicable.
| B. | Warrants and Rights |
Not applicable.
| C. | Other Securities |
Not applicable.
| D. | American Depositary Shares |
We do not have any American Depositary Shares.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
| A. | Disclosure Controls and Procedures |
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2021
The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by a company in reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2021, due to a material weakness in our internal control over financial reporting. Specifically, we currently lack sufficient accounting personnel with the appropriate level of knowledge, experience and training in IFRS and SEC reporting requirements.
| B. | Management’s Annual Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with IFRS. Our accounting policies and internal controls over financial reporting, established and maintained by management, are under the general oversight of the Board’s audit committee.
Our internal control over financial reporting includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Management assessed our internal control over financial reporting as of December 31, 2021.
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The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management’s assessment using the COSO criteria, our CEO and CFO concluded that our internal control over financial reporting as of December 31, 2021 was ineffective. We have taken, and are taking, certain actions to remediate the material weakness related to our lack of IFRS and SEC reporting experience. We engaged a consultant with IFRS knowledge and experience to supplement our current internal accounting personnel and assist us in the preparation of our financial statements to ensure that our financial statements are prepared in accordance with IFRS.
The Company continues to make efforts to implementing our existing and newly adopted procedures to improve our disclosure controls and internal controls over financing reporting.
| C. | Attestation Report of the Registered Public Accounting Firm |
Because the Company is a non-accelerated filer, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
| D. | Changes in Internal Controls over Financial Reporting |
Other than discussed above, there has been no change to our internal control over financial reporting that occurred during the period covered by this annual report on Form 20-F that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The audit committee of our board of directors currently consists of three members, Mu Ruifeng, Jin Yan and Baojun Zhu. Our board of directors has determined that all of our audit committee members are “independent” under the Exchange Act and have the requisite financial knowledge and experience to serve as members of our audit committee. In addition, our board of directors has determined that audit committee financial expert is an “audit committee financial expert” as defined in Item 16A of the Instructions to Form 20-F and meets NASDAQ’s financial sophistication requirements due to his current and past experience in various companies in which he was responsible for, amongst others, the financial oversight responsibilities.
ITEM 16B. CODE OF ETHICS
On October 25, 2014, our Audit Committee adopted a Code of Ethics that applies to all of the directors, officers and employees of the Company and its subsidiaries, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the Code of Ethics is filed as Exhibit 11.1 to the annual report on Form 20-F filed on October 27, 2015. Copies of our Code of Ethics are available in print, free of charge, upon request to JX Luxventure Limited，Bin Hai Da Dao No. 270，Lang Qin Wan Guo Ji Du Jia Cun Zong He Lou，Xiu Ying District, Haikou City, Hainan Province 570100, People’s Republic of China. During the fiscal year ended December 31, 2021, there were no waivers of our Code of Ethics.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with services rendered by our principal external auditors for the periods indicated.
| Fiscal Year Ended December 31, | ||||||||
| 2020 | 2021 | |||||||
| Audit Fees* | $ | 125,000 | $ | 250,000 | ||||
| * | “Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. |
Our Audit Committee pre-approves all auditing services and permitted non-audit services to be performed for us by our independent auditor, including the fees and terms thereof (subject to the de minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act that are approved by our Audit Committee prior to the completion of the audit).
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Prior to July 10, 2017, in lieu of an audit committee comprised of three independent directors, our audit committee was comprised of two independent members of our board of directors, namely John Sano and Matthew C. Los. On July 10, 2017, the board of directors appointed Ms. Yuet Mei Chan as an independent director and a member of the audit committee. On October 21, 2020, John Sano and Matthew C. Los resigned from their positions as independent directors of the Company and on October 25, 2020, Mr. Mu Ruifeng and Mr. Jin Yan were appointed as independent directors of the Company and member of the Audit Committee of the Company. On May 2, 2022, Yuet Mei Chan resigned from her position as independent director of the Company and on May 3, 2022, Mr. Baojun Zhu was appointed as independent directors of the Company and a member of the Audit Committee of the Company. As a result, we are in full compliance with the Nasdaq listing rules for the audit committee.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
There were no purchases of equity securities made by or on behalf of us or any “affiliated purchaser” as defined in Rule 10b-18 of the Exchange Act during the period covered by this Annual Report.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
On April 9, 2022, the Company engaged Onestop Assurance PAC (“Onestop”) as our independent registered public accounting firm firm to audit our consolidated financial statements for the fiscal year ended December 31, 2021. Onestop replaced WWC, P.C whose engagement was terminated by us on April 9, 2022. The change of our independent registered public accounting firm was approved by our Board and the Audit Committee of our Board, and the decision was not made due to any disagreements between us and WWC, P.C.
During the Company’s fiscal year ended December 31, 2020 and the subsequent interim period preceding their dismissal, there were no disagreements with WWC, P.C., whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of WWC, P.C. would have caused them to make reference to the subject matter of the disagreement in connection with their report on the Company’s financial statements.
The reports of WWC, P.C. on our consolidated financial statements for 2019 and 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle.
During the fiscal years ended December 31, 2019 and 2020, and the subsequent interim period preceding the dismissal of WWC, P.C. there were no (i) disagreements (as defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions therein) with WWC, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte, would have caused it to make reference to the subject matter of the disagreements in its report on the consolidated financial statements for such periods; or (ii) “reportable events” (hereinafter defined) requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F.
105
We have filed a report on form 6-K dated April 13, 2022 (the “April 6-K Report”) containing these disclosures and provided WWC, P.C. with a copy of the disclosures contained in that 6-K report and have requested that WWW, P.C. furnish us with a letter addressed to the SEC stating whether such firm agrees with the above statements or, if not, stating the respects in which it does not agree. We have received the requested letter from WWC, P.C. and filed a copy of the letter as an exhibit 16.1 to the April 6-K Report. This letter is included as an exhibit to this Annual Report, incorporated by reference to the April 6-K Report.
During the two most recent fiscal years and the interim periods preceding the engagement, and through the date of the April 6-K report, neither the Company nor anyone on its behalf has previously consulted with Onestop Assurance PAC regarding either (a) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided nor oral advice was provided to the Company that Onestop Assurance PAC concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (b) any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph 304(a)(1)(v)) of Regulation S-K).
ITEM 16G. CORPORATE GOVERNANCE
We were incorporated in the Republic of the Marshall Islands (“RMI”) and our corporate governance practices are governed by applicable RMI law, our Restated Articles and bylaws. In addition, because our Common Stock is listed on NASDAQ, we are subject to NASDAQ’s corporate governance requirements.
NASDAQ Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Listing Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement. Our RMI counsel has provided a letter to NASDAQ indicating that we have elected to follow home country practices in lieu of NASDAQ Listing Rule 5600 with the exception of those rules which are required to be followed pursuant to the provisions of Nasdaq Listing Rule 5615(a)(3), and our practices with regards to these NASDAQ requirements are not prohibited by the laws of the RMI. We currently follow our home country practice that (i) does not require us to hold an annual meeting of shareholders no later than one year after the end of its fiscal year, (ii) does not require us to seek shareholder approval for the adoption of share incentive plans; and (iii) does not require us to establish a compensation committee or nominating committee or nominating process. As a result,
| ● | in lieu of having a compensation committee under Nasdaq Listing Rule 5605(d), we currently do not have a compensation committee; |
| ● | in lieu of selecting or recommending director nominees for selection by either a majority of the independent directors or a nominating committee comprised solely of independent directors under Nasdaq Listing Rule 5605(e), we currently do not have a nominating committee or such nominating process; |
| ● | in lieu of holding a shareholder meeting each year under Nasdaq Listing Rule 5620(a), we did not hold an annual shareholder meeting in fiscal 2019; however, we may, hold annual shareholder meetings in the future if there are significant issues that require shareholders’ approvals; and |
| ● | in lieu of obtaining shareholder approval under Nasdaq Listing Rule 5635(c) prior to the adoption of an agreement pursuant to which stock may be acquired by officers, directors, employees or consultants, our board of directors approves such adoption, including our 2018 equity incentive plan. |
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
106
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The financial statements are filed as part of this annual report beginning on page F-1.
ITEM 19. EXHIBITS
107
| * | Filed herewith. |
108
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this report on its behalf.
| Date: May 13, 2022 | JX Luxventure Limited |
| /s/ Sun Lei | |
Sun Lei Chief Executive Officer |
109
JX Luxventure Limited
Consolidated Financial Statements
For the years ended December 31, 2021, 2020, and 2019
(Stated in US dollars)
CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of
JX Luxventure Limited (formerly known as “KBS Fashion Group Limited”)
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of JX Luxventure Limited (formerly known as “KBS Fashion Group Limited”)(the “Company”) as of December 31, 2021, the related consolidated statements of operation and comprehensive loss, stockholders’ equity, and cash flows, for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operation and its cash flows for the year ended December 31, 2021, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment Assessment of Trade Receivables
As described in Notes 4 and 26, the Company extends unsecured credit to its customers. The Company recognizes a loss allowance on outstanding trade receivables based on lifetime ECLs at each reporting date. The assessment of loss allowance requires significant judgement. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The audit engagement team performed extended procedures, which includes, among others, obtaining an understanding of the management’s assessment process, evaluating the relevant inputs and factors used during the process, and testing the reasonableness of the loss allowance.
Impairment Assessment of Non-Financial Assets
As described in Notes [4 and 6], the Company is required to test certain non-financial assets for impairment based on recoverability. The recoverable amount is determined based on the cash-generating-unit (CGU) to which the asset belongs. For each reporting period, management reviews the recoverable amount using discounted cash flows and determine if impairment is required. The assessment of the impairment requires significant judgement. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The audit engagement team performed extended procedures, which includes, among others, obtaining an understanding of the management’s assessment process, evaluating the reasonableness of the relevant inputs and factors used in calculating the projections, and testing the accuracy of the assessment output.
| /s/ Onestop Assurance PAC | |
| We have served as the Company’s auditor since 2022. | |
| Singapore | |
| May 13, 2022 | |
PCAOB ID number: 6732
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To: | The Board of Directors and Stockholders of |
KBS Fashion Group Limited |
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of KBS Fashion Group Limited (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment Assessment of Trade Receivables
As described in Notes 4 and 26, the Company extends unsecured credit to its customers. The Company recognizes a loss allowance on outstanding trade receivables based on lifetime ECLs at each reporting date. The assessment of loss allowance requires significant judgement. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The audit engagement team performed extended procedures, which includes, among others, obtaining an understanding of the management’s assessment process, evaluating the relevant inputs and factors used during the process, and testing the reasonableness of the loss allowance.
Impairment Assessment of Non-Financial Assets
As described in Notes 4 and 6, the Company is required to test certain non-financial assets for impairment based on recoverability. The recoverable amount is determined based on the cash-generating-unit (CGU) to which the asset belongs. For each reporting period, management reviews the recoverable amount using discounted cash flows and determine if impairment is required. The assessment of the impairment requires significant judgement. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. The audit engagement team performed extended procedures, which includes, among others, obtaining an understanding of the management’s assessment process, evaluating the reasonableness of the relevant inputs and factors used in calculating the projections, and testing the accuracy of the assessment output.
/s/ WWC, P.C. | |
Certified Public Accountants PCAOB ID number: |
We have served as the Company’s auditor from 2016 to 2021.
May 13, 2022
F-3
JX Luxventure limited
Consolidated Statements of Comprehensive Loss
For the years ended December 31, 2021, 2020, 2019
(Stated in U.S. Dollars)
| Year ended December 31, | ||||||||||||||||
| Notes | 2021 | 2020 | 2019 | |||||||||||||
| Revenue | 8 | |||||||||||||||
| Cost of sales | 9 | ( | ) | ( | ) | ( | ) | |||||||||
| Gross profit | ||||||||||||||||
| Other income | 10 | |||||||||||||||
| Other losses | 11 | ( | ) | ( | ) | ( | ) | |||||||||
| Distribution and selling expenses | 12 | ( | ) | ( | ) | ( | ) | |||||||||
| Administrative expenses | 13 | ( | ) | ( | ) | ( | ) | |||||||||
| (Loss)/profit from operations | ( | ) | ( | ) | ||||||||||||
| Finance costs | 14 | ( | ) | ( | ) | ( | ) | |||||||||
| - | ||||||||||||||||
| (Loss)/profit before tax | ( | ) | ( | ) | ||||||||||||
| Income tax income/(expense) | 15 | ( | ) | ( | ) | |||||||||||
| Loss for the year | 16 | ( | ) | ( | ) | ( | ) | |||||||||
| Other comprehensive loss | ||||||||||||||||
| - currency translation differences | ( | ) | ||||||||||||||
| Total comprehensive loss for the year | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss per share of common stock attributable to the Company | ||||||||||||||||
| - Basic | 19 | ( | ) | ( | ) | ( | ) | |||||||||
| - Diluted | 19 | ( | ) | ( | ) | ( | ) | |||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| - Basic | 19 | |||||||||||||||
| - Diluted | 19 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
JX Luxventure limited
Consolidated Statements of Financial Position
As at December 31, 2021, and 2020
(Stated in U.S. Dollars)
| As of December 31, | ||||||||||||
| Notes | 2021 | 2020 | ||||||||||
| Non-current assets | ||||||||||||
| Property, plant and equipment-net | 20 | |||||||||||
| Investment property-net | 20 | |||||||||||
| Prepayments and premiums under operating leases | 21 | |||||||||||
| Land use rights | 24 | |||||||||||
| Deferred tax assets | 15 | |||||||||||
| Current assets | ||||||||||||
| Inventories | 25 | |||||||||||
| Trade receivables | 26 | |||||||||||
| Other receivables and prepayments | 26 | |||||||||||
| Prepayments and premiums under operating leases | 21 | |||||||||||
| Cash and cash equivalents | 27 | |||||||||||
| Total assets | ||||||||||||
| Current liabilities | ||||||||||||
| Short term bank loans | 30 | |||||||||||
| Trade and other payables | 28 | |||||||||||
| Due to related parties | 29 | |||||||||||
| Contract liabilities | ||||||||||||
| Income tax payable | ||||||||||||
| Total liabilities | ||||||||||||
| Equity | ||||||||||||
| Share capital | 32 | |||||||||||
| Series A equity interest with preferential rights | ||||||||||||
| Series C equity interest with preferential rights | ||||||||||||
| Series D equity interest with preferential rights | ||||||||||||
| Share premium | 32 | |||||||||||
| Revaluation reserve | 33 | |||||||||||
| Statutory surplus reserve | 33 | |||||||||||
| Retained profits / accumulated deficit | 33 | ( | ) | |||||||||
| Foreign currency translation reserve | 33 | ( | ) | ( | ) | |||||||
| Total liabilities and equity | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
JX Luxventure limited
Consolidated Statements of Changes in Equity
For the years ended December 31, 2021, 2020, 2019
(Stated in U.S. Dollars)
| Share capital | Preferred A equity interest | Preferred C equity interest | Preferred D equity interest | Share premium | Revaluation reserve | Statutory surplus reserve | Retained earnings | Foreign currency translation reserve | Total equity | |||||||||||||||||||||||||||||||
| Note 32 | Note 32 | Note 32 | Note 32 | Note 32 | Note 33 | Note 33 | Note 33 | Note 33 | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Shares issued for stock based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Loss for the year | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss for the year | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Shares issued for stock based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition of subsidiary | - | - | - | |||||||||||||||||||||||||||||||||||||
| Loss for the year | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss for the year | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Shares issued for stock based compensation | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for shareholders’ loan | ||||||||||||||||||||||||||||||||||||||||
| Preferred shares issued | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Preferred shares converted into common stock | ( | ) | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||
| Declared dividend of right | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Loss for the year | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Other comprehensive loss for the year | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
JX Luxventure limited
Consolidated Statements of Cash Flows
For the years ended December 31, 2021, 2020, 2019
(Stated in U.S. Dollars)
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Loss for the year | ( |
) | ( |
) | ( |
) | ||||||
| Adjustments for: | ||||||||||||
| Share-based compensation | ||||||||||||
| Finance cost | ||||||||||||
| Interest income | ( |
) | ( |
) | ( |
) | ||||||
| Depreciation of property, plant and equipment & investment property | ||||||||||||
| Amortization of intangible assets | ||||||||||||
| Amortization of prepayments and premiums paid under operating leases | ||||||||||||
| Provision/ (reversal) of inventory obsolescence | ( |
) | ( |
) | ||||||||
| Bad debt provision of trade receivables | ||||||||||||
| Loss/(gain) on disposal of property, plant and equipment | ( |
) | ||||||||||
| Provision of impairment loss in property, plant and equipment & investment property | ||||||||||||
| Gain on disposal of subsidiary | ( |
) | ||||||||||
| Operating cash flows before movements in working capital | ( |
) | ( |
) | ||||||||
| (Increase)/ decrease in trade and other receivables | ( |
) | ( |
) | ( |
) | ||||||
| (Increase)/ decrease in inventories | ( |
) | ( |
) | ||||||||
| Prepayments and premiums paid under operating leases | ( |
) | ||||||||||
| Increase/ (decrease) in trade and other payables | ( |
) | ( |
) | ||||||||
| Increase/ (decrease) in income tax payable | ( |
) | ( |
) | ||||||||
| (Increase)/ decrease in deferred tax assets | |
( |
) | |||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( |
) | ( |
) | ( |
) | ||||||
| INVESTING ACTIVITIES | ||||||||||||
| Interest received | ||||||||||||
| Cash from acquisition of subsidiaries | ||||||||||||
| Cash from disposal of a subsidiary | ||||||||||||
| Proceeds on disposal of property, plant and equipment | ||||||||||||
| Purchase of property, plant and equipment | ( |
) | ( |
) | ||||||||
| NET CASH FROM INVESTING ACTIVITIES | ( |
) | ||||||||||
| FINANCING ACTIVITIES | ||||||||||||
| Interest paid | ( |
) | ( |
) | ( |
) | ||||||
| New bank loans raised | ||||||||||||
| Repayment of borrowings | ( |
) | ( |
) | ||||||||
| Advance from related party | ||||||||||||
| Preferred stock subscription | ||||||||||||
| NET CASH FROM FINANCING ACTIVITIES | ||||||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | ( |
) | ( |
) | ( |
) | ||||||
| Effects of currency translation | ( |
) | ||||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | ||||||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
JX Luxventure limited
Notes to Financial Statements
| 1. | GENERAL INFORMATION |
On January 26, 2012, Aquasition Investments Corp (“Company”) was organized as a blank check company pursuant to the laws of the Republic of the Marshall Islands for the purpose of acquiring through a merger, capital stock exchange, asset acquisition, stock purchase, or similar acquisition transaction, one or more operating businesses or assets.
On March 24, 2014, the Company entered into a Share Exchange Agreement and Plan of Liquidation (the “Agreement”) among KBS International Holdings, Inc. (“KBS”), a Nevada corporation, Hongri International Holdings Ltd (“Hongri”), a company organized under the laws of the British Virgin Islands, and Cheung So Wa and Chan Sun Keung, the principal shareholders of KBS.
On August 1, 2014, the share exchange was completed. The acquisition was accounted for as a reverse merger and recapitalization where the Company, the legal acquirer is the accounting acquiree, and KBS, the legal acquiree, was the accounting acquirer.
Description of Subsidiaries:
Hongri International Holdings Limited
(the “Hongri”), formerly known as Wah Ying International Investment Inc., was incorporated in the British Virgin Islands (the
“BVI”) on July 8, 2008 as a limited liability company with authorized share capital of $
France Cock (China) Limited (“France
Cock”) was incorporated in Hong Kong on September 21, 2005 as a limited liability company with authorized capital of HK$
Roller Rome Limited (“Roller Rome”)
was incorporated in the BVI on March 28, 2006 as a limited liability company with authorized share capital of $
F-8
Vast Billion Investment Limited (“Vast
Billion”) was incorporated in Hong Kong on November 25, 2010 as a limited liability company with authorized share capital of HK$
Hongri (Fujian) Sports Goods Co. Ltd.
(“Hongri Fujian”) was established in the People’s Republic of China (the “PRC”) on November 17, 2005 with
a registered and paid up capital of RMB
Anhui Kai Xin Apparel Company Limited
(“Anhui Kai Xin”) was established in the PRC on March 16, 2011 with a registered and paid up capital of RMB
Flower Crown Holding is a
Flower Crown (China) Holding Group Co.,
Limited (“Flower Crown HK”) was
Kim Hyun Technology (Tianjin) Co., Ltd.
(“Kim Hyun Tianjin”) was
Jin Xuan (Hainan) Holding Co., Ltd (“JX
Hainan”) was incorporated in November 11, 2021.
Jin Xuan Luxury Tourism (Hainan) Digital
Technology Co., Ltd. (“Jin Xuan Luxury Tourism”) was
Beijing Heyang International Travel
Service Co., Ltd. (“Heyang Travel”) was
F-9
| 2. | GROUP ORGANIZATION AND BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS |
Effective December 13, 2021, the Company reorganized its corporate subsidiary structure in the PRC under Flower Crown Holding. As a result of the Flower Crown Holding’s China subsidiaries restructuring, the Company no longer operated those entities through a VIE structure and became the indirect sole shareholder of JX Hainan Digital and Beijing Heyang. As part of the restructuring, due to the restriction of foreign ownership by the relevant laws and regulations of the People’s Republic of China, namely Provisions on Administration of Foreign Invested Telecommunications Enterprise, the Company divested Flower Crown (Hainan) Cross-Border E-Commerce Co., Ltd. under a Shares Transfer Agreement with a third party.
The Group structure as at the reporting date is as follows:
F-10
| 3. | APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”) |
For the year ended December 31, 2021 the Company has consistently adopted all the new and revised standards, amendments and interpretations (collectively IFRSs) issued by the International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee (formerly known as “International Financial Reporting Interpretations Committee” (“IFRIC”)) of the IASB that are effective for financial year beginning on January 1, 2021 in the preparation of the consolidated financial statements throughout the year.
For the year ended December 31, 2021, the following new and revised standards, amendments or interpretations that have become effective during the reporting period.
| ● | Interest Rate Benchmark Reform – Phase 2 |
| ● | COVID-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16) |
The adoption of the above new and revised standards had no significant financial effect on these financial statements.
The following new standards and amendments to standards have not come into effect for the financial year beginning January 1, 2021, and have not been early adopted by the Company in preparing these consolidated financial statements. None of these new standards and amendments to standards is expected to have a significant effect on the consolidated financial statements of the Company.
| ● | Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37) |
| ● | Annual Improvements to IFRS Standards 2018–2020 |
| ● | Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) |
| ● | Reference to the Conceptual Framework (Amendments to IFRS 3) |
| ● | Classification of Liabilities as Current or Non-current (Amendments to IAS 1) |
| ● | IFRS 17 Insurance contracts and amendments to IFRS 17 Insurance Contracts |
| ● | Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) |
| ● | Definition of Accounting Estimates (Amendments to IAS 8) |
| ● | Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) |
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| 4. | SIGNIFCANT ACCOUNTING POLICIES |
The principal accounting policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements have been prepared on the historical cost basis and in accordance with IFRS as issued by the IASB. The principal accounting policies are set out below.
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Foreign currencies
Functional and presentation currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”).
The Group conducts its business predominately in the PRC and hence its functional currency is the Renminbi (RMB).
Translation from RMB to USD found place at the following rates:
| Period end rates | Average rates | |||||
| December 31, 2019 | ||||||
| December 31, 2020 | ||||||
| December 31, 2021 |
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Translation from HKD to USD found place at the following rates:
| Period end rates | Average rates | |||||
| December 31, 2019 | ||||||
| December 31, 2020 | ||||||
| December 31, 2021 |
The results and financial positions in functional currency are translated into the presentation currency, USD, of the Company as follows:
| (1) | Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; |
| (2) | Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); |
| (3) | Share equity, share premium and dividends are translated at historical exchange rates; and |
| (4) | All resulting exchange differences are recognized in foreign currency translation reserve, a separate component of equity. |
All financial information presented in USD has been rounded to the nearest dollar, except when otherwise indicated.
Segment reporting
Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.
Individually material operating segments
are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect
of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute
the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material
may be aggregated if they share a majority of these criteria. The Group’s
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Revenue recognition
Revenue from contracts with customers
Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which the Company will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved. Currently, the Company’s contracts do not include such variable amount.
When the contract contains a financing component which provides the customer a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the Company and the customer at contract inception. When the contract contains a financing component which provides the Company a significant financial benefit for more than one year, revenue recognized under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in IFRS 15. Currently, the Company’s contract with its customers do not include financial benefit for more than one year.
Nature and timing of satisfaction of performance obligations for each of the revenue streams are as follows:
Revenue from the sale of goods
Performance obligation is satisfied at the point in time when control of the asset is transferred to the customer, generally on delivery and acceptance of the goods. The Company presents revenues from such transactions on a gross basis in the consolidated statements of comprehensive loss, as the Company acts as a principal to take inventory risks of these goods.
Revenue from the sale of packaged group tour service
Performance obligation is satisfied when the tour service is completed, generally when the tour group successfully returned from the tour destination to the place of origination. The Company presents revenues from such transactions on a gross basis in the consolidated statements of comprehensive loss, as the Company acts as a principal to provide a package of tourism services and take a full obligation to provide such services even if the suppliers are not able to deliver service.
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Revenue from reselling of air-ticket
The Company is a reseller of air-ticket, it provides value add services to its customers including guaranteed flight replacement and other financial benefits. The revenue is recognized when performance obligation has been satisfied, which could be significantly after the ticket sale. The Company recognizes gross revenue with an expense from the cost of purchasing from the supplier.
Other income
Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Rental income is recognized on a time proportion basis over the lease terms.
Dividend income is recognized when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Company and the amount of the dividend can be measured reliably.
Value added tax (VAT)
Current standard Output VAT in effect
is
| Period | Standard VAT rate in effect for product sales | |||
| April 1, 2019 - Current | % | |||
| May 1, 2018 – March 31, 2019 | % | |||
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale.
All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
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Retirement benefit costs
Pursuant to the relevant regulations of the PRC government, the Group’s subsidiaries located in the PRC participate in a local municipal government retirement benefits scheme (the “Scheme”), whereby they contribute a prescribed percentage of the basic salaries of their employees to the Scheme to fund their retirement benefits. Once the Scheme has been funded via contributions by the Group’s participating subsidiaries, the local municipal government takes responsibility for the retirement benefits obligations of all existing and future retired employees of those subsidiaries located in the PRC; accordingly, the only obligation of the Group with respect to the Scheme is to pay the on-going required contributions as long as the employees maintain employment with the Group. There are no provisions under the Scheme whereby forfeited contributions may be used to reduce future contributions. These plans are considered defined contribution plans. The Group has no legal or constructive obligations to pay further contributions after its payment of the fixed contributions into the pension schemes. Contributions to pension schemes are recognized as an expense in the period in which the related service is performed.
Taxation
The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
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Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
Store pre-opening cost
Store pre-opening cost was the start-up activity costs incurred prior to opening a new store, mainly including leasing, leasehold improvements, payroll and supplies. The accounting policies for leasing and leasehold improvements were as below. Other store pre-opening costs were directly charged to expenses when occurred.
Leasing
IFRS 16 Leases requires lessees to recognise assets and liabilities for most leases based on a ‘right-of-use model’ which reflects that, at the commencement date, a lessee has a financial obligation to make lease payments to the lessor for its right to use the underlying asset during the lease term. The lessor conveys that right to use the underlying asset at lease commencement, which is the time when it makes the underlying asset available for use by the lessee.
IFRS 16 defines a lease term as the noncancellable period for which the lessee has the right to use an underlying asset including optional periods when an entity is reasonably certain to exercise an option to extend (or not to terminate) a lease.
Under IFRS 16 lessees may also elect not to recognise assets and liabilities for leases with a lease term of 12 months or less. In such cases a lessee recognises the lease payments in profit or loss on a straight-line basis over the lease term. The exemption is required to be applied by class of underlying assets. Lessees can also make an election for leases for which the underlying asset is of low value. This election can be made on a lease-by-lease basis. For leases where the Group is the lessee, the lease term is either cancelable or no longer than 12 months, so the Group has elected not to record the leased assets.
Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors continue to classify leases as either operating or finance leases using similar principles as in IAS 17. IFRS 16 did not have any significant impact on leases where the Group is the lessor.
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Leasehold improvements
Leasehold improvements, principally comprising costs of office buildings and shops renovation, are held for administrative and selling purposes. Leasehold improvements are initially measured at cost and amortized systematically over its useful life.
Property, plant and equipment
Property, plant and equipment (“PPE”) including buildings held for use in the production or supply of goods or services, or for administrative purposes other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.
Depreciation is provided to write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.
Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is de-recognized.
Investment properties
Investment properties are land and buildings which are owned or held under a leasehold interest to earn rental income and/or for capital appreciation. These include land and buildings held for a currently undetermined future use. Such properties are stated at cost less accumulated depreciation and any impairment losses.
Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of the retirement or disposal.
Depreciation is calculated on the straight-line
basis to depreciate the cost of each item of investment properties over the estimated useful life of
The Group as lessor
Rental income from operating leases is recognized in profit or loss on a straight-line basis over the term of the relevant lease.
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Land use rights
Land use rights are stated at cost less accumulated amortization and accumulated impairment losses. Cost represents consideration paid for the rights to use the land on which various plants and buildings are situated for periods varying from 20 to 50 years.
Amortization of land use rights is calculated on a straight-line basis over the period of the land use rights.
Inventories
Inventories are stated at the lower of cost and net realizable value. Costs of inventories are determined using the weighted average method. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.
Financial instruments – investments and other financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient of not adjusting the effect of a significant financing component, the Group initially measures a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 in accordance with the policies set out for “Revenue recognition”.
In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
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Subsequent measurement
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at amortized cost (debt instruments)
The Group measures financial assets at amortized cost if both of the following conditions are met:
| ● | The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows. |
| ● | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognized in the income statement when the asset is derecognized, modified or impaired.
Financial assets at fair value through other comprehensive income (debt instruments)
The Group measures debt instruments at fair value through other comprehensive income if both of the following conditions are met:
| ● | The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling. |
| ● | The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
For debt instruments at fair value through other comprehensive income, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in the income statement and computed in the same manner as for financial assets measured at amortized cost. The remaining fair value changes are recognized in other comprehensive income. Upon derecognition, the cumulative fair value change recognized in other comprehensive income is recycled to the income statement.
Financial assets at fair value through other comprehensive income (equity investments)
Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity investments designated at fair value through other comprehensive income when they meet the definition of equity under HKAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to the income statement. Dividends are recognized as other income in the income statement when the right of payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Group and the amount of the dividend can be measured reliably, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in other comprehensive income. Equity investments designated at fair value through other comprehensive income are not subject to impairment assessment.
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Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortized cost or at fair value through other comprehensive income, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.
Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the income statement. This category includes derivative financial instruments and structured bank deposits.
A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in the income statement. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.
A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.
Financial instruments – impairment of financial assets
The Group recognizes an allowance for ECLs for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
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General approach
ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available without undue cost or effort, including historical and forward-looking information.
The Group considers a financial asset in default when contractual payments are 120 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Debt instruments at fair value through other comprehensive income and financial assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for trade receivables which apply the simplified approach as detailed below.
Stage 1 – Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month ECLs
Stage 2 – Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 – Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance is measured at an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do not contain a significant financing component or when the Group applies the practical expedient of not adjusting the effect of a significant financing component, the Group applies the simplified approach in calculating ECLs. Under the simplified approach, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
For trade receivables that contain a significant financing component and lease receivables, the Group chooses as its accounting policy to adopt the simplified approach in calculating ECLs with policies as described above.
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Financial instruments – derecognition of financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:
| ● | the rights to receive cash flows from the asset have expired; or |
| ● | the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. |
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Financial instruments – financial liabilities
Initial recognition and measurement
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The Group’s financial liabilities include trade payables, other payables, financial liabilities included in accruals and interest-bearing bank borrowings.
Subsequent measurement
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as through the effective interest rate amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance costs in the income statement.
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Financial instruments – derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires.
When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in the income statement.
Financial instruments – offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
Capital and Reserves
Share capital represents the nominal value of shares that have been issued by the Group. Share capital is determined using the nominal value of shares that have been issued.
Retained profits include all current and prior period results as determined in the combined statement of comprehensive income.
Foreign currency translation reserve arising on the translation are included in the currency translation reserve.
All transactions with owners of the Group are recorded separately within equity.
Earnings/(loss) per share
Basic earnings per share (“EPS”) are computed by dividing income attributable to holders of common shares by the weighted average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Potential dilutive securities are excluded from the calculation of diluted EPS in loss periods as their effect would be anti-dilutive.
The preparation of financial statements in conformity with IFRS requires management to exercise judgment in the process of applying the Group’s accounting policies and requires the use of accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and reported amount of revenue and expenses during the reporting period. The following estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are disclosed below.
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| 5. | SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING POLICIES |
Allowance for Bad and Doubtful debts
Allowances for bad and doubtful debts are based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of bad and doubtful debts requires the use of judgment and estimates, where the expected outcome is different from the original estimate, such difference will impact carrying value of trade and other receivables and doubtful debt expenses in the period in which such estimate has been charged.
Impairment Losses
Impairment losses are based on an assessment of the investment or long-lived assets’ ability to generate future cash flows when there is evidence that these assets may be impaired. The calculation of the amount of impairment loss are based on estimates made by management when applying broad accounting principles governing the accounting for these assets. The determination of these estimates requires judgment by management. The final outcome may differ from the original estimates made by management, which may impact the carrying value of the assets which management has determined to be impaired and charged to the Company’s profit loss during the period.
Income Tax
The Group has exposure to income taxes
in numerous jurisdictions. Significant judgment is involved in determining the Group’s provision for income taxes. There are certain
transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group
recognizes liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome
of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and differed
tax provisions in the period in which such determination is made. The carrying amount of the Group’s income tax payable as at December
31, 2021 and 2020 amounted to
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| 6. | KEY SOURCES OF ESTIMATION UNCERTAINTY |
In the application of the Group’s accounting policies, which are described in Note 4, management is required to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year.
Depreciation of building, machinery and equipment
As described in Note 4, the Group reviews
the estimated useful lives and residual values of property, plant and equipment at the end of each reporting period. The cost of building,
machinery and equipment is depreciated on a straight-line basis over the assets’ estimated useful lives.
Impairment of non-financial assets
Property, plant and equipment are tested for impairment whenever there is any objective evidence or indication that these assets may be impaired.
For the purpose of impairment testing, the recoverable amount (i.e. the higher of the fair value less cost to sell and the value-in-use) is determined on an individual asset basis unless the asset does not generate cash flows that are largely independent of those from other assets. If this is the case, the recoverable amount is determined for the cash-generating-unit (“CGU”) to which the asset belongs.
If the recoverable amount of the asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount.
The difference between the carrying amount and recoverable amount is recognized as an impairment loss in the income statement, unless the asset is carried at revalued amount, in which case, such impairment loss is treated as a revaluation decrease.
An impairment loss for an asset other than goodwill is reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. The carrying amount of this asset is increased to its revised recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of any accumulated amortization or depreciation) had no impairment loss been recognized for the asset in prior years.
F-26
A reversal of impairment loss for an asset other than goodwill is recognized in the income statement, unless the asset is carried at revalued amount, in which case, such reversal is treated as a revaluation increase.
During the years ended December 31, 2021, 2020, and 2019, the Company recognized impairment losses of $, $, and $, respectively, for its prepayments for acquisition of land use rights. During the years ended December 31, 2021, 2020, and 2019, the Company recognized impairment losses of $, $, and $, respectively, for its related prepayments for construction on such land. The impairment reflects the current reduction in the value of the investment as a result of the delay in time to complete the construction projects and delay in procurement of legal certificates that would lead to the assets being put into service that would give rise to expected future profitability which at December 31, 2020, has been temporarily postponed beyond the next operating period. The impairment losses charged to the prepayments has brought the carrying values to their respective recoverable amount in its fair value less costs to sell.
During the years ended December 31, 2021, 2020, and 2019, the Company recognized impairment losses of $, $ , and $, respectively, for a part of its factory plant in Anhui that is not currently in use. The impairment reflects the current reduction in the value of the carrying cost as a result of the company’s evaluation of the recoverability of its investment. The impairment losses charged to the factory plant has brought the carrying values to their respective recoverable amount in its fair value less costs to sell.
For the prepayment for acquisition of
land use rights, the Company provided an estimate of its fair value based on the market value substitution rule. The estimated fair value
belongs to Level 2 of the fair value hierarchy because the input is determined through quoted prices of similar assets without an actively
quoted market. Using the market approach, the Company compares the price of the land use right that the Company intended to acquire with
the price of similar land use rights in the same geographical area, adjusted by factors such as price index, frequency of actual transactions
conducted, environmental conditions, etc. Significant assumptions used in this estimation include the ability to legally obtain such land
use rights, the usage of land as industrial use, the date of transaction at year end, etc. As a result, the Company provided an estimate
in the amount of $
F-27
For the prepayment for construction,
the Company provided an estimate of its fair value based on the time value approach. The estimated fair value belongs to Level 3 of the
fair value hierarchy because the input is not easily observable. Using this approach, the Company calculates the time value of money of
the amount prepaid based on the Company’s weighted average cost of capital (“WACC”) in order to arrive at its fair value.
The Company uses this approach to determine its recoverable amount because such prepayments are not readily resalable, and the ability
to realize this amount is contingent upon the Company’s ability to successfully acquire the land use right as mentioned above. Significant
assumptions used in this estimation include using the WACC, which is comprised of the Company’s metrics of return of equity, return
of debt, the relevant weights of the returns of equity and debt, and tax rate, in determining the fair value. As a result, as at December
31, 2015, the Company provided an estimate in the amount of $
For the factory plant, the Company provided
an estimate of its fair value based on the time value approach. The estimated fair value belongs to Level 3 of the fair value hierarchy
because the input is not easily observable. Using this approach, the Company calculates the time value of money of the amount recoverable
based on the Company’s weighted average cost of capital (“WACC”) in order to arrive at its fair value. The Company uses
this approach to determine its recoverable amount because a part of the factory plant is not readily resalable. Significant assumptions
used in this estimation include using the WACC, which is comprised of the Company’s metrics of return of equity, return of debt,
the relevant weights of the returns of equity and debt, and tax rate, in determining the fair value. As a result, as at December 31, 2018,
the Company recorded as impairment loss in the amount of $
During the year ended December 31, 2021,
the Company recognized impairment loss of $
| 7. | SEGMENT REPORTING |
Management currently identifies the Group’s three sales models as operating segments, which are wholesale, retail and contract manufacturing. The segment presentation is in accordance with management’s expectation of future business developments. These operating segments are monitored and strategic decisions are made on the basis of segmental gross margins.
| Wholesale | Retail | Subcontracting | ||||||||||||||||||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||||||||||||||||||
| By business | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Sales to external customers | ||||||||||||||||||||||||||||||||||||
| Segment revenue | ||||||||||||||||||||||||||||||||||||
| Segment gross margins/(loss) | ||||||||||||||||||||||||||||||||||||
| Reconciling items | ||||||||||||||||||||||||||||||||||||
| Profit/(loss) before tax | ||||||||||||||||||||||||||||||||||||
| Income tax income/(expense) | ||||||||||||||||||||||||||||||||||||
| Profit/(loss) for the year | ||||||||||||||||||||||||||||||||||||
F-28
(continued)
| Travel service | Cross-board business | Consolidated | ||||||||||||||||||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||||||||||||||||||
| By business | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||||||||||||||||
| Sales to external customers | ||||||||||||||||||||||||||||||||||||
| Segment revenue | ||||||||||||||||||||||||||||||||||||
| Segment gross margins/(loss) | ||||||||||||||||||||||||||||||||||||
| Reconciling items | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Profit/(loss) before tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Income tax income/(expense) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Profit/(loss) for the year | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||||||
| Wholesale and Retail | Subcontracting | Travel service | cross-board products | Unallocated | Consolidated | |||||||||||||||||||
| Current assets | ( | ) | ||||||||||||||||||||||
| Non-current assets | - | |||||||||||||||||||||||
| Total assets | ( | ) | ||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||
| Wholesale and Retail | Subcontracting | Travel service | cross-board products | Unallocated | Consolidated | |||||||||||||||||||
| Current assets | ||||||||||||||||||||||||
| Non-current assets | ||||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||||||
F-29
Geographical information
The Group’s operations are located in the PRC and all of the Group’s revenue is derived from sales to customers in the PRC. Hence, no analysis by geographical area of operations is provided.
Information about major customers
Major distributors that make up
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Customer A | ||||||||||||
| Customer B | ||||||||||||
| Total revenue | ||||||||||||
Information about major suppliers
Major suppliers that make up
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Supplier A | ||||||||||||
| Supplier B | ||||||||||||
| Supplier C | ||||||||||||
| Supplier D | ||||||||||||
| Supplier E | ||||||||||||
| Supplier F | ||||||||||||
| Supplier G | ||||||||||||
| Supplier H | ||||||||||||
| Supplier I | ||||||||||||
| Other suppliers | ||||||||||||
| 8. | REVENUE |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Apparel | ||||||||||||
| - Wholesale | ||||||||||||
| - Retail | ||||||||||||
| Subcontracting | ||||||||||||
| Travel service | ||||||||||||
| Cross-board products | ||||||||||||
| Total | ||||||||||||
Revenue is denominated only in USD.
F-30
| 9. | COST OF REVENUE |
Cost of revenue for our cross-board business comprise the cost of products purchased and surcharges on purchase cost. Cost of revenue for our travel services comprise the cost of air-tickets brought from airline or the cost of services provided from local travel firms or persons.
Cost of sales for our retail and wholesale of garment business comprises of purchasing materials, labor costs for personnel employed in production, depreciation of non-current assets used for production purpose, outsourced manufacturing cost, taxes and surcharges, and water and electricity.
The following table shows a breakdown of cost of sales of all business for the periods presented for each category:
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Changes in inventories of finished goods and work in progress | ||||||||||||
| Materials consumed in production | ||||||||||||
| Purchases of finished goods | ||||||||||||
| Labor | - | |||||||||||
| Depreciation | - | |||||||||||
| Rental | ||||||||||||
| Outsourced manufacturing cost | ||||||||||||
| Outsourced service cost | ||||||||||||
| Taxes and surcharges * | ||||||||||||
| Water and electricity | - | |||||||||||
| Inventory provision | ( |
) | ( |
) | ||||||||
| Others | - | |||||||||||
| Foreign currency translation difference | ||||||||||||
F-31
| 10. | OTHER INCOME |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Government grant | ||||||||||||
| Interest income on bank deposits | ||||||||||||
| Other | ||||||||||||
| 11. | OTHER LOSSES |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Gain/(Loss) on disposals of property, plant and equipment | ( | ) | ( | ) | ||||||||
| Foreign exchange gain | ||||||||||||
| Gain/(loss) on disposal of a subsidiary | ||||||||||||
| Bad debt provision of trade receivables | ( | ) | ( | ) | ( | ) | ||||||
| Impairment of long-lived assets | ( | ) | ||||||||||
| Others | ( | ) | ( | ) | ||||||||
| ( | ) | ( | ) | ( | ) | |||||||
| 12. | DISTRIBUTION AND SELLING EXPENSES |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Rental | ||||||||||||
| Outsourced service fee | ||||||||||||
| Labor | ||||||||||||
| Subsidy to distributors | ||||||||||||
| Promotion | ||||||||||||
| Advertisement | ||||||||||||
| Covid financial aid to distributors | ||||||||||||
| Others | ||||||||||||
| 13. | ADMINISTRATIVE EXPENSE |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Labor | ||||||||||||
| Audit fee | ||||||||||||
| Professional and other service fee | ||||||||||||
| Design fee | ||||||||||||
| Depreciation and amortization charges | ||||||||||||
| Decoration | ||||||||||||
| Rental | ||||||||||||
| Travelling and entertainment | ||||||||||||
| Others | ||||||||||||
| 14. | FINANCE COSTS |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Interest expenses on bank borrowings | ||||||||||||
| wholly repayable within one year | ||||||||||||
F-32
| 15. | INCOME TAX (INCOME)/ EXPENSE |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| PRC enterprises income tax: | ||||||||||||
| Current tax | ||||||||||||
| Deferred tax | ( | ) | ||||||||||
| ( | ) | |||||||||||
Hongri Fujian, Anhui Kai Xin, Kim Hyun
Tianjin, Jin Xuan Luxury Tourism, Flower Crown China and Heyang Travel are located in PRC and subject to the applicable enterprise income
tax rate of
France Cock, Vast Billion and Flower
Crown HK were incorporated in Hong Kong and subject to Hong Kong profits tax at a tax rate of
Hongri International Holding Limited and Roller Rome were incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.
KBS Fashion Group Limited was incorporated in the Marshall Island, and, under the current laws of the Marshall Island, is not subject to income taxes.
Flower Crown Holding was incorporated in the Cayman Islands, and, under the current laws of the Cayman Islands, is not subject to income taxes.
The tax charge for the Company can be
divided into non-PRC entities and PRC entities. As for the non-PRC entities, all the entities are expense center and not subject to any
tax and also no deferred tax assets are considered. The loss for the non-PRC for the year ended December 31, 2021 is $
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (Loss)/profit before tax in PRC | ( | ) | ( | ) | ||||||||
| Tax calculated at domestic tax rates applicable to profits in PRC (2021, 2020, and 2019: | ( | ) | ( | ) | ||||||||
| Valuation allowance on deferred tax assets | ||||||||||||
| Tax charge for the year | ( | ) | ||||||||||
The following is the analysis of the deferred tax balances for financial reporting purposes:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Temporary difference | Deferred tax assets | Temporary difference | Deferred tax assets | Temporary difference | Deferred tax assets | |||||||||||||||||||
| Beginning of the year | ||||||||||||||||||||||||
| Bad Debt provisions charged to profit or loss | ( | ) | ( | ) | ||||||||||||||||||||
| Inventory provision charged to profit or loss | - | - | - | - | ||||||||||||||||||||
| Impairment charged to profit or loss | ||||||||||||||||||||||||
| Tax loss carried forward | ||||||||||||||||||||||||
| Allowance | ( | ) | - | - | - | - | ||||||||||||||||||
| Effect of translation | ( | ) | ||||||||||||||||||||||
| End of the year | - | |||||||||||||||||||||||
F-33
| 16. | (LOSS)/PROFIT FOR THE YEAR |
Profit for the year has been arrived at after charging:
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Cost of inventories recognized as expenses | ||||||||||||
| Taxes and surcharges | ||||||||||||
| Depreciation of property, plant and equipment | ||||||||||||
| Amortization of land use rights and trademarks | ||||||||||||
| Amortization of prepayments and premiums under operating leases | ||||||||||||
| Provision (Reversal) of inventory obsolescence | ( | ) | ( | |||||||||
| Provision of bad debt allowance | ||||||||||||
| Provision of impairment loss in property | ||||||||||||
| 17. | EMPLOYEES’ EMOLUMENTS |
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Salaries and other short-term benefits | ||||||||||||
| Defined contribution benefit schemes | ||||||||||||
| Total employee benefits expense (including directors’ emoluments) | ||||||||||||
The employees of the Group’s PRC subsidiaries are members of state-managed retirement benefit schemes operated by the local government. The subsidiaries are required to contribute a specified percentage of its payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect to the retirement benefit schemes is to make the specified contributions.
| 18. | DIRECTORS’ EMOLUMENTS |
The emoluments paid or payable to the directors of the Company were as follows:
| Year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Salaries | ||||||||||||
| Yan Keyan | ||||||||||||
| Sun Lei | ||||||||||||
| Li Huidan | ||||||||||||
| Lixia Tu | ||||||||||||
| John Sano | ||||||||||||
| Themis Kalapotharakos | ||||||||||||
| Matthew Los | ||||||||||||
| Zhongmin Zhang | ||||||||||||
| Yuet Mei Chan | ||||||||||||
| Social Welfare | ||||||||||||
| Yan Keyan | ||||||||||||
F-34
| 19. | LOSS PER SHARE |
| For the years ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Basic Loss Per Share Numerator | ||||||||||||
| Profit for the year attributable to owners of the Company | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Diluted Loss Per Share Numerator | ||||||||||||
| Profit for the year attributable to owners of the Company | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Basic Loss Per Share Denominator | ||||||||||||
| Original shares: | ||||||||||||
| Additions from actual events: | ||||||||||||
| - Issuance of common stock, weighted | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||
| Diluted Loss Per Share Denominator | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||
| Dilutive shares: Potential additions from dilutive events: | ||||||||||||
| - Exercise of investor warrants* | ||||||||||||
| Diluted Weighted Average Shares Outstanding: | ||||||||||||
| Loss Per Share | ||||||||||||
| - Basic | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| - Diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Weighted Average Shares Outstanding | ||||||||||||
| - Basic | ||||||||||||
| - Diluted | ||||||||||||
| * | There were no potential dilutive additions to diluted weighted shares outstanding as a result of the loss during the periods presented. |
F-35
| 20. | PROPERTY, PLANT AND EQUIPMENT |
Owner-occupied Property
| Plant | Machinery | Office equipment | Motor vehicles | Furniture and fixtures | Leasehold improvements- factories and offices | Leasehold improvements- shops | Total | |||||||||||||||||||||||||
| COST | ||||||||||||||||||||||||||||||||
| At December 31, 2019 | ||||||||||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||||||
| Disposals | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Reclassification to investment property | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Translation adjustment | ||||||||||||||||||||||||||||||||
| At December 31, 2020 | ||||||||||||||||||||||||||||||||
| Additions | ||||||||||||||||||||||||||||||||
| Disposals | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Reclassification to investment property | ( | ) | - | - | - | - | - | - | ( | ) | ||||||||||||||||||||||
| Translation adjustment | ||||||||||||||||||||||||||||||||
| At December 31, 2021 | - | |||||||||||||||||||||||||||||||
| DEPRECIATION AND IMPAIRMENT | ||||||||||||||||||||||||||||||||
| At December 31, 2019 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Provided for the year | (317,378） | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Eliminated upon disposal of assets | ||||||||||||||||||||||||||||||||
| Depreciation reclassified to investment property | ||||||||||||||||||||||||||||||||
| Impairment reclassified to investment property | ||||||||||||||||||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| At December 31, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Provided for the year | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Eliminated upon disposal of assets | - | |||||||||||||||||||||||||||||||
| Depreciation reclassified to investment property | ||||||||||||||||||||||||||||||||
| Impairment reclassified to investment property | ||||||||||||||||||||||||||||||||
| Impairment | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| At December 31, 2021 | ( | ) | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| CARRYING AMOUNT | ||||||||||||||||||||||||||||||||
| At December 31, 2020 | ||||||||||||||||||||||||||||||||
| At December 31, 2021 | ||||||||||||||||||||||||||||||||
F-36
Impairment loss charged for the years
ended December 31, 2021, 2020, and 2019 were $
Depreciation is provided on straight-line basis for all property, plant and equipment over their estimated useful lives of the assets as follows:
| Useful life | Residual Value | |||||
| Plant | ||||||
| Machinery | ||||||
| Office equipment | ||||||
| Motor vehicles | ||||||
| Furniture and fixtures | ||||||
| Leasehold improvements-factories and offices | ||||||
| Leasehold improvements-shops | ||||||
| Distributor shops’ furniture and fixtures | ||||||
Plant and building include buildings owned by the Company are set out below:
| Location | Description | Gross area (m2) | ||||||
| Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC | ||||||||
| Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC | ||||||||
| 8-101 Bojingwan Beiyuan, Hexi District, Tianjing, the PRC | ||||||||
The first two buildings were pledged as security for the outstanding bank loans as set forth in note 30.
Investment Properties
As at December 31, 2021, fair value approximated carry amounts, being the initial cost to acquire these investment properties.
| COST | 2021 | 2020 | ||||||
| Opening balance at 1 January | ||||||||
| Acquisitions | ||||||||
| Capitalized subsequent expenditure | ||||||||
| Classified as held for sale or disposals | ||||||||
| Transfer (to)/from inventories and owner-occupied property | ||||||||
| Translation adjustment | ( | ) | ||||||
| Closing balance at 31 December | ||||||||
| DEPRECIATION AND IMPAIRMENT | 2021 | 2020 | ||||||
| Opening balance at 1 January | ( | ) | ( | ) | ||||
| Provided for the year | ( | ) | ( | ) | ||||
| Eliminated upon disposal of assets | ||||||||
| Impairment for the year | ( | ) | ||||||
| Transfer to/(from) inventories and owner-occupied property | ( | ) | ( | ) | ||||
| Translation adjustment | ( | ) | ( | ) | ||||
| Closing balance at 31 December | ( | ) | ( | ) | ||||
F-37
| CARRYING AMOUNT | 2021 | 2020 | ||||||
| Closing balance at 31 December | ||||||||
| 21. | PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES |
| Amount | ||||
| At January 1, 2020 | ||||
| additions for the year | ||||
| charge for the year | ( | ) | ||
| translation adjustment | ||||
| At December 31, 2020 | ||||
| additions for the year | ||||
| charge for the year | ( | ) | ||
| translation adjustment | ||||
| At December 31, 2021 | ||||
Analyzed for reporting purposes as:
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Current asset | ||||||||
| Non-current asset | ||||||||
| 22. | PREPAYMENT FOR CONSTRUCTION OF NEW PLANT |
On November 20, 2010, Hongri Fujian
entered into an agreement with a third party, Anqing Zhongfang Construction and Installation Co., Ltd., for the construction of the new
plant in Anhui at a consideration of $
In 2014, Kaixin Anhui made another prepayment
of $
In 2015, an amount of $
The third phase of the project is related to the construction of a building. The construction site is located on a piece of land whose land use right was to be acquired by the Company. Due to reasons as set forth in note 23, the anticipated completion date of the project is expected to be delayed and, in the worst case, may be terminated. Accordingly, management provided a provision of impairment loss against the carrying value of such prepayment. The detail of estimation of such provision is explained in note 6.
As at December 31, 2021, the carrying amount of the prepayment for construction of new plant is as follows:
| As at December 31, 2021 | ||||
| Prepaid in 2015 | ||||
| Recognized as construction in progress | ( | ) | ||
| Impairment loss in 2015: | ( | ) | ||
| Impairment loss in 2016: | ( | ) | ||
| Translation adjustment: | ( | ) | ||
F-38
| 23. | PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT |
On September 2, 2010, Hongri Fujian
entered into an agreement with a third party, Taihu Weiqi Sports Apparel Co., Ltd., to acquire a land use right in relation to the development
of factories in Anhui Kaixin for a total consideration of $
As at December 31, 2021, the carrying amount of the prepayment for acquisition of land use right is as follows:
| As at December 31, 2021 | ||||
| Prepaid in 2010 | ||||
| Impairment loss: | ( | ) | ||
| Impairment loss in 2016: | ( | ) | ||
| Translation adjustment: | ( | ) | ||
| 24. | LAND USE RIGHTS |
| Amount | ||||
| COST | ||||
| At January 1, 2020 | ||||
| additions for the year | ||||
| translation adjustment | ||||
| At December 31, 2020 | ||||
| additions for the year | ||||
| translation adjustment | ||||
| At December 31, 2021 | ||||
| AMORTIZATION | ||||
| At January 1, 2020 | ( | ) | ||
| charge for the year | ( | ) | ||
| translation adjustment | ( | ) | ||
| At December 31, 2020 | ( | ) | ||
| charge for the year | ( | ) | ||
| Impairment | ( | ) | ||
| translation adjustment | ( | ) | ||
| At December 31, 2021 | ( | ) | ||
| CARRYING AMOUNTS | ||||
| At December 31, 2020 | ||||
| At December 31, 2021 | ||||
The amounts represent the prepayment
of rentals for land use right (industrial use) situated in the PRC. The land use rights have the term of
All the land use rights mentioned above were owned by Anhui Kaixin.
The land use right is comprised of the following:
| Location | Expiry date of tenure | Land area (m2) | ||||
| Longshan Road, Economic development District, Taihu County | ||||||
| Longshan Road, Economic development District, Taihu County | ||||||
F-39
| 25. | INVENTORIES |
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Raw materials | ||||||||
| Finished goods | ||||||||
| Provision for obsolete inventories | ( | ) | ||||||
| 26. | TRADE RECEIVABLES, OTHER RECEIVABLES AND PREPAYMENTS |
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Trade receivables | ||||||||
| Bad debt provision for trade receivables | ( | ) | ( | ) | ||||
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Other receivables | ||||||||
| Prepayments | ||||||||
The fair value of trade and other receivables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the consolidated statements of financial position to be reasonable approximation of their fair values.
Prepayments include advances to suppliers, prepaid expenses and prepaid income tax.
F-40
Before accepting any new customer, the Group assesses the potential customer’s credit quality and defined credit limits by customer. Limits attributed to customers are reviewed once a year. The aging analysis of trade receivables is as follows:
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Current | ||||||||
| Past due for less than 4 months | ||||||||
| Past due for more than 4 months | ||||||||
The movement in the provision for doubtful debts during the year is as follows:
| 2021 | 2020 | |||||||
| As at January 1 | ||||||||
| Provision provided in the year | ||||||||
| Translation adjustment | ||||||||
| As at December 31 | ||||||||
Among the amounts of trade receivables,
$
| 27. | CASH AND CASH EQUIVALENTS |
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash on hand | ||||||||
| Bank deposits | ||||||||
| Other monetary funds | ||||||||
F-41
| As at December 31, | ||||||||
| 2020 | 2020 | |||||||
| Renminbi | ||||||||
| Hong Kong Dollars | ||||||||
| United States Dollars | ||||||||
Cash and cash equivalents comprise cash
held by the Group and short-term deposits with an original maturity of three months or less. Bank deposits as at December 31, 2021 carry
interest at market rates which ranged from
| 28. | TRADE AND OTHER PAYABLES |
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Trade payables | ||||||||
| Employee benefits payable | ||||||||
| Accrual and other payables | ||||||||
| Subtotal financial liabilities | ||||||||
| Other taxes payable | ||||||||
The fair value of trade and other payables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the consolidated statements of financial position to be reasonable approximation of their fair values.
Trade payables comprise amounts outstanding for trade purchase. The average credit period is 30 days from the time when the services are rendered by or goods received from suppliers. The aging analysis of trade payables is as follows:
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Current | ||||||||
| Past due for less than 4 months | ||||||||
| Past due for over 4 months | ||||||||
The Company was granted a credit term of 30 days. The balances past due were mainly for the Company’s high bargaining power.
| 29. | RELATED PARTIES PAYABLE |
| (1) | Nature of relationship with related parties |
| Name | Relationship with the Group | |
| Yan, Keyan | ||
| Chen, Bizhen | ||
| Sun, Lei | ||
| Li Huidan |
| (2) | Significant balances between the Group and the above related parties: |
| As at December 31, | ||||||||||||
| Name | Nature | 2021 | 2020 | |||||||||
| Yan, Keyan | Borrowing of funds | |||||||||||
| Sun, Lei | Borrowing of funds | |||||||||||
F-42
Related parties payables were unsecured, non-interest bearing and repayment on demand.
(3) Significant related parties transactions between the Group and the above related parties:
During 2021, Mr. Yan and Ms. Chen provided personal guarantees for the loans as set forth in Note 30.
During 2021, the Company issued
During 2021, the Company issued
| Name | Shares issued | Value | ||||||
| Yan, Keyan | $ | |||||||
| Sun, Lei | ||||||||
| Li Huidan | ||||||||
| $ | ||||||||
| * | The Company entered into a lease arrangement for office space with this related party in 2010. The breakdown of the commitment to the lease is disclosed in note 34. |
| 30. | SHORT-TERM BANK LOANS |
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Secured bank borrowings | ||||||||
| Carrying amount repayable within 1 year | ||||||||
The borrowings are fixed-rate and denominated in RMB.
| Bank loans | Amount USD | Period | Interest rate | Mortgage | Personal guarantee | |||||||||||||||
| #1 | 4/26/2021 | 4/25/2022 | % | |||||||||||||||||
F-43
| 31. | RIGHTS |
On March 12, 2021, the Company announced
the authorization and declaration of a dividend distribution of one right for each outstanding share of common stock, par value $
If an Acquiring Person obtains beneficial ownership of 15 percent or more of the Common Stock, then each Right will entitle the holder thereof to purchase, for the Exercise Price, a number of shares of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a then-current market value of twice the Exercise Price. All Rights that are or, under certain circumstances specified in the Rights Agreement, were beneficially owned by an Acquiring Person or certain of its transferees will be void.
In general, if anyone acquires
As of December 31, 2021, there are
The Company classified the Rights as permanent equity in the consolidated balance sheets because they are convertible to preferred B share which are further convertible to common stock of the Company. The Preferred Shares are recorded initially at fair value, net of issuance costs.
The fair value of the rights was determined using a Black-Scholes model. This model requires the input of highly subjective assumptions, including price volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value of the rights and the Company’s results of operations could be impacted. This model is dependent upon several variables such as the instrument’s expected term, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend yield rate over the expected instrument term, and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result of the down round protection. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of valuation. Expected dividend yield is based on historical trends. The Company measures volatility using the volatility rates of market index.
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The inputs to the model were as follows:
| December 31, 2021 | ||||
| Exercise price | ||||
| Dividend yield | ||||
| Risk-free rate | % | |||
| Expected term (in years) | ||||
| Expected volatility | % | |||
| 32. | SHARE CAPITAL AND SHARE PREMIUM |
The details of the Group’s share capital are as follows:
| Number of shares | Share capital | Share premium | ||||||||||
| Shares outstanding as December 31, 2019 | ||||||||||||
| Issuance of shares | ||||||||||||
| Shares outstanding as December 31, 2020 | ||||||||||||
| Issuance of shares | ||||||||||||
| Issuance of rights | ||||||||||||
| Shares outstanding as December 31, 2021 | ||||||||||||
| Number of shares | Share capital | Share premium | ||||||||||
| Authorized Common shares of US$ | $ | $ | ||||||||||
| Issue and fully paid common shares of US$ | $ | $ | ||||||||||
| Issue and fully paid common shares of US$ | $ | |||||||||||
| Issue and fully paid common shares of US$ | $ | |||||||||||
Preferred Stock
The Company is authorized to issue
On April 8, 2021, the Company issued
F-45
On September 1, 2021, the Company issued
On November 1, 2021, the “Company
closed the private placement offering (the “Offering”) of its newly-designated Series D Convertible Preferred Stock, par value
$
Holders of Series A, C and D Convertible Preferred Stock converted certain preferred stock to common stock during 2021. Following table shows the changes of the preferred stock during 2021:
| Preferred A | Preferred C | Preferred D | ||||||||||||||||||||||
| shares | Amount $ | Shares | Amount $ | Shares | Amount $ | |||||||||||||||||||
| At December 31, 2020 | ||||||||||||||||||||||||
| New issued during the year | ||||||||||||||||||||||||
| Converted to common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| At December 31, 2021 | ||||||||||||||||||||||||
The Company classified all Preferred Shares as permanent equity in the consolidated balance sheets because they are not redeemable and convertible to common stock of the Company. The Preferred Shares are recorded initially at fair value, net of issuance costs.
F-46
Common Stock
The Company is authorized to issue
On September 1, 2020, the Company granted,
and subsequently issued,
On December 21, 2020, the Company agreed
to sell and issue to the Sun Lei, a total of
On December 21, 2020, the Company closed
a share exchange agreement with Flower Crown Holding and its shareholders, pursuant to which the Company acquired from Flower Crown Holding’s
shareholders all of the issued and outstanding capital of Flower Crown Holding in exchange for the issuance of an aggregate of
On February 12, 2021, the Company granted
an aggregate of
On March 4, 2021, the Company issued
On June 4, 2021, the Company issued
On September 7, 2021, the Company issued
On October 1, 2021, the Company issued
On December 8, 2021, the Company issued
On October 19, 2021 and November 15,
2021, the Company issued
| 33. | RESERVE |
Statutory surplus reserve
As stipulated by the relevant laws and
regulations applicable to China’s foreign investment enterprises, the Company’s PRC subsidiaries are required to maintain
a statutory surplus reserve which is non-distributable.
F-47
The statutory surplus reserve can be used for making up losses of the group entities in Mainland China, if any. The statutory surplus reserve may also be used to increase capital or to meet unexpected or future losses. The statutory surplus reserve is non-distributable other than upon liquidation.
The statutory surplus reserve of the
Group amounts to $
Revaluation reserve
Revaluation reserve is comprised of the surplus or deficit arising from the revaluation of the Company’s fixed assets.
Retained profits
The retained profits comprise the cumulative net gains and losses recognized in the Company’s income statement.
Foreign currency translation reserve (other comprehensive income)
Foreign currency translation reserve represents the foreign currency translation difference arising from the translation of the financial statements of companies within the Group from their functional currency to the Group’s presentation currency.
| 34. | RISK MANAGEMENT AND FAIR VALUES |
| 1. | Capital risk |
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to owners through the optimization of the debt and equity balance. The Group’s overall strategy remains unchanged during the year.
The capital structure of the Group consisted of borrowings net of bank balances and cash, and equity attributable to owners of the Company comprising issued share capital and various reserves.
The directors of the Company review the capital structure regularly. As part of this review, the Group considers the cost of capital and the risks associated with each class of capital, and will balance its overall capital through the payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debt.
The Group monitors capital using the Gearing Ratio, which is net debt divided by total equity. Net debt represents borrowings less cash and cash equivalents. The Company met its objective by minoring borrowing activities.
The Company and its subsidiaries are not subject to externally imposed capital requirements.
| December 31, 2021 | December 31, 2020 | |||||||
| Total borrowing | ||||||||
| Less: cash and cash equivalents | ( | ) | ( | ) | ||||
| Net debt | ( | ) | ( | ) | ||||
| Total equity | ||||||||
| Total capital | ||||||||
| Gearing ratio | ( | ) | % | ( | )% | |||
F-48
| 2. | Financial risk |
Financial risk management objectives and policies
The Group’s major financial instruments include trade and other receivables, related parties receivables, cash and cash equivalents, trade and other payables, related parties payables and short-term loans. Details of these financial instruments are disclosed in the respective notes. The risks associated with these financial instruments include credit risk, market risk (interest rate risk and currency risk) and liquidity risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
| 3. | Market risk |
| (i) | Foreign currency risk |
While our reporting currency is the U.S.
dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially all of
our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may
be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB.
| (ii) | Interest rate risk |
We deposit surplus funds with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.
| 4. | Credit risk |
As at December 31, 2020, the Group’s maximum exposure to credit risk which will cause a financial loss to the Group due to failure to perform an obligation by the counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial position.
In order to minimize the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at the end of each reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. In this regard, the directors of the Group consider that the Group’s credit risk is significantly reduced.
The Group’s exposure to credit
risk on trade receivables in influenced mainly by the individual characteristics of each customer therefore concentrations of credit risk
primarily arise when the Group has significant exposure to individual customers.
F-49
| 5. | Liquidity risk |
In the management of the liquidity risk, the Group monitors and maintains a level of cash and bank balances deemed adequate by the management to finance the Group’s operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilization of bank borrowings and ensures compliance with loan covenants.
Liquidity tables
The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities as at December 31, 2021 based on agreed repayment terms. The tables have been drawn up based on undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows.
As at December 31, 2021
| Within 1 year | Over 1 year | Total | ||||||||||
| Short-term bank loans and related interests | ||||||||||||
| Trade and other payables | ||||||||||||
| Related parties payables | ||||||||||||
| Total | ||||||||||||
As at December 31, 2020
| Within 1 year | Over 1 year | Total | ||||||||||
| Short-term bank loans and related interests | ||||||||||||
| Trade and other payables | ||||||||||||
| Related parties payables | ||||||||||||
| Total | ||||||||||||
| 6. | Fair value |
The fair value of financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.
The following table presents the fair value of the Group’s financial instruments measured at the end of the reporting period on a recurring basis, categorized into the three-level fair value hierarchy as defined in IFRS 13, Fair Value Measurement. The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:
| - | Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. |
| - | Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available. |
| - | Level 3 valuations: Fair value measured using significant unobservable inputs. |
During the years ended December 31, 2021 and 2020, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3. The Group’s policy is to recognize transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
Valuation techniques and inputs used in Level 2 fair value measurements
The fair value of financial assets in Level 2 is determined by the model as disclosed in note 31.
The directors of the Company consider that the carrying amounts of financial assets and financial liabilities recorded at amortized cost approximate their fair values.
F-50
| 35. | COMMITMENTS AND CONTINGENCIES |
| (1) | The Company had the following capital commitments in respect of the construction of plant and equipment which were contracted but not provided for in the financial statements: |
| As at December 31, 2021 | As at December 31, 2020 | |||||||
| Contracted and authorized, in RMB | ||||||||
| Contracted and authorized, in USD | ||||||||
| (2) | As at December 31, 2021, the Company had lease commitments as follows: |
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Within 1 year | ||||||||
| 2-5 years | ||||||||
| Thereafter | ||||||||
| As at December 31, | ||||||||
| 2021 | 2020 | |||||||
| Within 1 year | ||||||||
| 2-5 years | ||||||||
| Thereafter | ||||||||
| 36. | EVENTS AFTER THE BALANCE SHEET |
No Significant subsequent event was identified by the Company.
* * * * *
F-51
Exhibit 1.4
Exhibit 2.2
Exhibit 2.3
Exhibit 2.4
Exhibit 2.5
Exhibit 2.6
Exhibit 2.7
Exhibit 2.8
Exhibit 2.9
Exhibit 2.10
Exhibit 2.11
DESCRIPTION OF SECURITIES
REGISTERED UNDER SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Description of Common Stock
As of the date of the Annual Report on Form 20-F of which this Exhibit 2.11 is a part, JX Luxventure Limited (the “Company”, “we”, “us” or “our”) has only one class of securities registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): the Company’s common stock.
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, $0.0001 par value | LLL | NASDAQ Capital Market |
The following description of our common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our amended and restated articles of incorporation, as amended (the “Articles of Incorporation”), which are incorporated by reference as exhibits to the Annual Report on Form 20-F of which this Exhibit 2.11 is a part.
Authorized Capitalization
The Company was incorporated on January 26, 2012 under the Marshall Islands Business Corporations Act (“BCA”). The provisions of the BCA, together with provisions of our Articles of Incorporation and our bylaws govern the rights of holders of our common stock.
Pursuant to our Articles of Incorporation, our authorized capital stock consists of up to 155,000,000 shares, par value of $0.0001 per share, consisting of 150,000,000 shares of common stock, $0.0001 par value per share (the “Common Stock”) and 5,000,000 shares of preferred stock, $0.0001 par value per share. As of December 31, 2021, we had 5,899,893 shares of Common Stock issued and outstanding. As of date of this Annual Report on Form 20-F, there are 7,439,893 shares of Common Stock are issued and outstanding and 1,470,000 shares of Preferred Stock are issued and outstanding, consisting of 1,240,000 shares of Series A Convertible Preferred Stock; 150,000 shares of Series C Convertible Preferred Stock, and 80,000 shares of Series D Convertible Preferred Stock.
Our Articles of Incorporation authorize our board of directors, without any further vote or action by our stockholders, to establish one or more series of preferred stock and to issue up to 5,000,000 shares of preferred stock in different classes and series and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the common stock, at such times and on such other terms as they think proper. Our board of directors may issue shares of preferred stock stock on terms calculated to discourage, delay or prevent a change of control of the Company or the removal of our management.
Economic and Voting Rights
Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of shares of Common Stock of the Company are entitled to receive ratably all dividends, if any, declared by our board of directors out of funds legally available for dividends.
On March 12, 2021, the Company announced the authorization and declaration of a dividend distribution of one right (the “Right”) for each outstanding share of Common Stock of the Company to stockholders of record as of the close of business on March 31, 2021. Each Right will entitle the holder to purchase, for the exercise price of $50, 0.00667 of a share of Preferred Stock (the “Exercise Price”) having economic and other terms similar to that of one share of Common Stock. This portion of a share of Preferred Stock is intended to give the stockholder approximately the same dividend, voting and liquidation rights as would one share of Common Stock, and should approximate the value of one share of Common Stock. If an acquiring person obtains beneficial ownership of 15 percent or more of the Common Stock, then each Right will entitle the holder thereof to purchase, for the Exercise Price, a number of shares of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a then-current market value of twice the Exercise Price. In general, if anyone acquires 15% or more of the Common Stock of the Company, the Rights will give rights holders, other than the acquiring person, to buy common stock at lower price to significantly dilute the acquiring person. The board of directors adopted the Rights Agreement to protect our stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires 15 percent or more of the shares of Common Stock without the approval of the board of directors. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the board of directors.
Upon the dissolution, liquidation or winding up of the affairs of the Company, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders or our Common Stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of Common Stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities.
Each outstanding share of Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Amendments to the Articles of Incorporation generally require the affirmative vote of the holders of a majority of all outstanding shares of capital stock entitled to vote. Amendments to our bylaws require the affirmative vote of a majority of the entire board of directors at any regular or special meeting of the board of directors or by unanimous written consent of the entire board of directors in lieu of a meeting; provided, however, that any bylaw amended or adopted by the board of directors may be amended or repealed by the affirmative vote of the holders of a majority of the total voting power of the then outstanding capital stock of the Company entitled to vote thereon.
Election and Removal of Directors
Our directors are elected by the holders of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled to vote generally in the election of directors (“Voting Stock”). The provisions of our Articles of Incorporation provide that cumulative voting shall not be used to elect directors. Each director will be elected to serve until the next annual meeting of stockholders and until his/her successor shall have been duly elected and qualified, except in the event of his/her death, resignation, removal or the earlier termination of his/her term of office. Any director or the entire board of directors may be removed at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the total voting power of the Voting Stock entitled to vote thereon or with cause by directors constituting at least two-thirds of the entire board of directors.
Vacancies in the board of directors occurring by death, resignation, the creation of new directorships, the failure of the stockholders to elect the whole board at any annual election of directors, or, except as herein provided, for any other reason, including removal of directors for cause, may be filled either by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, at any special meeting called for that purpose or at any regular meeting of the board of directors. Vacancies occurring by removal of directors without cause may be filled only by vote of the stockholders.
Stockholders Meetings
Under our bylaws, annual stockholder meetings will be held at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands. Under our Articles of Incorporation, special meetings may be called by the board of directors, or by the secretary of the Company requested by stockholders representing certain amount of voting power. Our board of directors may set a record date not less than 15 days and not more than 60 days before the date of any meeting to determine the stockholders that will be entitled to receive notice of the stockholders’ meeting and to vote at the meeting.
2
Dissenters’ Rights of Appraisal and Payment
Under the BCA, our stockholders have the right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation. In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed appraiser.
Stockholders’ Derivative Actions
Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.
Indemnification of Officers and Directors
The BCA authorizes corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties. Our amended and restated articles of incorporation include a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest extent permitted by law. We must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain employees for some liabilities.
The limitation of liability and indemnification provisions in our Articles of Incorporation bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
Transfer Agent
The registrar and transfer agent for our Common Stock is American Stock Transfer & Trust Company, LLC.
3
Exhibit 8.1
List of Subsidiaries of JX Luxventure Limited
| Name of Subsidiary | Jurisdiction of Incorporation or Organization | |
| Hongri International Holdings Limited | British Virgin Islands | |
| Roller Rome Limited | British Virgin Islands | |
| France Cock (China) Limited | Hong Kong | |
| Vast Billion Investment Limited | Hong Kong | |
| Hongri (Fujian) Sports Goods Co., Ltd. | PRC | |
| Anhui Kai Xin Apparel Co. Ltd. | PRC | |
| Flower Crown Holding | Cayman Islands | |
| Flower Crown (China) Holding Group Co., Limited | Hong Kong | |
| Kim Hyun Technology (Tianjin) Co., Ltd | PRC | |
| Jin Xuan (Hainan) Holding Co, Ltd. | PRC | |
| Jin Xuan Luxury Tourism (Hainan) Digital Technology Co., Ltd. | PRC | |
| Beijing Heyang International Travel Service Co., Ltd. | PRC |
Exhibit 12.1
Certification
Pursuant to Rule 13a-14(a) of the Exchange Act
I, Sun Lei, certify that:
| 1. | I have reviewed this annual report on Form 20-F of JX Luxventure Limited; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: May 13, 2022
| By: | /s/ Sun Lei | |
| Name: | Sun Lei | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 12.2
Certification
Pursuant to Rule 13a-14(a) of the Exchange Act
I, Keyan Yan, certify that:
| 1. | I have reviewed this Annual Report on Form 20-F of JX Luxventure Limited for the fiscal year ended December 31, 2021; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: May 13, 2022
| By: | /s/ Keyan Yan | |
| Name: | Keyan Yan | |
| Title: |
Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 13.1
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of JX Luxventure Limited (the “Company”) on Form 20-F for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sun Lei, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 13, 2022 | ||
| By: | /s/ Sun Lei | |
| Name: | Sun Lei | |
| Title: |
Chief Executive Officer (Principal Executive Officer) |
|
Exhibit 13.2
Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of JX Luxventure Limited (the “Company”) on Form 20-F for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Keyan Yan, Interim Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 13, 2022 | ||
| By: | /s/ Keyan Yan | |
| Name: | Keyan Yan | |
| Title: |
Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
|
Exhibit 15.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (SEC File No. 333-262642) of our report dated May 17, 2021, relating to the audit of the consolidated financial statements of JX Luxventure Limited, formerly known as KBS Fashion Group Limited (the “Company”), for the years ended December 31, 2020 and December 31, 2019 and the related consolidated statements of comprehensive loss, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements), appearing in this Annual Report the Company on Form 20-F for the year ended December 31, 2021, as filed with the United States Securities Exchange Commission (“SEC”).
WWC, P.C.
Certified Public Accountants
PCAOB ID: 1171
San Mateo, California
May 13, 2022
Exhibit 15.2
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-229046) of JX Luxventure Limited (formerly known as “KBS Fashion Group Limited”) of our report dated May 13, 2022, relating to the consolidated financial statements of JX Luxventure Limited (formerly known as “KBS Fashion Group Limited”) as at December 31, 2021 and for the year ended December 31, 2021, which appear in the Annual Report on Form 20-F of JX Luxventure Limited (formerly known as “KBS Fashion Group Limited”) for the year ended December 31, 2021.
| /s/ Onestop Assurance PAC | |
| We have served as the Company’s auditor since 2022. | |
| Singapore | |
| May 13, 2022 | |