PART
I
ITEM
1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
A.
|
Directors
and Senior Management
|
Not
applicable.
Not
applicable.
Not
applicable.
ITEM
2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not
applicable.
|
B.
|
Method
and Expected Timetable
|
Not
applicable.
|
A.
|
Selected
Financial Data
|
The
following table presents selected financial data regarding our business. It should be read in conjunction with our consolidated
financial statements and related notes contained elsewhere in this annual report and the information under Item 5 “Operating
and Financial Review and Prospects.” The selected consolidated statements of comprehensive income data for the fiscal years
ended December 31, 2017, 2016 and 2015, and the selected consolidated statements of financial position data as of December 31,
2017 and 2016 have been derived from our audited consolidated financial statements that are included in this annual report beginning
on page F-1. The selected consolidated statements of comprehensive income data for the fiscal years ended December 31, 2014 and
2013, and the selected consolidated statements of financial position data as of December 31, 2015, 2014 and 2013 have been derived
from our audited consolidated financial statements that are not included in this annual report.
Our
consolidated financial statements were prepared and presented in accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board (“IASB”). The selected financial data information is only
a summary and should be read in conjunction with the historical consolidated financial statements and related notes contained
elsewhere herein. The financial statements contained elsewhere fully represent our financial condition and operations; however,
they are not indicative of our future performance.
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
23,762,536
|
|
|
$
|
41,200,205
|
|
|
$
|
61,343,681
|
|
|
$
|
58,832,481
|
|
|
$
|
99,559,814
|
|
Total cost of sales
|
|
|
(35,274,352
|
)
|
|
|
(39,041,932
|
)
|
|
|
(46,511,274
|
)
|
|
|
(39,416,973
|
)
|
|
|
(57,363,839
|
)
|
Gross profit
|
|
|
(11,511,816
|
)
|
|
|
2,158,272
|
|
|
|
14,832,407
|
|
|
|
19,415,508
|
|
|
|
42,195,975
|
|
Distribution and selling expenses
|
|
|
(3,265,380
|
)
|
|
|
(3,606,010
|
)
|
|
|
(6,621,256
|
)
|
|
|
(7,191,606
|
)
|
|
|
(6,238,995
|
)
|
Administrative expenses
|
|
|
(4,879,397
|
)
|
|
|
(3,543,993
|
)
|
|
|
2,798,082
|
|
|
|
(4,649,229
|
)
|
|
|
(2,211,431
|
)
|
Profit for the year
|
|
|
(14,815,596
|
)
|
|
|
(11,902,688
|
)
|
|
|
1,243,670
|
|
|
|
6,876,982
|
|
|
|
25,419,366
|
|
Total comprehensive income for the year
|
|
|
(10,004,880
|
)
|
|
|
(18,028,121
|
)
|
|
|
(4,801,102
|
)
|
|
|
6,526,172
|
|
|
|
28,016,625
|
|
Outstanding shares
|
|
|
1,860,831
|
|
|
|
1,750,142
|
|
|
|
1,694,489
|
|
|
|
1,694,489
|
|
|
|
1,694,489
|
|
Earning per share, basic diluted
|
|
|
-7.96
|
|
|
|
-6.80
|
|
|
|
0.73
|
|
|
|
4.06
|
|
|
|
15.00
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,050,456
|
|
|
$
|
24,576,341
|
|
|
$
|
21,214,080
|
|
|
$
|
20,604,583
|
|
|
|
43,700,087
|
|
Non-current assets
|
|
|
40,966,319
|
|
|
|
34,754,942
|
|
|
|
47,221,529
|
|
|
|
52,929,386
|
|
|
|
37,306,845
|
|
Current assets
|
|
|
40,343,386
|
|
|
|
56,343,823
|
|
|
|
62,098,951
|
|
|
|
62,093,570
|
|
|
|
76,045,907
|
|
Working capital
|
|
|
33,060,877
|
|
|
|
48,647,185
|
|
|
|
53,598,854
|
|
|
|
52,704,076
|
|
|
|
59,857,688
|
|
Total assets
|
|
|
81,309,705
|
|
|
|
91,098,765
|
|
|
|
109,310,480
|
|
|
|
115,022,956
|
|
|
|
113,352,752
|
|
Current liabilities
|
|
|
7,282,509
|
|
|
|
7,696,638
|
|
|
|
8,500,097
|
|
|
|
9,389,493
|
|
|
|
16,188,219
|
|
Total liabilities
|
|
|
7,282,509
|
|
|
|
7,696,638
|
|
|
|
8,503,506
|
|
|
|
9,404,880
|
|
|
|
19,620,659
|
|
Equity
|
|
|
74,027,196
|
|
|
|
83,402,127
|
|
|
|
100,816,974
|
|
|
|
105,618,076
|
|
|
|
93,732,093
|
|
Exchange
Rate Information
Our
business is primarily conducted in China and almost all of our revenues are denominated in RMB. This annual report contains translations
of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations
from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.5063 to US$1.00, the exchange
rate set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System on December 30, 2017. We
make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as
the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign
currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on
foreign trade. On April 20, 2018, the certified exchange rate was RMB6.2945 to US$1.00.
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report
or will use in the preparation of any other periodic reports or any other information to be provided to you. The source of these
rates is the Federal Reserve Statistical Release.
|
|
Exchange rate
|
|
Period
|
|
Period End
|
|
|
Average(1)
|
|
|
Low
|
|
|
High
|
|
|
|
(RMB Per US$1.00)
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1478
|
|
|
|
6.0537
|
|
|
|
6.2438
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1620
|
|
|
|
6.0402
|
|
|
|
6.2591
|
|
2015
|
|
|
6.4778
|
|
|
|
6.2827
|
|
|
|
6.1870
|
|
|
|
6.4896
|
|
2016
|
|
|
6.9430
|
|
|
|
6.6549
|
|
|
|
6.4480
|
|
|
|
6.9580
|
|
2017
|
|
|
6.5063
|
|
|
|
6.7350
|
|
|
|
6.4773
|
|
|
|
6.9575
|
|
September
|
|
|
6.6533
|
|
|
|
6.5690
|
|
|
|
6.4773
|
|
|
|
6.6591
|
|
October
|
|
|
6.6328
|
|
|
|
6.6254
|
|
|
|
6.5712
|
|
|
|
6.6533
|
|
November
|
|
|
6.6090
|
|
|
|
6.6200
|
|
|
|
6.5967
|
|
|
|
6.6385
|
|
December
|
|
|
6.5063
|
|
|
|
6.5932
|
|
|
|
6.5063
|
|
|
|
6.6210
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.2841
|
|
|
|
6.4233
|
|
|
|
6.2841
|
|
|
|
6.5263
|
|
February
|
|
|
6.3280
|
|
|
|
6.3183
|
|
|
|
6.2649
|
|
|
|
6.3471
|
|
March
|
|
|
6.2726
|
|
|
|
6.3174
|
|
|
|
6.2685
|
|
|
|
6.3565
|
|
April (thought April 20, 2018)
|
|
|
6.2945
|
|
|
|
6.2859
|
|
|
|
6.2655
|
|
|
|
6.3045
|
|
Source: Federal Reserve Statistical Release
(1)
|
Annual
averages were calculated by using the average of the exchange rates on the last day of each month during the relevant year.
Monthly averages are calculated by using the average of the daily rates during the relevant month.
|
B.
|
Capitalization
and Indebtedness
|
Not
applicable.
C.
|
Reasons
for the Offer and Use of Proceeds
|
Not
applicable.
An
investment in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together
with all of the other information included in this annual report, before making an investment decision. If any of the following
risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price
of our common stock could decline, and you may lose all or part of your investment.
RISKS
RELATED TO OUR BUSINESS
General
economic conditions, including a prolonged weakness in the economy, may affect consumer discretionary spending, which could adversely
affect our business and financial performance.
The
apparel industry has historically been subject to substantial cyclical variations. Our business and financial performance are
dependent on a number of factors impacting consumer discretionary spending, including general economic and business conditions;
consumer confidence; wages and employment levels; the housing market; consumer debt levels; availability of consumer credit; credit
and interest rates; fuel and energy costs; energy shortages; taxes; general political conditions, both domestic and abroad. Consumer
product purchases, including purchases of our products, may decline during recessionary periods. Our ability to access the capital
markets may be restricted at a time when we would like, or need, to raise capital, which could impair on our ability to open additional
stores or build additional manufacturing lines. In addition, as domestic and international economic conditions change, trends
in consumer spending on discretionary items, including our merchandise, become unpredictable and subject to reductions due to
economic uncertainties. A prolonged economic recovery or an uncertain outlook in the economy could result in additional declines
in consumer discretionary spending, which could materially affect our financial performance.
A
contraction in apparel sales and production could impair our results of operations and liquidity and jeopardize our supply base.
Apparel
sales and production are cyclical and depend, among other things, on general economic conditions and consumer spending and preferences.
As the volume of apparel production fluctuates, the demand for our products also fluctuates. A contraction in apparel sales could
harm our results of operations and liquidity. In addition, our suppliers would also be subject to many of the same consequences
which could pressure their results of operations and liquidity. Depending on an individual supplier’s financial condition
and access to capital, its viability could be challenged which could impact its ability to perform as we expect and consequently
our ability to meet our own commitments.
If
we are unable to anticipate consumer preferences and develop new menswear products, we may not be able to maintain or increase
our net revenues and profits.
Our
success depends on our ability to identify, originate and define apparel trends as well as to anticipate, gauge and react to changing
consumer demands for menswear in a timely manner. Our target market of consumers comprises urban males between the ages of 20
and 40 with moderate-to-high levels of disposable income. Our business is particularly sensitive to their fashion preferences,
which cannot be predicted with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift
rapidly, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate
accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing
new products, designs, styles and categories, we could experience lower sales, excess inventories and lower profit margins. In
a distressed economic and retail environment, many of our competitors may engage in aggressive activities, such as markdowns or
other promotional sales to dispose of excess, slow-moving inventory, further increasing the need to react appropriately to changing
consumer preferences and fashion trends. Failure to do so could adversely affect the level of acceptance of our products, our
brand image and our relationship with our distributors, and therefore have a material adverse effect on our financial condition
or results of operations.
The
apparel industry is highly competitive, and if we fail to compete effectively, we could lose our market position.
The
menswear industry is highly competitive in China and worldwide. We compete with various domestic brands with similar business
models and target markets. We also compete with a growing number of international brands trying to expand their market share in
China to take advantage of rising consumer spending on casual menswear. Our primary international and domestic competitors include
Exceed, Xiniya, Cabbeen, GXG and NQ. Some of our competitors are significantly larger and have greater financial resources than
we do. In order to compete effectively, we must: (1) maintain the image of our brands and our reputation for innovation and high
quality; (2) be flexible and innovative in responding to rapidly changing market demands on the basis of brand image, style, performance
and quality; and (3) offer consumers a wide variety of high quality products at competitive prices.
The
purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing
programs and product features. Some of our competitors enjoy competitive advantages, including greater brand recognition and greater
financial resources for competitive activities, such as sales, marketing and strategic acquisitions. The number of our direct
competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into
our product lines. Our competitors may enter into business combinations or alliances that strengthen their competitive positions
or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly
and effectively than we can to new or changing opportunities, standards or consumer preferences. Our results of operations and
market position may be adversely impacted by our competitors and the competitive pressures in the menswear industries.
Failure
to effectively promote or develop our brand could materially and adversely affect our sales and profits.
We
sell all our products under the KBS brand, from which we derive most of our revenues. Brand image is an important factor that
affects a customer’s purchasing decision for menswear products. Our success therefore depends on, among other things, market
recognition and acceptance of the KBS brand and the culture, lifestyle, and images associated with the brand, some of which may
not be within our control. We have limited control over our distributors that we rely upon to sell our products, which may limit
our ability to ensure a consistent brand image. See “Risks Factors Relating to Our Business –We have limited control
over the ultimate retail sales by our distributors and our image and business may be adversely affected if our distributors fail
to adhere to, or fail to cause the third party retail outlet operators to adhere to, our retail policies and standards.”
We began designing, promoting, and selling KBS branded products in China in 2006. To effectively promote KBS brand, we need build
and maintain the brand image by focusing on a variety of promotional and marketing activities to promote brand awareness, as well
as to increase its presence in the markets in which we compete. There is no assurance that we will be able to effectively promote
or develop KBS brand, and if we fail to do so, the goodwill of KBS brand may be undermined and our business as well as our financial
results may be adversely affected. In addition, negative publicity or disputes regarding KBS brand, products, company, or management
could materially and adversely affect public perception of KBS brand. Any impact on our ability to continue to sell KBS brand
or any significant damage to KBS brand’s image could materially and adversely affect our sales and profits.
Our
business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may
be severely disrupted if we lose their services.
Our
future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely
on the expertise, experience, and business contacts, of Mr. Keyan Yan, our Chairman and Chief Executive Officer, Ms. Lixia Tu,
our Director and Chief Financial Officer and Mr. Themis Kalapotharakos, our director. If one or more of our senior executives
are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time
and resources searching, recruiting, and integrating the replacements into our operations, which would substantially divert management’s
attention from and severely disrupt the Company business. This may also adversely affect our ability to execute our business strategy.
Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers and
key employees.
Failure
to execute our business expansion plan could adversely affect our financial condition and results of operations.
A
large part of our initial growth resulted from an increase in the number of our retail sales outlets, including corporate and
franchised stores, and the increased sales volume and profitability provided by these sales outlets. The number of our sales outlets
increased from 8 in 2006 to 40 in year 2017. In the future, we intend to invest more resources to improve brand recognition, starting
from 2015 we had new channel of sales wholesaling to some online shops or multi brand shops, the profitability of these part sales
are lower than franchised stores or corporate stores. For the future’s new channel of sales, we cannot guarantee an increase
in new sales or improved profitability of it.
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 famous sportswear producers and some
overseas orders. The construction commenced in 2011 and is to take place in four phases: Phase 1 consists 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 property by the end of 2014. Phase 3 construction of the adjacent facility on the third parcel of land has been delayed because
the local government needs additional time to conclude negotiations with local residents over appropriate resettlement terms.
Because the time for the government to resolve this matter is uncertain, we wrote off the land use right of the third parcel of
land from account balance, according to the international framework reporting standard. Phase 4 includes building production facilities
with annual production capacity of 10 million pieces, an office building, staff quarters and living facilities on the third parcel
of land. As a result, our commitments to this facility may reduce our liquidity for an indefinite period and until it is completed.
We could also indefinitely lose opportunities to expand our sales due to any further delay of our construction.
The
decision to increase our production capacity was based in part on our projections of market demand for our products and OEM orders
from other brand name owners. If actual customer demand does not meet our projections, we will likely suffer overcapacity problems
and may have to leave capacity idle or need to contract out our facilities at an unfavorable price, which may reduce our overall
profitability and adversely affect our financial condition and results of operations. Our future success depends on our ability
to expand the Company’s business to address growth in demand for our current and future products.
Our
ability to expand the Company’s business is subject to significant risks and uncertainties, including:
|
●
|
the
unavailability of additional funding to invest more in brand recognition such as advertisement, expand our production capacity,
purchase additional fixed assets and purchase raw materials on favorable terms or at all;
|
|
●
|
our
inability to manage an online shop, hire qualified personnel and establish distribution methods;
|
|
●
|
conditions
in the commercial real estate market existing at the time we seek to expand;
|
|
●
|
delays
and cost overruns as a result of a number of factors, many of which may be beyond our control, such as problems with equipment
vendors and
|
|
●
|
contract
manufacturers;
|
|
●
|
failure
to maintain high quality control standards;
|
|
●
|
shortage
of raw materials;
|
|
●
|
our
inability to obtain, or delays in obtaining, required approvals by relevant government authorities;
|
|
●
|
diversion
of significant management attention and other resources; and
|
|
●
|
failure
to execute our expansion plan effectively.
|
The
expansion of our business may place significant strain on our personnel, management, financial systems and operational infrastructure
and may impede our ability to meet any increased demand for our products. To accommodate the Company’s growth, we will need
to implement a variety of new and upgraded operational and financial systems, procedures, and controls, including improvements
to our accounting and other internal management systems, by dedicating additional resources to our reporting and accounting function
and improvements to our record keeping and contract tracking system. We will also need to recruit more personnel and train and
manage our growing employee base. Furthermore, we will need to maintain and expand relationships with our current and future customers,
suppliers, distributors and other third parties, and there is no guarantee that we will succeed.
If
we encounter any of the risks described above or if we are otherwise unable to establish or successfully operate online shops
or additional production capacity, we may be unable to grow our business and revenues, reduce our operating costs, maintain our
competitiveness or improve our profitability and, consequently, our business, financial condition, results of operations and prospects
will be adversely affected.
If
we are unable to fund capital expenditures or obtain additional sources of liquidity when we need it, our business may be adversely
affected. In addition, if we obtain equity financing, the issuance of our equity securities could cause dilution for our stockholders.
To the extent we obtain the financing through the issuance of debt securities, our debt service obligations could increase and
we may become subject to restrictive operating and financial covenants.
We anticipate that we will make substantial
capital investments to expand our business within the next 3 years. For the fiscal years ended December 31, 2017 and 2016, we paid
approximately $946,882 and $40,037, respectively, for capital expenditures, which include expenses related to our second and third
phase construction of production facility, purchasing and upgrading production equipment, install fire-fighting equipment, upgrading
of our point-of-sale and enterprise resource.
There
was approximately $3.8 million of cash released from the trust account to us immediately following the closing of our share exchange
transaction with KBS International on August 1, 2014. However, there is no assurance that we will have sufficient cash to fund
our anticipated capital expenditures. If we need but are unable to obtain adequate financing or financing on terms favorable to
us, we may be unable to successfully maintain our operations and accomplish our growth strategy. In addition, we may be unable
to generate sufficient cash internally or obtain alternative sources of capital to fund our proposed capital expenditures, take
advantage of business opportunities or respond to competitive pressures. As a result, we may seek to sell additional equity securities,
debt securities, or borrow from lending institutions. Any issuance of equity securities could cause dilution for our stockholders.
Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating
and finance covenants. Our ability to obtain external financing in the future is also subject to a number of uncertainties, including:
|
●
|
Our
future financial condition, results of operations and cash flows;
|
|
●
|
general
market conditions for financing activities by companies in our industry;
|
|
●
|
economic,
political and other conditions in China and elsewhere; and
|
|
●
|
uncertain
economic prospect and tightened credit markets resulting from the recent global economic slowdown and financial market crisis.
|
If
we are unable to obtain funding in a timely manner or on commercially acceptable terms, or at all, our growth prospects and future
profitability may be materially adversely affected. Adverse changes in the capital markets could make it difficult to obtain capital
or obtain it at attractive rates.
Our
past results may not be indicative of our future performance and evaluating our business and prospects may be difficult.
Our
business has gone through various stages of the business life cycle in recent years as demonstrated by our growth in net sales,
which reached $99.6 million for the year ended December 31, 2013, while in 2014 our net sales decreased by 40% to $58.8 million
and in year 2015 net sales went up slightly by 4.3% to $61.3 million, our net sales decreased by 32.8% to $41.2 million in 2016
and net sales further decreased 42% to $23.8 million in 2017. The decrease in sales in 2015, 2016 and 2017 as compared with 2013
was mainly due to the slowdown of the Chinese economic growth and a challenging retail environment. As a result, we cannot assure
that we will be able to achieve similar growth in future periods as recent years before 2014, and our historical operating results
may not provide a meaningful basis for evaluating our business, financial performance and prospects. Moreover, our ability to
achieve satisfactory production results at higher volumes is unproven. Therefore, you should not rely on our past results or our
historical rate of growth as an indication of our future performance.
We
experience fluctuations in operating results.
Our
annual and quarterly operating results have fluctuated, and are expected to continue to fluctuate. Among the factors that may
cause our operating results to fluctuate are customers’ response to merchandise offerings, the timing of the rollout of
new sales outlets, seasonal variations in sales, the timing of merchandise receipts, the level of merchandise returns, changes
in merchandise mix and presentation, our cost of merchandise, unanticipated operating costs, and other factors beyond our control,
such as general economic conditions and actions of competitors.
We
have historically experienced seasonal fluctuations in our sales. A substantial portion of our revenues are typically earned during
the second and fourth quarters and we generally experience lowest revenues during the first and third quarters. If sales during
the second and fourth quarters are lower than expected, our operating results would be adversely affected, and it would have a
disproportionately large impact on our annual operating results. The sales of our products are also affected by local spending
behavior, which are typically affected by seasonal shopping patterns during major Chinese holidays. Extreme changes in weather
patterns could also affect customers’ purchasing behavior, which may lead to fluctuations in our net sales. For example,
extended periods of unusually warm temperatures during the winter season or cool weather during the summer season could render
a portion of our inventory incompatible with such unusual weather conditions. These extreme or unusual weather conditions could
have a material adverse effect on our results of operations.
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 2017, we typically expect and receive payment within 30-180
days of product delivery. In addition, we had about 66.8% of accounts receivables are within a 180 days credit term. Starting
in September 2015, we extended credit to some of our customers to 150-180 days without requiring collaterals. We perform ongoing
credit evaluations of the financial condition of our customers and we generally require no collateral from our distributors and
authorized retailers to secure their payment obligations. However, our sales going forward may rely more heavily on credit, and
if we encounter future problems collecting amounts due from our clients or if we experience delays in the collection of amounts
due from our clients, our liquidity could be negatively affected.
The
Chinese economy experienced a softening of economic growth, and the appeal industry is also facing a downturn. The impact of the
current and possible future economic downturn on our distributors cannot be predicted and may be severe, causing a significant
impact on their business. As a result, our financial condition and result of operations could be negatively affected. In addition,
if they cannot continue their orders of our products due to the failure of paying us for its previous purchases, our brand image
and reputation may be materially negatively affected as well.
We
rely on distributors for a substantial portion of our sales and the loss of any of our large distributors would harm our business.
A
substantial portion of our sales are made to distributors that resell our products. For the years ended December 31, 2016 and
2017, distributors accounted for approximately 67% and 66.5% of our total sales, respectively, and our top five distributors accounted
for approximately 24.5% and 23.8% of our total sales, respectively. The marketing efforts of our distributors are critical for
our success. If we fail to attract additional distributors, and our existing distributors do not promote our products at the same
or at a greater level than the products of our competitors, our business, financial condition and results of operations could
be adversely affected.
Furthermore,
there is no assurance that any of our distributors will satisfy the sales targets set forth in their distribution agreements and
we or they may not wish to renew the distribution agreements in future years. Moreover, our distributors are not obliged to continue
to place orders with the Company at the same level as before or at all and there is no assurance that we would be able to obtain
orders from other distributors to replace any such lost sales on terms satisfactory to us or all. If any of our largest distributors
substantially reduces its purchases from us, or otherwise fails to renew its distribution agreement with us, we may suffer a significant
loss of sales and our business, results of operations, and financial condition may be materially and adversely affected.
We
have limited control over the ultimate retail sales by our distributors and our image and business may be adversely affected if
our distributors fail to adhere to, or fail to cause the third party retail outlet operators to adhere to, our retail policies
and standards.
We
rely on the contractual obligations set forth in the distribution agreements that we enter into with our distributors, as well
as policies and standards we formulate from time to time, to impose our retail policies on these distributors in respect of the
franchisee retail outlets. In addition, as we do not enter into any agreements with the third party retail outlet operators, we
rely on our distributors to ensure that these franchisee retail outlets operate in accordance with our retail policies. As such,
our control over the ultimate retail sales by our distributors and the franchisee retail outlet operators is limited. There is
no assurance that our distributors or the third party franchisee retail outlet operators will comply with, or that the distributors
will enforce, our retail policies. As a result, we may not be able to effectively manage our sales network or maintain a uniform
brand image, and cannot assure you that franchisee retail outlets would continue to offer quality services to consumers.
In
addition, if any of the distributors or third party franchisee retail outlet operators experiences difficulties in selling our
products in the retail market, they may attempt to disregard our pricing policies and liquidate their excessive inventory buildup
through aggressive discounts, which may damage the image and the value of our brand. There is no assurance that we will be able
to, in a timely manner, impose penalties on or replace any distributors who consistently fail to comply with, or fail to cause
the third party franchisee retail outlet operators appointed by them to comply with, our retail policies in their operation of
franchisee retail outlets. In such event, our business, results of operations and financial condition may be materially and adversely
affected.
We
may not be able to accurately track the inventory levels at our distributors, retailers or department store concessions.
Our
ability to track the sales by our distributors to third-party retailers and the ultimate retail sales by the retailers, and consequently
their respective inventory levels, is limited. We implement a policy to require our distributors to provide us with their sales
reports on a weekly basis and we carry out random on-site inspections of our distributors to track their inventories. The purpose
of tracking the inventory level is mainly to gather information regarding the market acceptance of our products so that we can
reflect consumers’ preferences in the design and development of our products for the next season. The tracking of inventory
level also helps us to understand the market recognition of our products in a particular region, and thus allows us to adjust
our marketing strategy if necessary. The implementation of the policy, however, requires the distributors to accurately report
the relevant data to us in a timely manner, which is largely dependent on the cooperation of the Company’s distributors.
We may not always obtain the required data in time and the data provided to us by our distributors may be inaccurate or incomplete.
We
plan to implement an enterprise resource planning system, or ERP system in next stage, which will allow us to track sales at the
authorized retail outlets on a timely basis. Such system is expected to facilitate the processing of basic replenishment orders
from our distributors, the movement of products through our authorized retail network, and the collection of information for planning
and forecasting purposes. If we are unable to roll out the ERP system as planned, we would not be able to accurately track our
inventory levels on a timely basis. Inaccurate, mistaken, incomplete or delayed data regarding inventory levels may mislead the
Company to make wrong business judgments for its production, marketing efforts and sales strategies. If that happens, our operations
and financial results may be materially adversely affected. In addition, if we cannot manage inventory levels properly, future
orders of our products may be reduced, which would materially adversely affect our future business, financial condition, results
of operation and prospects.
Our
operations could be materially adversely affected if we fail to effectively manage our relationships with, or lose the services
of, our OEM contract manufacturers.
The
production of our brand name products are 100% outsourced to PRC-based third party OEM contract manufacturers. In the years ended
December 31, 2017 and 2016 we had 5 and 6 contract manufacturers, respectively. Purchases from our top five OEM contract manufacturers
accounted for approximately 88.6% and 98% of our total purchases for the years ended December 31, 2017 and 2016, respectively.
As we do not enter into long-term contracts with our OEM contract manufacturers, they may decide not to accept our future OEM
orders on the same or similar terms, or at all. If an OEM contract manufacturer decides to substantially reduce its volume of
supply to us or to terminate its business relationship with us, we may not be able to find a proper replacement in a timely manner
and may be forced to default on the agreements with our distributors that sell our products. This may negatively impact our revenues
and adversely affect our reputation and relationships with our distributors that sell our products, causing a material adverse
effect on our financial condition, results of operations and prospects.
Further,
if any of our OEM contract manufacturers fails to provide the required number of products meeting our quality standards, we may
have to delay delivery of products to our distributors, become unable to supply products at all, or even recall products previously
dispatched. This could cause the Company to lose revenues or market share and damage our reputation, any of which could have a
material adverse effect on our business, financial condition, results of operations and prospects. In addition, some OEM contract
manufacturers may not fully comply with certain laws, such as labor and environmental laws. If any of our OEM contract manufacturers
is found to have violated laws and regulations in the PRC, media reports on such violations may negatively affect our reputation
and image, resulting in material adverse impact on our business, financial condition and results of operations.
While
we provide the designs of our products to the OEM contract manufacturers, as well as guidance for manufacturing the products ordered
by us, we do not have direct control over the OEM contract manufacturers. If any of them is involved in unauthorized production
and sale of goods using the KBS brand, our reputation, financial condition and results of operations may be materially adversely
affected.
As
the Company grows, our reliance on OEM contract manufacturers may also grow as our added production capacity may not be sufficient
to keep pace with the increased production requirements driven by our growth. We may not be able to find sufficient additional
OEM contract manufacturers to produce our products on the same or similar terms as our existing OEM contract manufacturers, and
we may not be able to achieve our growth and development goals.
Any
interruption in our operations could impair our financial performance and negatively affect our brand.
Our
operations are complicated and integrated, involving the coordination of third party OEM contract manufacturers and external distribution
processes. While these operations are modified on a regular basis in an effort to improve outsourcing and distribution efficiency
and flexibility, we may experience difficulties in coordinating the various aspects of our operations processes, thereby causing
downtime and delays. In addition, we may encounter interruption in our operations processes due to a catastrophic loss or events
beyond our control, such as fires, explosions, labor disturbances or violent weather conditions. Any interruptions in our operations
or capabilities at our facilities could result in our inability to procure our products, which would reduce our net sales and
earnings for the affected period. If there is a delays in delivery times to our customers, our business and reputation could be
severely affected. Any significant delays in deliveries to our customers could lead to increased returns or cancellations and
cause the Company to lose future sales. The Company currently does not have business interruption insurance to offset these potential
losses, delays and risks so a material interruption of our business operations could severely damage our business.
We
rely heavily on our management information system for inventory management, distribution and other functions. If our system fail
to perform these functions adequately or if we experience an interruption in our operation, our business and results of operations
could be materially adversely affected.
The
efficient operation of our business is dependent on our management information systems. We rely heavily on our management information
systems to manage our order entry, order fulfillment, pricing, point-of-sale and inventory replenishment processes.
We
cannot assure you that our management information system will operate properly or without interruption. Any malfunction to any
part or all of our management information system for a prolonged period may cause delays in operations or impairment of our overall
business efficiency. We also cannot ensure that the level of security currently maintained will be sufficient to protect the system
from third party intrusions, viruses, lost or stolen data, or similar situations. Additionally, as part of our growth and development
strategy over the next few years, we plan to upgrade and improve our management information system. We cannot assure you that
there will be no interruptions to our management information system during the upgrades or that the new management information
system will be able to integrate fully with the existing information system.
The
failure of our management information system to perform as we anticipate could disrupt our business and could result in decreased
revenue, increased overhead costs and excess or out-of-stock inventory levels, causing our business and results of operations
to suffer materially.
Failure
to protect the integrity, security and use of our customers’ information and media could expose us to litigation and materially
damage our standing with our customers.
Increasing
costs associated with information security — such as increased investment in technology, the costs of compliance with consumer
protection laws and costs resulting from consumer fraud — could cause our business and results of operations to suffer materially.
While we have taken significant steps to protect customer and confidential information, including entering into confidentiality
agreements with relevant employees and incorporate confidentiality clauses in our policies, there can be no assurance that advances
in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our
customer transaction processing capabilities and personal data. If any such compromise of our security were to occur, it could
have a material adverse effect on our reputation, operating results and financial condition. Any such compromise may materially
increase the costs we incur to protect against such information security breaches and could subject us to additional legal risk.
Procurement specialists and managers are required to sign a confidentiality agreement.
We
have limited insurance coverage in China and may not be able to recover insurance proceeds if we experience uninsured losses.
Operation
of our facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor
disturbances and other business interruptions. We do not carry any business interruption insurance, product recall or third-party
liability insurance for our production facilities or with respect to our products to cover claims pertaining to personal injury
or property or environmental damage arising from defects in our products, product recalls, accidents on our property or damage
relating to our operations. While business interruption insurance and other types of insurance are available to a limited extent
in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring
such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance
coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial
and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out
of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Our
inability to protect our trademarks and other intellectual property rights may prevent us from successfully marketing our products
and competing effectively.
We
believe our trademarks and other intellectual property rights are important to our success and competitive position and recognize
the importance of registering the trademarks related to our KBS brand for protection against infringement. We currently hold two
registered trademarks. Failure to protect our intellectual property could harm our brand and our reputation, and adversely affect
our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks,
patents, copyrights and trade secrets, could result in the expenditure of significant financial and managerial resources. We produce,
market and sell our products under registered trademarks. We regard our intellectual property, particularly our trademarks and
trade secrets to be of considerable value and importance to our business and our success. We rely on a combination of trademark,
patent, and trade secrecy laws, and contractual provisions to protect our intellectual property rights. There can be no assurance
that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate
our trademarks, trade secrets or similar proprietary rights. In addition, there can be no assurance that other parties will not
assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any such
claim or litigation could be costly and we may lack the resources required to defend against such claims. In addition, any event
that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse effect
on our ability to market or sell our brands, and profitably exploit our products.
Environmental
regulations impose substantial costs and limitations on our operations.
We
use chemicals and produces significant emissions in our manufacturing operations. As such, we are subject to various national
and local environmental laws and regulations in China concerning issues such as air emissions, wastewater discharges, and solid
waste management and disposal. These laws and regulations can restrict or limit our operations and expose us to liability and
penalties for non-compliance. While we believe that our facilities are in material compliance with all applicable environmental
laws and regulations, the risks of substantial unanticipated costs and liabilities related to compliance with these laws and regulations
are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new
environmental compliance or remediation liabilities and costs. While we believe that we can comply with existing environmental
legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance
may prove to be more limiting and costly than anticipated.
We
may be unable to establish and maintain an effective system of internal control over financial reporting, and, as a result, we
may be unable to accurately report our financial results or prevent fraud.
We
are subject to reporting obligations under the U.S. securities law. The SEC as required by Section 404 of the Sarbanes-Oxley Act
of 2002 (“SOX 404”), adopted rules requiring every public company to include a management report on such company’s
internal control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness
of the company’s internal control over financial reporting. In addition, the independent registered public accounting firm
auditing the financial statements of a company that is not a non-accelerated filer under Rule 12b-2 of the Exchange Act must also
attest to the operating effectiveness of the company’s internal controls.
Failure
to achieve and maintain an effective internal control environment could result in our inability to accurately report our financial
results, prevent or detect fraud or provide timely and reliable financial and other information pursuant to the reporting obligations
we have as a public company, which could have a material adverse effect on our business, financial condition and results of operations.
Further, it could cause our investors to lose confidence in the information we report, which could adversely affect our stock
price.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Our
business operation may be affected if we are forced to relocate our manufacturing facilities and stores.
We
leased the premises for our office located in Shishi and one corporate store. However, none of our lease agreements have been
registered with the relevant governmental agencies. According to our PRC legal counsel, Grandall Law Firm (Beijing), without registration,
our rights to use and occupy the premises may not be secured if any third parties such as other tenants who have registered their
lease agreements challenge us under PRC law. Moreover, while we have taken various measures to verify the ownership of property
such as checking utility bills and search government records, most of our landlords have declined to confirm whether they possess
the property ownership certificates and land use rights certificates for our properties. As a result, we have been unable to verify
whether third parties may assert their ownership rights under PRC law against most of our landlords or challenge most of our leases
in the future. If our rights to use the premises are challenged, we may be forced to relocate to other premises. We may not be
able to relocate to a suitable premise promptly or lease alternative premises on terms at least as favorable as our existing ones.
In addition, relocation costs and interruption of production may have a material adverse effect on our business operation and
financial performance.
Changes
in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.
We
conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition and prospects
are significantly dependent on economic and political developments in China. China’s economy differs from the economies
of developed countries in many aspects, including the level of development, growth rate and degree of government control over
foreign exchange and allocation of resources. While China’s economy has experienced significant growth in the past 30 years,
the growth has been uneven across different regions and periods and among various economic sectors in China. We cannot assure
you that China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that
if there is a slowdown, such slowdown will not have a negative effect on its business and results of operations.
The
PRC government exercises significant control over China’s economic growth through the allocation of resources, control over
payment of foreign currency-denominated obligations, implementation of monetary policy, and preferential treatment of particular
industries or companies. Certain measures adopted by the PRC government may restrict loans to certain industries, such as changes
in the statutory deposit reserve ratio and lending guidelines for commercial banks by the People’s Bank of China, or PBOC.
These current and future government actions could materially affect our liquidity, access to capital, and ability to operate our
business.
The
global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into
recession. Since 2012, growth of the Chinese economy has slowed. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy but may also
have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed
to boost the Chinese economy, may contribute to higher inflation, which could adversely affect our results of operations and financial
condition. See “Risks Related to Doing Business in China -Future inflation in China may inhibit our ability to conduct business
in China.”
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested
enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations
of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties,
which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention. In addition, most of our executive officers and directors
are residents of China and not of the United States, and substantially all the assets of these persons are located outside the
United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce
a judgment obtained in the United States against our Chinese operations and subsidiaries.
You
may have difficulty enforcing judgments against us.
Most
of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition,
most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion
of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on
the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are
not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition,
there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to
PRC law, Grandall Law Firm (Beijing), has advised us that the recognition and enforcement of foreign judgments are provided for
under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between
jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement
of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not
enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles
of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment
rendered by a court in the United States.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other
matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations
of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest
we then hold in Chinese properties or joint ventures
Restrictions
on currency exchange may limit our ability to receive and use our sales effectively.
The
majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our
ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested
enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB in the future.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our securities will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative
to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change
in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments
we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. However, the PBOC regularly intervenes in the foreign exchange
market to limit fluctuations in RMB exchange rates and achieve policy goals. Following the removal of the U.S. dollar peg, the
RMB appreciated more than 20% against the U.S. dollar over the following three years. From July 2008 to June 2010, the RMB traded
within a narrow range against the U.S. dollar. Since June 2010 the RMB has further appreciated against the U.S. dollar, from approximately
RMB6.83 per U.S. dollar as of June 1, 2010 to approximately RMB 6.53 per U.S. dollar as of December 31, 2017. It is difficult
to predict how RMB exchange rates may change going forward.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise
fund and conduct our business.
Substantially
all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to
make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our
PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards
and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual
after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches
50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not
transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to
transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and conduct our business.
Failure
to comply with PRC regulations relating to the investment in offshore special purpose companies by PRC residents may subject our
PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC
subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
On
July 14, 2014, the SAFE issued the Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing and
Roundtrip Investment by Domestic Residents Through Special Purpose Vehicles, or Circular 37. Circular 37 repeals and replaces
the Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore
Special Purpose Vehicles, or Circular 75. Under Circular 37, PRC residents are required to register with the SAFE or its local
branches prior to establishing, or acquiring control of, an offshore company for the purpose of investment or financing that offshore
company with equity interests in, or assets of, a PRC enterprise or with offshore equity interest or assets legally held by such
PRC resident. In addition, PRC residents are required to amend their registrations with the SAFE and its local branches to reflect
any material changes with respect to such PRC resident’s investment in such offshore company, including changes to basic
information of such PRC resident, increase or decrease in capital, share transfer or share swap, merger or division. In the event
that a PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries
of that offshore special purpose vehicle may be prohibited from distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited
from contributing additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various foreign exchange
registration requirements described above could result in liability under the PRC laws for evasion of applicable foreign exchange
restrictions.
We
do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply
with SAFE regulations. The failure of our beneficial owners who are PRC residents to comply with these SAFE registrations may
subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, since Circular 37 was recently
promulgated and it is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions,
will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations
will affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit
our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute
dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
Our
business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition
of Hongri PRC constitutes a Round-trip Investment without MOFCOM approval.
On
August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors (the “Foreign M&A Rule”), which became effective on September 8, 2006 and was amended on June 22, 2009.
According
to the Foreign M&A Rule, a “Round-trip Investment” is defined as having taken place when a PRC business that is
owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same
PRC individual(s). Under the Foreign M&A Rule, any Round-trip Investment must be approved by MOFCOM, and any indirect arrangement
or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.
Our
Hong Kong subsidiary Vast Billion Investment Limited (“Vast Billion”) acquired Hongri PRC in 2011 from Bizhen Chen
and Keyan Yan. At the time of the acquisition, Hongri International, the parent company of Vast Billion, was owned and controlled
by Mr. Sun Keung Chan and Ms. So Wa Cheung, both of whom are citizens of the Hong Kong Special Administrative Region. Mr. Yan
entered into the Amended and Restated Option Agreement with Mr. Chan and Ms. Cheung, dated March 9, 2011, pursuant to which Mr.
Yan was granted an option to acquire all of the shares of common stock that Mr. Chan and Ms. Cheung will acquire in Target in
connection with the reverse acquisition, for an aggregate exercise price of RMB 131,409 (approximately $20,000). Mr. Yan may exercise
this option during the period commencing on the date which is six (6) months after the date on which the first registration statement
is filed by the Company under the Securities Act, and ending on the fifth anniversary thereof.
Because
no Chinese nationals have direct stock ownership of either Hongri International or Vast Billion, we believe that the above transactions
do not constitute a “Round-trip Investment” and therefore it has decided not to seek the approval from MOFCOM or China
Securities Regulatory Commission (“CSRC”), pursuant to the Foreign M&A Rule. However, the PRC regulatory authorities
may take the view that these transactions and the reverse acquisition of Hongri PRC are part of an overall series of arrangements
which constitute a Round-trip Investment, because at the end of the transactions, the stockholders of Hongri PRC became majority
owners and effective controlling parties of a foreign entity that acquired ownership of Hongri PRC.
If
we are found to be in violation of the Foreign M&A Rule, the PRC regulatory authorities would have broad discretion in dealing
with such violation, including levying fines, confiscating our income, revoking our PRC subsidiaries’ business or operating
licenses, requiring us to restructure or unwind the relevant ownership structure or operations. Any of these actions could cause
significant disruption to our business operations and may materially and adversely affect our business, financial condition and
results of operations. We believe that if these regulatory actions occur, we may be able to find a way to re-establish control
of Hongri PRC’s business operations through a series of contractual arrangements rather than an outright purchase of the
equity of Hongri PRC. But we cannot assure you that such contractual arrangements will be protected by PRC law or that we can
receive as complete or effective economic benefit and overall control of Hongri PRC’s business than if we had direct ownership
of Hongri PRC.
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On
March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November
28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.
The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies,
or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled
offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior
management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops,
board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income
and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear
as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We
may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source
income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing
rules dividends paid to us from our PRC 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 stockholders from transferring
our shares.
Heightened
scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations
and its acquisition strategy.
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
SAT Circular 698, effective on January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect
Asset Transfer by Non-PRC Resident Enterprises , or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a
non-resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly
or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate
income tax, the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate
income tax. SAT Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer
has a reasonable commercial purpose. However, as SAT Announcement 7 is newly issued, there is uncertainty as to the application
of SAT Announcement 7 and the interpretation of the term “reasonable commercial purpose.”
Under
SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders
has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate
income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax
due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from
the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
Although
SAT Announcement 7 is generally effective as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction
that took place prior to its effectiveness has not yet been finally settled. As a result, SAT Announcement 7 could be determined
by PRC tax authorities to be applicable to the historical reorganization, and it is possible that these transactions could be
determined by PRC tax authorities to lack a reasonable commercial purpose. As a result, the transfer of shares by certain shareholders
to other parties could be subject to corporate income tax of up to 10% on capital gains generated from such transfers, and PRC
tax authorities could impose tax obligations on the transferring shareholders or subject us to penalty if the transferring shareholders
do not pay such obligations and withhold such tax.
SAT
Announcement 7 and its interpretation by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers
of shares in a publicly-traded entity that is listed overseas is available if the purchase of the shares and the sale of the shares
both take place in open-market transactions. However, if a shareholder of an entity that is listed overseas purchases shares in
the open market and sells them in a private transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject
to SAT Circular 698 and SAT Announcement 7, which could subject such shareholder to additional reporting obligations or tax burdens.
Accordingly, if a holder of the Company’s common stock purchases such common stock in the open market and sells them in
a private transaction, or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities
may take actions, including requesting to provide assistance for their investigation or impose a penalty on it, which could have
a negative impact on the company’s business operations.
Our
failure to fully comply with PRC laws relating to social insurance and housing accumulation fund may expose it to potential administrative
penalties.
The
PRC laws and regulations require all employers in China to fully contribute their own portion to the social insurance and housing
accumulation funds for their employees within a certain period of time. Failure to do so may expose the employers to make rectification
for the unpaid contributions by the relevant labor authority.
As
of the date of this report, Hongri PRC has not paid housing accumulation funds for its employees. In addition, Hongri PRC failed
to make contributions to the social insurance in full amount for its employees before 2014. PRC governmental authorities may impose
penalties on Hongri PRC for failure to comply. In addition, in the event that any current or former employee files a complaint
with the PRC government, Hongri PRC may be subject to making up the contributions to the social insurance and housing accumulation
funds as well as paying administrative fines. The total cost of these contributions and any related fines or penalties could be
significant and could have a material adverse effect on our working capital.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act (“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, have 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 subsidiaries, 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 subsidiaries 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 subsidiaries 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.
Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed
so-called reverse merger transactions, 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
on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to stockholder lawsuits, SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our subsidiaries, our business and our stock price after the Acquisition.
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 and/or defend our subsidiaries. This situation may be costly and
time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our
subsidiaries and business operations may be severely and adversely affected and your investment in our stock could be rendered
worthless.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements will not be subject to the scrutiny
of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental
agency that is located in China where all of our operations and business are located have conducted any due diligence on our operations
or reviewed or cleared any of our disclosure.
Unlike
public reporting companies whose operations are located primarily in the United States, however, all of our operations will be
located in China. Since all of our operations and business takes place in China, it may be more difficult for the Staff of the
SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are
not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore,
our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory
authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator
that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our
other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with
the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise
been scrutinized by any local regulator.
Proceedings
instituted by the SEC against five PRC-based accounting firms could result in financial statements being determined to be not
in compliance with the requirements of the Securities Exchange Act of 1934.
In
December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based
accounting firms alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder
by failing to provide to the SEC the firms’ work papers related to their audits of certain PRC-based companies that are
publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any person, temporarily or
permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have
willfully violated, or willfully aided and abetted the violation of, any such laws or rules and regulations. On January 22, 2014,
an initial administrative law decision was issued, sanctioning four of these accounting firms and suspending them from practicing
before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by
the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of the initial decision.
In February 2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with
the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed
procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If a firm does not follow the
procedures, the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against
the non-compliant firm or it could restart the administrative proceeding against all four firms.
If
our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the
SEC, and we are unable to find in a timely manner another registered public accounting firm which can audit and issue a report
on our financial statements, our financial statements could be determined to not be in compliance with the requirements for financial
statements of public companies with a class of securities registered under the Securities Exchange Act of 1934, as amended, or
the Exchange Act. Such a determination could ultimately lead to the SEC’s revocation of the registration of our common stock
under the Exchange Act, which would cause the immediate delisting of our common stock from the NASDAQ Capital Market, and the
effective termination of the trading market for our common stock in the United States, which would likely have a significant adverse
effect on the value of our common stock.
RISKS
RELATED TO THIS OFFERING AND THE MARKET FOR OUR SECURITIES GENERALLY
If
we fail to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a
limited public market for our shares and make obtaining future debt or equity financing more difficult for us.
Our
common stock is traded and listed on the Nasdaq Capital Market under the symbol “KBSF.” The common stock may be delisted
if we fail to maintain certain Nasdaq listing requirements. For instance, companies listed on NASDAQ are subject to delisting
for, among other things, failure to maintain a minimum closing bid price per share of $1.00 for 30 consecutive business days.
On March 3, 2016, we received a letter from NASDAQ indicating that for the 30 consecutive business days between January 20, 2016
and March 2, 2016, the bid price of our common stock closed below the minimum $1.00 per share requirement pursuant to NASDAQ Listing
Rule 5550(a)(2) for continued inclusion on The NASDAQ Capital Market. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we
had an initial grace period of 180 calendar days, or until August 30, 2016, to regain compliance with the minimum bid price requirement.
After the Company effectuated a one-for-fifteen reverse stock split of the outstanding common stock, the Company received a letter
from Nasdaq on February 27, 2017 stating that because the Company maintained the closing bid price of its common stock at $1.00
per share or greater from February 9 to February 24, 2017, they determined that the Company has regained compliance with the minimum
closing bid price requirement.
We
cannot ensure you that we will continue to comply with the requirements for continued listing on The NASDAQ Capital Market in
the future. If our common stock is no longer listed on The NASDAQ Capital Market, our shares would likely trade on the over-the-counter
market. If our shares were to trade on the over-the-counter market, selling our shares could be more difficult because smaller
quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of
us may be reduced. In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed upon
them, which may discourage broker-dealers from effecting transactions in our shares, further limiting the liquidity of our shares.
These factors could result in lower prices and larger spreads in the bid and ask prices for our shares. Such delisting from The
NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability to raise additional
necessary capital through equity or debt financing, and could significantly increase the ownership dilution to shareholders caused
by our issuing equity in financing or other transactions.
If
we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in
the over-the-counter market.
Delisting
from NASDAQ may cause our shares of common stock to become the SEC’s “penny stock” rules. The SEC generally
defines a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to specific exemptions. One such exemption is to be listed on NASDAQ. The market price of our common
stock is currently higher than $1.00 per share. However, because the daily trading volume in our common stock is very low, significant
price movement can be caused by the trading in a relatively small number of shares. Therefore, were we to be delisted from NASDAQ,
our common stock may become subject to the SEC’s “penny stock” rules. These rules require, among other things,
that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii)
disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction
and (iv) monthly account statements showing the market values of our securities held in the customer’s accounts. A broker
would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This
information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions
in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for shareholders
to purchase or sell our shares. Because the broker, not us, prepares this information, we would not be able to assure that such
information is accurate, complete or current.
Trading
in our shares over the last three months has been very limited, so our stock price is highly volatile, leading to the possibility
that you may not be able to sell as much stock as you want at prevailing prices.
Because
approximately 70% of our then issued and outstanding shares of common stock was tendered in the tender offering closed on July
29, 2014, we currently have a limited amount of shares eligible for public trading. The average daily trading volume in our common
stock over the last three months is very limited. If limited trading in our common stock continues, it may be difficult for investors
to sell their shares in the public market at any given time at prevailing prices. Moreover, the market price for shares of our
common stock may be made more volatile because of the relatively low volume of trading in our common stock. When trading volume
is low, significant price movement of our common stock can be caused by the trading in a relatively small number of shares. Volatility
in our common stock could cause stockholders to incur substantial losses.
Numerous
factors, many of which are beyond our control, may cause the market price of our Common Stock to fluctuate significantly.
There
are numerous additional factors, many of which are beyond our control, may cause the market price of our Common Stock to fluctuate
significantly. These factors include:
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earnings releases, actual or anticipated changes in our earnings, fluctuations in our
operating results or our failure to meet the expectations of financial market analysts
and investors;
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in financial estimates by us or by any securities analysts who might cover our shares;
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about our business in the press or the investment community;
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developments relating to our relationships with our customers or suppliers;
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market price and volume fluctuations of other publicly traded companies and, in particular,
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economic conditions and trends;
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major
catastrophic events;
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announcements
by us or our competitors of new products, significant acquisitions, strategic partnerships
or divestitures;
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in accounting standards, policies, guidance, interpretation or principles;
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of external funding sources;
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of our shares, including sales by our directors, officers or significant shareholders;
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or departures of key personnel.
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Securities
class action litigation is often instituted against companies following periods of volatility in their share price. This type
of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities
markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance
of particular companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions
experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price
of our shares and other interests in our company at a time when you want to sell your interest in us.
We
do not intend to pay dividends for the foreseeable future.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and do not
anticipate paying any cash dividends on our shares. Accordingly, investors must be prepared to rely on sales of their shares after
price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our
shares. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors, and will depend
on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable laws, and other
factors our board deems relevant.
Certain
of our shareholders hold a significant percentage of our outstanding voting securities.
Mr.
Keyan Yan, our Chairman and Chief Executive Officer, is the beneficial owner of approximately 48.05% of our outstanding voting
securities. As a result, he possesses significant influence and can elect a majority of our board of directors and authorize or
prevent proposed significant corporate transactions. His ownership and control may also have the effect of delaying or preventing
a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential
acquirer from making a tender offer.
We
have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1)
of the JOBS Act which allows us to delay the adoption of new or revised accounting standards that have different effective dates
for public and private companies until those standards apply to private companies.
We
are an emerging growth company as defined in the JOBS Act, and will continue to be an emerging growth company until: (i) the last
day of our fiscal year following the fifth anniversary of our initial public offering in 2012 (“IPO”), (ii) the date
on which we become a large accelerated filer, or (iii) the date on which we have issued an aggregate of $1 billion in non-convertible
debt during the preceding 3 years. As an emerging growth company, we have elected to use the extended transition period for complying
with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption
of new or revised accounting standards that have different effective dates for public and private companies until those standards
apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply
with public company effective dates.
Our
outstanding warrants may adversely affect the market price of our shares of common stock. [to be updated]
There
are currently 393,836 warrants outstanding. Each warrant entitles the holder to purchase one share of common stock at a price
of $172.5. The sale or possibility of sale of the shares underlying the warrants could have an adverse effect on the market price
for our shares of common stock or our ability to obtain future financing. If and to the extent these warrants are exercised, you
may experience dilution to your holdings.
You
will not be able to exercise your redeemable warrants if we do not have an effective registration statement and a prospectus in
place when you desire to do so.
No
redeemable warrants will be exercisable, and we will not be obligated to issue shares of common stock upon exercise of redeemable
warrants by a holder unless, at the time of such exercise, we have a registration statement or post-effective amendment under
the Securities Act covering the shares of common stock issuable upon the exercise of the redeemable warrants and a current prospectus
relating to shares of common stock. Under the terms of a redeemable warrant agreement between American Stock Transfer & Trust
Company as warrant agent, and us, we have agreed to use our best efforts to have a registration statement in effect covering shares
of common stock issuable upon exercise of the redeemable warrants from the date the redeemable warrants become exercisable and
to maintain a current prospectus relating to shares of common stock until the redeemable warrants expire or are redeemed, and
to take such action as is necessary to qualify the shares of common stock issuable upon exercise of the redeemable warrants for
sale in those states in which the IPO was initially qualified. However, we cannot assure you that we will be able to do so. We
may be unable to have a registration statement in effect covering shares of common stock issuable upon exercise of the redeemable
warrants or to maintain a current prospectus relating to such shares of common stock if, for example, we lack the current financial
statements necessary to be included in such registration statement or prospectus. We have no obligation to settle the redeemable
warrants for cash, in any event, and the redeemable warrants may not be exercised and we will not deliver securities therefor
in the absence of an effective registration statement and a prospectus available for use. The redeemable warrants may be deprived
of any value, the market for the redeemable warrants may be limited if there is no registration statement in effect covering the
shares of common stock issuable upon the exercise of the redeemable warrants or the prospectus relating to the shares of common
stock issuable upon the exercise of the redeemable warrants is not current and the redeemable warrants may expire worthless. If
you are unable to exercise or sell your redeemable warrants, you will have paid the full unit price for only the shares of common
stock underlying the units.
Holders
of warrants included in the placement units may exercise these warrants even if an effective registration statement and a prospectus
is not in place, which means they may be able to exercise such warrants while public warrants might not be exercisable and may
expire worthless.
Unlike
the warrants underlying the units issued in connection with our IPO, the warrants included in the placement units will not be
restricted from being exercised in the absence of a registration statement under the Securities Act in effect covering the shares
of common stock issuable upon the exercise of the such warrants and a current prospectus relating to shares of common stock. Therefore,
the holders thereof will be able to exercise such warrants regardless of whether the issuance of the underlying shares of common
stock is registered under the Securities Act, while public warrants might not be exercisable and may expire worthless.
We
are a “foreign private issuer” and have disclosure obligations that are different than those of U.S. domestic reporting
companies, so you should not expect to receive the same information about us as a U.S. domestic reporting company may provide.
Furthermore, if we or lose our status as a foreign private issuer, we would be required to comply fully with the reporting requirements
of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting
costs that we would not incur as a foreign private issuer.
We
are a foreign private issuer as defined in Rule 405 under the Securities Act and, as a result, we are not subject to certain of
the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required by the SEC or the federal securities
laws to issue quarterly reports or file proxy statements with the SEC. We are also allowed to file our annual report with the
SEC within four months of our fiscal year end. We are also not required to disclose certain detailed information regarding executive
compensation that is required from U.S. domestic issuers. Further, our directors and executive officers are not required to report
equity holdings under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements
of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific
information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules
of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different
than those required by U.S. domestic reporting companies, our shareholders should not expect to receive all of the same types
of information about us and at the same time as information is received from, or provided by, U.S. domestic reporting companies.
We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer. Violations
of these rules could affect our business, results of operations and financial condition.
If
we lose our status as a foreign private issuer at some future time, we will be required to comply fully with the reporting requirements
of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting
costs that it would not incur as a foreign private issuer.
As
a foreign private issuer, we are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable
to domestic U.S. issuers. This may afford less protection to holders of our securities.
We
are exempted from certain corporate governance requirements of the Nasdaq Stock Market by virtue of being a foreign private issuer.
As a foreign private issuer, we are permitted to follow the governance practices of our home country, the Republic of the Marshall
Islands in lieu of certain corporate governance requirements of Nasdaq. As result, the standards applicable to us are considerably
different than the standards applied to domestic U.S. issuers. For instance, we are not required to:
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have
a compensation committee and a nominating committee to be comprised solely of “independent
directors; and
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hold
an annual meeting of shareholders no later than one year after the end of the Company’s
fiscal year-end.
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As
a result, you may not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate
governance requirements.
Future
sales or perceived sales of our shares of common stock could depress our stock price.
As
of the date of this report, we have 2,271,299 shares of common stock outstanding. Many of these shares will become eligible for
sale in the public market, subject to limitations imposed by Rule 144 under the Securities Act. If the holders of these shares
were to attempt to sell a substantial amount of their holdings at once, the market price of our common stock could decline. Moreover,
the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short
the common stock, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping
to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our common
stock being offered for sale to increase, our common stock market price would likely further decline. All of these events could
combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we
deem appropriate.
Holders
of our securities may face difficulties in protecting their interests because we are incorporated under the Republic of the Marshall
Islands law.
We
are a company incorporated under the laws of the Marshall Islands, and almost all of our assets are located outside the United
States. In addition, majority of our directors and officers, and their assets, are located outside of the United States. As a
result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have
difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons
in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. You may also
have difficulty bringing an original action in the appropriate court of the Marshall Islands to enforce liabilities against us
or any person based upon the U.S. federal securities laws.
Provisions
of our articles of incorporation may impede a takeover or make it more difficult for shareholders to change the direction or management
of the Company, which could reduce shareholders’ opportunity to influence management of the Company.
Our
articles of incorporation permit our board of directors to issue up to five million shares of preferred stock with a par value
of $0.0001 from time to time, with such rights and preferences as they consider appropriate. These terms may include voting rights
including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights
and redemption rights provisions. The issuance of any preferred stock could reduce the value of our common stock. In addition,
specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets
to, a third party. The ability of the board of directors to issue preferred stock could make it more difficult, delay, discourage,
prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent shareholders from recognizing
a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common
stock.
ITEM
4.
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INFORMATION
ON THE COMPANY
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A.
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History
and Development of the Company
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We
are a Republic of the Marshall Islands Company incorporated under the Marshall Islands Business Corporations Act (“BDA”)
on January 26, 2012. We were originally organized under the name “Aquasition Corp.” for the purpose of acquiring through
a merger, capital stock exchange, asset acquisition, stock purchase, or similar acquisition transaction, one or more operating
businesses or assets. The address of the Company’s principal executive office is Xingfengge Building, Baogaiyupu Industrial
Park, Shishi City, Fujian Province of china..
On
March 24, 2014, we entered into a share exchange agreement and plan of liquidation (the “Exchange Agreement”), with
KBS International, Hongri International, a then wholly owned subsidiary of KBS International and Cheung So Wa and Chan Sun Keung,
each an individual and shareholder of KBS International (each, a “Principal Stockholder”). The Exchange Agreement
was subsequently amended on June 21, 2014. The transactions contemplated in the Exchange Agreement (the “Share Exchange”)
were closed on August 1, 2014. At the closing, we acquired 100% of the issued and outstanding equity interest in Hongri International
from KBS International. In exchange, we issued an aggregate of 1,530,497 shares of common stock of the Company to KBS International.
In addition, on July 29, 2014, we completed a tender offer related to the Share Exchange and redeemed the 332,116 shares of common
stock validly tendered and not withdrawn. Pursuant to the Exchange Agreement, KBS International was liquidated and dissolved in
August 2014 and the 1,530,497 shares of common stock of the Company were distributed to each shareholder of KBS International
according to their respective ownership of KBS International. As a result, following the consummation of the Share Exchange, we
had a total of 1,694,489 shares of common stock outstanding. On March 29, 2016, we granted an aggregate of 73,334 restricted shares
of common stock to certain executive officers and directors of the Company as compensations for their past services in 2015 and
future services to be provided in 2016.
On
October 31, 2014, we held a special shareholder meeting and amended our Articles of Incorporation to change our name to KBS Fashion
Group Limited.
On
February 3, 2017, a special shareholder meeting was held at the Company’s headquarters in China and at the meeting, our
shareholders approved a proposal to grant discretionary authority to the Board of Directors of the Company to effect a reverse
stock split of issued and outstanding shares of common stock at a ratio within the range from one-for-two up to one-for-twenty;
and determine whether to pay in cash the fair value of fractions of a share of common stock as of the time when those entitled
to receive such fractions are determined, or to entitle shareholders to receive, in lieu of any fractional share, the number of
shares of common stock rounded up to the next whole number. On February 3, 2017, after the special shareholder meeting, our Board
of Directors approved a one-for-fifteen reverse stock split of the Company’s issued and outstanding common stock. In addition,
in lieu of issuing any fractional share, the Board of Directors decided that shareholders are entitled to receive the number of
shares of common stock rounded up to the next whole number. Our common stock began trading on the NASDAQ Stock Market on a split-adjusted
basis when the market opened on February 9, 2017.
On
July 10, 2017, we granted an aggregate of 215,000 restricted shares of common stock to certain executive officers and directors
of the Company as compensations for their services in 2017.
On
February 10, 2018, we granted an aggregate of 285,000 restricted shares of common stock to certain executive officers and directors
of the Company as compensations for their services in 2018.
Corporate
Structure
All
of our business operations are conducted through our PRC subsidiaries. The chart below presents our corporate structure as of
the date of this report.
Principal
Capital Expenditures and Divestitures
For the years ended December 31, 2017 and 2016,
our total capital expenditures and divestitures were $946,882 and $40,037, respectively. Such expenditures were primarily used
construction of production facility and purchasing fire protection facility.
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 3329
collections of new products, each year with a different theme to highlight the current trends in menswear for the season.
We
have established a nationwide distribution network covering 12 of China’s 32 provinces and centrally administered municipalities.
As of December 31, 2017, this network was comprised of 1 corporate store owned and operated by the company and 40 franchised stores
operated by 16 third party distributors or their sub-distributors. The number of stores has grown from 1 corporate store and 7
franchised stores as of December 31, 2006. In the years ended December 31, 2017, 2016 and 2015, sales through our corporate stores
accounted for 29.4%, 13% and 29.5% of our total revenues respectively, and sales through distributors and whole sellers accounted
for 66.5%, 78% and 66.5% of our revenues, respectively. Total revenue from corporate stores sales for fiscal year 2017 was $7.0
million, compared to $5.53 million for 2016 and $18.09 million for 2015.
From
2009 through 2017, total net sales decreased from $28.1 million to $23.8 million while the net profit decreased from $9.0 million
to a net loss of $14.8 million.
Our
Competitive Strengths
We
believe that the following competitive strengths enable us to compete effectively in and capitalize on the growing casual menswear
industry in China.
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There
is a sizable market for our products
. We believe that we have a sizeable potential
market. Our target customers are male middle-class consumers in the 20-40 age range.
According to the national census in 2010, the population in China between 15-59 years-old
was 940 million. Our target group falls into this category and is estimated to be more
than 200 million people. As a result of the growing affluence in the PRC and increased
purchasing power of the PRC population, we believe that PRC consumers are becoming more
willing and able to purchase casual menswear. In addition, we believe that the purchasing
decision of PRC consumers is becoming more predicated upon brand image, product design
and style, rather than just price considerations. With rising affluence and improvement
in lifestyle, we also believe the overall Chinese population is generally growing more
brand name conscious and style oriented and has shown a propensity for increased spending
on casual menswear.
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We
have a strong focus on design and product development
. We believe that our in-house
design and product development capabilities allow us to create unique products that appeal
to our customers. We have established a strong in-house design and product development
team of 22 employees as of April 10, 2018. 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 793 SKU that encompasses our
full range of product offerings, including outerwear, tops, bottoms and accessories.
We introduce new design elements into our product lines each season. With our highly
skilled and creative team of designers, we have extensive experience in creating unique
designs to meet the preferences and needs of our target customer base.
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Our
trademarked brand has earned a following in China
. Our brand was developed in
2006. Our marketing concept is “French origin, Korean design and made for Chinese.”
Our customers are middle-class consumers in the 20-40 age range. We believe that their
products’ concept, marketing, design and packaging fully match with the pro-western
attitude and life styles of their target customers. We believe the KBS brand is essential
to our success to penetrate to the casual menswear market in China.
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We
have an extensive and well-managed nationwide distribution network
. We have an
extensive distribution network throughout China. As of December 31, 2017, we had 1 KBS
branded corporate stores and 40 franchised stores across 12 of China’s 32 provinces
and centrally administered municipalities. The KBS branded corporate stores are required
to sell only our products. We have been building up our selected distributor network
since 2007. As of December 31, 2017, we had 14 distributors operating 40 franchised stores.
All of our distributors have been working with us from 1 to 10 years. We select our distributors
based on a number of criteria, including experience in the menswear retail industry,
sales channels, business resources, brand promotion capabilities and ability to help
us implement our broader business strategies. Our distributors help us respond to changing
consumer tastes in a timely manner by providing regular feedback on our products at our
semi-annual sales fairs and frequent communications. The financial resources of our distributors
allow us to expand our retail network with less working capital investment from us than
would be required for establishing direct stores, as our distributors are responsible
for the store rentals and cost of inventory in their stores. We sold a substantial amount
of our products through our distributors, which have allowed us to distribute our products
to a wide geographic area and penetrate markets by leveraging the local market knowledge
of our distributors and their sub- distributors. We believe that our distribution network
has enabled us to expand our business and increase our sales efficiently and with less
operational risk. This model has also minimized our operational risk because we typically
start production after we receive orders from our distributors. We believe that using
a distribution network to sell a substantial amount of our KBS products has enabled us
to devote our resources to our core competitive strengths of design, brand management
and product development.
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We
have an experienced management team
.
Our management team has extensive
R&D, marketing and financial experience, led by our Chief Executive Officer, Mr.
Keyan Yan. Mr. Yan has over 26 years of experience in the apparel industry and also has
developed a differentiated product by international cooperation with a Korean designer.
After working in the garment industry for more than 16 years, Mr. Yan acquired and developed
the KBS brand. With his strong understanding of the apparel industry, Mr. Yan has successfully
established this brand name in the market. We are committed to attract and retain top
management level executives who we believe are and will continue to be the driving force
behind our product development and growth.
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Our
Growth Strategy
We
intend to further strengthen our market position in the casual menswear market in China by implementing the following strategies:
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We
plan to expand our online business and purchase one or more online sales platforms or
online stores
. Together with the change in consumer trends, online sales is now
the most important sales channel in Chinese market and is becoming increasingly important
globally. Sales from our stores and distributors have been steadily decreasing, and we
are now in the process of identifying the best possible ways to establish and expand
our online business. We already signed a cooperation agreement with Hanghzou Si Teng
Internet Technology Co. Ltd (“Si Teng E-commerce”), under which we authorized
Si Teng E-commerce to open, operate and maintain online stores through Amazon in the
US and Alibaba Express in China to sell our products. Additionally we plan to research
and purchase one or more online sales platforms and online stores. We believe that KBS
will have better opportunities to expand by purchasing online sales platforms or online
stores in year 2018, and the management of KBS will keep on exploring other areas and
business models, such as the use of artificial intelligence for brand promotion, learning
customer preferences, and identifying shopping trends. We consider that our policy to
expand our outreach using new technologies will add significant shareholder value.
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We
plan to expand our OEM sales by attracting more reputable and long-term clients.
We
just signed a new contract with Hangzhou Zhi Yin Apparel Clothes Co. Ltd. (“Zhi
Yin”) a major producer of children’s apparel in China. Under the contract
we will act as a long term supplier of down jackets to Zhi Yin. It is estimated that,
pursuant to the agreement, we will generate an additional RMB 25 million (approximately
US$ 4 million) of revenue in fiscal year 2018. We are also expanding our OEM business
and to get more clients, especially to focus on online providers, as they have expanded
their market share over the past years quickly together with the change in Chinese consumer’s
preferences and occupy a large market share. By the time when we start executing the
orders, we expect that we can have continued and increasing business.
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We
plan to design our products through different channels.
Starting from year 2015,
the design of our products has been conducted through three channels. In addition to
our in-house design team, we also outsource the design of our products to reputable third-party
designers. Thirdly our original design manufacturers (ODMs) also directly sell their
products to us. Through these channels, we are able to choose the designs that best match
the KBS style. In 2017, we had recruited 4 highly qualified design staff and will continue
to hire more design personnel in the future.
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We
plan to continue to raise the profile of the KBS brand through enhanced advertising and
promotional activities
. We believe that the strong association of KBS brand with
our concept of “French origin, Korean design and made for Chinese” has helped
drive our brand positioning and customers’ receptivity to our products. We intend
to further build our brand and deliver a consistent brand image from product design to
sales and marketing. We seek to promote and enhance our presence in China’s casual
menswear market by continuing to adopt proactive marketing strategies and produce high
quality, well- designed casual menswear for our target market. In particular, we aim
to increase awareness of our brand through: (1) multi-channel advertising strategies
through national television, fashion magazines, billboards and other media channels;
(2) further assisting our distributors’ regional advertising efforts; (3) distinctive
store and product launch campaigns, including special events for new product launches
and large-scale grand opening events for new stores, particularly new corporate stores;
(4) update of the decoration and layout of a number of existing stores which have been
in operation for years to improve the shopping experience; (5) participation in fashion
shows; and (6) sponsorships of selected high-impact events. We believe that these advertising
and promotional activities will help to further strengthen brand awareness in our target
market and enhance customer loyalty.
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We
plan to expand and build upon our design and product development capabilities.
We intend to further strengthen our design and product development capabilities by accelerating
the commercialization of design concepts, expanding our product offerings and continuing
to develop what we believe is unique casual menswear. We plan to further invest in design
and product development and expand our design and product development team by attracting
talented designers, either domestic or international, and training young graduates from
leading fashion design institutes. We believe that combining western fashion design experience
with our local designer’s understanding of the China market and aesthetic will
enable us to create fashionable yet popular casual menswear for consumers in China. We
also intend to cooperate with our suppliers to develop new materials and fabrics which
we believe will give customers a unique fashion product and create new market opportunities.
We believe that our focus on designing unique and quality casual menswear will allow
us to maintain our competitiveness and help to enhance our sales and overall profitability.
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We
plan to expand our production capacity to expand and diversify our product offerings
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Our production facility is located in Taihu City, Anhui Province, China, consisting of
total 110,557 square meters of land. Currently this facility has a production capacity
of 2 million pieces of clothes per year and can accommodate 5,000 workers. This production
facility mainly produces OEM products for famous sportswear producers and fulfill some
overseas orders. The construction of our facility commenced in 2011 and takes place in
four phases: Phase 1 consists 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 property by the end of 2014. Although we have the designed capacity of 5 million pieces
yearly, the facility currently may only produce 2 million pieces per year. Phase 3 construction
has been delayed because the local government needs additional time to conclude negotiations
with local residents over appropriate resettlement terms. Once the government settles
with the local residents, the phase 3 and 4 can be continued. Phase 4 will include production
facilities with annual production capacity of 10 million pieces, an office building,
staff quarters and living facilities. Upon completion, the new facility is expected to
have a production capacity of 20 million pieces and accommodate 5,000 workers. Please
see “—Production” below for a more complete explanation of our plans
for the expansion of our production capacity. We anticipate that the new production facility
will allow us to further refine our existing product lines by offering more styles within
our existing apparel and accessories categories and to introduce additional, complementary
apparel and accessories categories into our product line. We currently introduce 500
to 900 different styles of products each year and intend to increase the number of our
product offerings in the future.
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We
plan to expand our international market and attract more orders from overseas.
Starting
from year 2016, we have been awarded international OEM orders for producing clothes with
overseas brands. Such orders are usually large and continuous. Due to the completion
of phase 2 construction of our Anhui factory, we have enough production capacity to take
on large orders. The current utilization rate of the Anhui factory is still quite low
and we expect to invest more in attracting more large orders from overseas.
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The
KBS Brand
We
are engaged in a highly competitive industry in which brand image and recognition is critical to attracting customers to purchase
our products. We have adopted KBS as a uniform brand name and image for all stores in our distribution network and on all products
sold in those stores. The KBS brand was created by Ms. Qinghua Ye in 2006 and registered with the trademark administration authority
in 2008. Subsequently, Ms. Ye assigned the KBS trademark to Hongri PRC in 2008. In 2009, Hongri PRC transferred this trademark
to France Cock, which then licensed such trademark back to Hongri PRC. Based on our sharp rise in revenue since 2006, we believe
that the KBS brand has gained a following in the casual menswear market in the cities where our products are sold.
To
promote our brand, we have developed and implemented brand management policies in all of our corporate stores and franchised stores.
Our brand management policies set out detailed requirements for store decorations and display of products. This enables us to
project a consistent brand image. In addition, each season, our design and product development team develops display concepts,
including the presentation of our collections in the stores and the color schemes for the backdrops. We also work closely with
our distributors to supervise the daily operations of franchised stores through unscheduled visits to ensure that our brand management
policies are properly followed.
We
may suspend the supply of our products or terminate distribution agreements in the event that any of our distributors or their
sub-distributors consistently fails to comply with our brand management policies.
Our
Products
Our
apparel products include cotton and down jackets, sweaters, shirts, T-shirts, jeans and trousers. Accessories include shoes, bags,
socks and caps. In 2017, the suggested retail prices of our products ranged from RMB 199 to RMB 1,499 (approximately $29.9 to
$225) for our apparel products and RMB 15 to RMB 899 (approximately $2 to $135) for our accessory products. Since 2006, we have
launched 3329 collections of new products, each year with a different theme to highlight the current trends in menswear for the
season.
Our
Design
We
believe one of our key strengths is our internal design and product development team, which designs products that reinforce our
brand image. Major parts of our products are designed by our internal design and product development team with the collaboration
of Korean designers. As of December 31, 2017, our design and product development team consisted of 22 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 26
years of experience in the industry. All of the other designers are graduates of professional design schools in China. We believe
that our design and product development team is innovative and passionate and that the individual experience of each of our designers
helps bring new and exciting products to our customers. Our design and product development team conceptualizes each season’s
collections through an interactive process, taking into account our brand strategy, product image and market feedback, drawing
inspirations from domestic and international fashion trends and collaborating with both our suppliers and distributors to fine-tune
our designs. In particular, we collaborate with our suppliers to develop a variety of materials and fabrics for our products.
We also involve distributors in our product selection process to take advantage of their market intelligence, which helps us to
adapt to constantly changing customer preferences in local markets. Our designers also attend various domestic and international
fashion shows to keep abreast of the latest fashion trends.
Starting
from year 2015, design of our products comes from three channels. In addition to designing products by our in-house staff, we
outsource to certain reputable designers. From time to time, our ODMs also will directly sell their designed products to us.
In
a typical year, we design and make around 1,000 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 700 designs for mass production.
Final design of all of our products will be approved by our Chairman, Mr. Yan.
Our
Distribution Network
We
have established a nationwide distribution network consisting of corporate stores and franchised stores covering 12 of China’s
32 provinces and centrally administered municipalities.
Corporate
Stores
As
of December 31, 2017, we owned and operated 1 corporate store with the floor area of approximately 120 square meters. The number
of corporate stores grew significantly from 1 as of December 31, 2006, with the aggregate floor area increasing from approximately
60 square meters as of December 31, 2006 to 18 stores with the aggregate floor area of approximately 1,974 square meters as of
December 31, 2014. As part of our corporate strategy, we closed 17 corporate stores in the last two years because of the low profitability
of certain corporate stores. In the years ended December 31, 2017, 2016 and 2015, sales through our corporate stores accounted
for 29.4%, 13% and 29.5% of our total revenues, respectively.
We
directly own and operate our corporate store. This direct control enables us to have closer relationship with our ultimate customers
and better understanding of market trends and consumer preferences. Required capital for opening of each store depends on the
location and area of the designated store. On average, the renovation cost per store is around $67,000 and the first year of rent
payment is around $140,000 including premium paid to the previous owner. Rental period varies from two to five years. The total
capital required to open a new store is generally around $207,000 per store. Once negotiation of rent is concluded, it takes one
to two months to open up a store. We usually open up stores right before a peak season, such as labor holiday in May, National
holiday in October and Chinese New Year in January/February. On average, new stores break even after one to three months of operation.
We
currently have one standard designs for our corporate stores located in Fujian Province. They were considered as flagship stores
for our distributors’ reference. Because in year 2016 and 2015 we closed some corporate stores, the inventories of these
stores were cleared through promotion exhibitions we held in the third-tier cities at lower prices.
For
corporate stores opened in second tier cities, we normally have a higher aesthetic standard compared with corporate stores in
third and fourth tier cities. We generally locate our corporate stores at street level to access high pedestrian flow. Normally,
we will sell in-season stock in our second-tier city corporate stores. Our second-tier city corporate stores are also designed
to showcase our marketability to potential distributors so as to induce them to join our distributorship. For stores opened in
the third and fourth tier cities, we normally sell some of our slow-moving or off-season stock at a discount due to our awareness
of the generally lesser amount of disposable income available to residents of these cities. During certain times of the year,
such as the New Year, Chinese New Year and Labor Day, we will organize promotional discounts together with our franchised stores
to attract more customers and increase our stock turnover.
Franchised
Stores
We
sell a substantial amount of our products to our franchised distributors who in turn sell them to retail customers through KBS
branded retail stores operated by our distributors or their sub-distributors. Since 2013, we have also been selling products to
3 provincial distributors without their own stores, or the no-store distributors, on a trial basis. We do not have any ownership
in, or controlling relationship with, these franchised stores, but we have entered into distribution agreements with them in the
Company’s standard form, pursuant to which we require distributors and their sub-distributors to sell only KBS products
in these stores. Distributors are responsible for selecting and ordering products from us and overseeing the sales in the stores
operated by them and their sub-distributors. By selling directly to our distributors, we can recognize revenues upon delivery
to our distributors and delegate the distribution responsibilities to our distributors. This allows us to distribute our merchandise
to a wide geographic area and penetrate markets by leveraging the local market knowledge of our distributors and their sub-distributors.
This also minimizes our inventory and sales risks while allowing us to allocate our resources to our core competitive strengths
of design, brand management and product development. We believe that our cooperation with distributors has enabled us to expand
our business and accelerate our sales growth at much lower costs and operational risk and achieve brand recognition throughout
China.
We
have been building up our selected franchised distributor network since 2007. As of December 31, 2017, we had 14 franchised distributors
who operated 40 retail stores directly or through their sub-distributors, all of which were stand-alone stores, which were typically
located in commercial centers, including department stores or shopping malls, in their cities. All these distributors have worked
with us for about 1 to 8 years. We have not encountered any material dispute or financial difficulty with our key distributors.
The average floor area of each retail store was approximately 75 square meters as of December 2017. 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 3,075 square meters as of December 31, 2017. In the years ended December 31, 2017, 2016 and
2015, sales through our distributors accounted for 63.3%, 78% and 66.5% of our revenues, respectively.
During
the fiscal year ended December 31, 2015, we had one customer exceeding 10% of our net sales, which accounted for 10.8% of our
revenues. During each of the fiscal years ended December 31, 2016 and 2017, we had no customer exceeding 10% of our net sales.
Sales
generated by our five best-performing franchised distributors accounted for approximately 23.8%, 28.3% and 27.10% of our revenues
in the years ended December 31, 2017, 2016 and 2015, respectively. Those top distributors have been with us since 2007 or 2008
and have grown organically with us. At the same time, we are exploring more distributors in other regions including relatively
small distributors to grow with their businesses. Although we rely on distributors for the sales and marketing of our products,
we believe our business is not substantially dependent on any individual distributor.
We
are highly selective in appointing distributors. We select our distributors based on a number of criteria, including experience
in the menswear retail industry, sales channels, business resources, brand promotion capabilities and ability to help us implement
our broader business strategies. We maintain good relationships with many regional or local distributor candidates which we identify
through our internal research and external referrals but only appoint a handful of them to become our distributors. We evaluate
the relevant experience of the distributor candidates in operating retail stores, their financial condition and sources of funding
required for the establishment of a regional distribution network and their ability to develop a network of retail stores in the
designated distribution region of a given distributor before we make any appointment.
Once
appointed, each distributor must enter into a distribution agreement with us. We do not own any interest in any of our distributors,
their sub-distributors or the retail stores they operate. The distribution agreements we typically enter into with distributors
do not allow us to be involved in the daily operating, financing or other activities of the distributors, except that distributors
need to comply with our brand management policies and pricing and store management guidelines. Key terms of our standard distribution
agreement include:
|
●
|
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.
|
|
●
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Duration
.
The distribution agreements generally have an initial term of one year and are renewable
at our discretion after taking into account factors such as compliance with our brand
management policies and sales performance.
|
|
●
|
Distributor
Pricing
. Distributors agree to order our products at a discount from our suggested
retail prices. The discounted wholesale prices to distributors are classified into the
following three categories: provincial distributor at a discount of 35% of retail price,
district distributor is 30% of retail price and the wholesale distributor is 25% of retail
price.
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|
●
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Minimum
Purchase Requirement
. Each of our distributors is customarily expected to purchase
a minimum amount of our products for each trade fair held biannually according to their
present and expected distribution network. The minimum is typically RMB800,000 (approximately
$118,653) for each store.
|
|
●
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Payment
and Delivery.
Normally, we expect distributors to pay us RMB0.5 million (approximately
$74,158)to RMB1 million (approximately $148,317) 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.
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 provides 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, 2017:
Location
|
|
As of December 31,
2017
|
|
Fujian
|
|
|
7
|
|
Guangdong
|
|
|
2
|
|
Guangxi
|
|
|
3
|
|
Jiangsu
|
|
|
4
|
|
Anhui
|
|
|
1
|
|
Zhejiang
|
|
|
2
|
|
Chongqing
|
|
|
4
|
|
Inner Mongolia
|
|
|
1
|
|
Tianjin
|
|
|
3
|
|
Hebei
|
|
|
4
|
|
Heilongjiang
|
|
|
4
|
|
Sichuan
|
|
|
5
|
|
Total
|
|
|
40
|
|
Pricing
Policy
We
sell our products to our distributors at uniform discounts from our suggested retail prices. We have a suggested retail price
policy that applies to all our stores to help maintain brand image, ensure consistent pricing levels from region to region and
prevent price competition among our distributors. In determining our pricing strategies, we take into account market supply and
demand, production cost and the prices of our competitors’ similar products. Our sales representatives collect and record
the retail prices of our products sold by our retailers. We analyze the information collected and engage in discussions with our
distributors to ensure that they follow our pricing policy. See “—Franchised Stores” above.
Production
Originally
located in Shishi City in Fujian Province and started production in 2006, our production facility is currently located in Taihu
City in Anhui Province, China. The facility currently has a production capacity of 2 million pieces of clothes per year. This
production facility mainly produces OEM products for famous sportswear producers. Our production facility was operating at full
capacity between 2009 and 2012. In 2014, we produced about 0.39 million units at the operating capacity of 19.5%; while in 2015,
we produced about 0.48 million units at the operating capacity of 24%. In 2016, we produced about 0.54 million units at the operating
capacity of 27%.
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, 2017, we had 3
ODM contract manufacturers and 3 OEM contract manufacturers. In the years ended December 31, 2016 and 2015, we had 6 and 8 OEM
contract manufacturers, respectively. Our sourcing strategy is based upon the quality of fabrics and workmanship that our customers
expect from the KBS brand. The costs of our outsourced production amounted to approximately $10.94 million, $26.1 million and
$27.9 million for years ended December 31, 2017, 2016 and 2015, respectively, accounting for approximately 31%, 66.8% and 92.0%
of our total cost of sales in the respective periods.
As
of December 31, 2017, our principal ODM and OEM contract suppliers included the following:
No.
|
|
1
|
Shishi Hua
Lai Shi Clothing Co. Ltd
|
2
|
Bai Tian
Ni(Fujian) Clothing fabric Co. Ltd
|
3
|
Shishi Rongpeng
Clothing Co.Ltd
|
4
|
Shishi Wuyi
textile trading Co.Ltd
|
5
|
Shishi Zhongwen
textile trading Co.Ltd
|
We
are not materially reliant on any single ODM or OEM contract supplier.
Inventory
Management
We
recognize that controlling the level of inventory is important to our overall operational efficiency and cost control. Based on
the purchase orders our distributors and the department store chains place at our biannual sales fairs, we are able to anticipate
the demand for our products in advance and plan ahead for our own manufacturing and the orders we will be required to place with
our ODM and OEM contract manufacturers. We generally plan purchases of raw materials and place manufacturing orders with our ODM
and OEM contract manufacturers immediately after each of our two seasonal sales fairs, usually in May for our autumn and winter
products and in October for our spring and summer products, where we confirm sales orders with our distributors and department
store chains. This enables us and our ODM and OEM contract manufacturers to have sufficient time, ranging from two to eight weeks,
to produce the products and provide our products suitable for a specific season to our distributors and department store chains
on a just-in-time basis so as to minimize our inventory levels. The alternative way to control cost is when if we have chance
to buy materials which the price is much lower than market price, we will buy it in advance and give to OEM contract manufactures
use our material to produce.
Quality
Control
Product
quality control is a critical aspect of our business. Our dedicated quality control team performs various quality inspection and
testing procedures, including random sample testing at different stages of our production process, to ensure that our products
meet or exceed the expectations of our consumers. We also perform routine product inspections on every batch of our products and
sample testing to ensure consistent quality of our products, including semi-finished and finished products.
We
have implemented a centralized system for procurement and inspection of raw materials and ancillary components to help ensure
a stable and high quality supply. Those materials and components that fail to meet our tests may be returned to the suppliers
for replacement. Our quality control team also carries out quality control procedures on the products produced by our ODM and
OEM contract manufacturers. We conduct on-site inspections of our ODM and OEM contract manufacturers before we enter into business
relationships with them. We also send our in-house quality control staff on-site to our ODM and OEM contract manufacturers to
monitor the entire production process. The initial product inspections are performed on-site by our staff before these products
are shipped to our headquarters for further inspection and storage in our warehouse. We also provide technical training to ODM
and OEM contract manufacturers to assist them with quality control of the production processes and inspect pre-production samples
and finished products from ODM and OEM contract manufacturers. We have not encountered any material disruptions to our business
as a result of the failure of any of our ODM and OEM contract manufacturers to meet our quality standards.
In
order to further improve the quality of our products and shorten our delivery cycle, we intend to increase our control over the
manufacturing process and production cycle of our ODM and OEM contract manufacturers, primarily by requiring our ODM and OEM contract
manufacturers to implement stricter and more comprehensive quality control procedures, which cover each stage of the production
process, from raw material selection and procurement to finished products packaging and delivery. We also intend to apply more
stringent standards for inspecting products manufactured for us by our ODM and OEM contract manufacturers.
Marketing
and Advertising
We
have conducted multi-channel marketing campaigns to advertise our products to our target customers through advertising in newspapers,
magazines, the Internet, and billboards, and organizing regular and frequent in-store marketing activities and road shows.
We
have implemented strict requirements on our distributors with respect to the display and promotion of our products to ensure consistent
branding and enhance marketing results. Our distributors are required to ensure that our marketing strategies are implemented
at the retail outlets managed or authorized by them, including displaying our products according to our specifications and using
our billboard advertisements. We also assign sales representatives to monitor the in-store displays of our products at various
retail outlets on a regular basis to help ensure that our retailers have followed our product display policies.
In
the years ended December 31, 2017, 2016 and 2015 our total advertising and promotional expenses amounted to approximately $1.59
million, $1.55 million and $1.70 million, respectively, which accounted for approximately 7.5%, 3.8% and 2.8% of our revenues
in the respective periods.
Competition
The
menswear industry in China is a fragmented industry. Competition mainly comes from local market players such as Exceed, Xiniya,
Zuoan and Cabbeen. We believes that we differentiate ourselves by providing more fashionable, younger-looking and leisure products,
and competitive pricing without giving up the casual feel of our products.
We
compete primarily on the basis of product design, brand recognition, operational efficiency and a low cost structure. Some of
our domestic competitors have a stronger customer base, greater resources and more industry expertise than us. However, we believe
that we can continue to successfully compete with our local competitors due to our unique product designs.
Intellectual
Property
We
currently have the licenses to use two registered trademarks in the PRC.
The
registered trademarks on which we have licenses are the following:
Trademark
|
|
Registration No.
|
|
|
Valid Term
|
KBS
|
|
|
4342760
|
|
|
January 1, 2014 - December 31, 2018
|
|
|
|
|
|
|
|
Ka bi sports
|
|
|
5462336
|
|
|
March 14, 2010 - March 12, 2020
|
We
believe that these trademarks provide significant value as they are important for marketing and building brand recognition. We
are not aware of any third party currently using trademarks similar to our trademarks in the PRC on the same products.
Insurance
We
do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies
in China offer limited business insurance products. While business interruption insurance is available to a limited extent in
China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring
such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to
business and product liability exposure. See “Risk Factors—Risks Related to Our Business—We have limited insurance
coverage in China and may not be able to recover insurance proceeds if we experience uninsured losses.”
Regulation
Because
our primary operating subsidiaries are located in China, we are subject to China’s national and local laws detailed below.
We believe that we are in material compliance with all registrations and requirements for the issuance and maintenance of all
licenses required by the governing bodies and that all license fees and filings are current.
Foreign
Invested Entity and Foreign Investment in Commerce Sectors
The
establishment, alteration, registered capital requirement, corporate governance, and similar matters, of Hongri PRC will be governed
by the Wholly Foreign Owned Enterprise Law of the PRC, which was promulgated on April 12, 1986 and amended on October 31, 2000,
and its Implementation Rules which were promulgated on December 1990 and amended on April 12, 2001 and February 19, 2014.
In
addition, on April 16, 2004, MOFCOM issued the FICE Regulation to open up the commerce sector to foreign investment, and also
to provide for various market entry restrictions against foreign investment in companies engaged in the wholesale, retail, commissioned
sale and/or franchise business, or FICEs. FICEs are required to obtain special approvals from the national or provincial-level
MOFCOM offices to conduct the foregoing commerce business.
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.
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.
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.
Dividend
Distributions
Substantially
all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to
make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our
PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards
and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual
after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches
50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not
transferable to us in the form of loans, advances, or cash dividends.
We
are currently subject to PRC corporate income and other taxes at the level of our PRC operating subsidiaries, to a 5% dividend
withholding tax on profits distributed from our PRC operating subsidiaries to their HK holding company, and, if the Company is
subject to US taxation, to US taxes on amounts received in distribution from its subsidiary(ies). There is no income tax in Hong
Kong, the BVI or the Marshall Islands on amounts distributed up through the entities from the PRC, or any dividend withholding
tax in HK, the BVI or the Marshall Islands. The combined entities’ obligation to pay dividends to the shareholders of the Company
is calculated on an after-tax basis, and therefore is net of the taxes.
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 2017, 2016 and 2015. 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.
Circular
37
On
July 14, 2014, SAFE issued the Circular on Relevant Issues Relating to Domestic Residents’ Investment and Financing and
Roundtrip Investment through Special Purpose Vehicles (“Circular 37”), which replaced the Circular 75. Circular 37
requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets
or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose
vehicle.” Circular 37 further requires amendment to the registration in the event of any significant changes with respect
to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange,
merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails
to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making
profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the
special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
As
we stated under “Risk factors—Risks Related to Doing Business in China— Failure to comply with PRC regulations
relating to the investment in offshore special purpose companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute profits to us or otherwise materially adversely affect us,” we have notified substantial beneficial
owners of our company who we know are PRC residents to comply with the registration obligation. However, we may not be aware of
the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners
and cannot assure you that all of our PRC resident beneficial owners will comply with Circular 37. The failure of our beneficial
owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to Circular 37 or the failure
of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in Circular
37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration
may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions
from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Employee
Stock Option Plans or Incentive Plans
In
December 2006, the People’s Bank of China promulgated the Administrative Measures on Individual Foreign Exchange, or the
Individual Foreign Exchange Regulations, setting forth the requirements for foreign exchange transactions by individuals (both
PRC or non-PRC citizens) under the current account and the capital account. Pursuant to Circular 37, PRC residents who participate
in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the
foreign exchange registration with respect to offshore special purpose companies. In addition, under the Notices on Issues concerning
the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed
Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options
by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local
branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified
institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive
plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise
of share options, purchase and sale of shares or interests and funds transfers. We have not granted any incentive shares or share
options to our PRC citizen employees; however, if we do so in the future, our PRC citizen employees who are granted restricted
shares or share options will be subject to these rules.
M&A
Rule
On
August 8, 2006, six PRC regulatory agencies promulgated the Foreign M&A Rule, which was later amended in June 2009.
The
Foreign M&A Rule, among other things, govern the approval process by which a PRC company may participate in an acquisition
of assets or equity interests by foreign investors. The Foreign M&A Rule allow PRC government agencies to assess the economic
terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other
relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of
the application for approval, depending on the structure of the transaction. The Foreign M&A Rule also prohibit a transaction
at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures,
requires that consideration must be paid within defined periods, generally not in excess of a year. The Foreign M&A Rule also
limit our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration,
holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities.
Transaction structures involving trusts, nominees and similar entities are prohibited.
In
addition, the Foreign M&A Rule regulates “Round-trip Investments.” For further information, please see the discussion
under “Risk Factors – Risks Related to Doing Business in China – our business and financial performance may
be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Hongri PRC constitutes a
Round-trip Investment without MOFCOM approval.”
|
C.
|
Organizational
Structure
|
See
“—A. History and Development of the Company—Corporate Structure” above for details of our current organizational
structure.
|
D.
|
Property,
Plants and Equipment
|
Our
company has established a nationwide distribution network covering 12 of China’s 32 provinces and centrally administered
municipalities. As of December 31, 2017, this network was comprised of 1 corporate store owned and operated by us and 40 franchised
stores operated by 14 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 cannot guarantee when and whether the construction of the adjacent facility on the third parcel
of land will be eventually completed. If the construction of the new production facilities is completed, our total production
capacity of the facility is expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per
year.
In
2016, we closed 1 corporate store and as of December 31, 2017, we leased the premises for our sole remaining corporate store.
We have undertaken various measures to verify the lessons’ 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. Before we ever rent some stores are located in rural areas where land use rights are held collectively
by villages, where 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
believes the risk of third party claims against our leases of these stores is relatively small and the measures taken by our company
are sufficient to verify the land use rights for all of its stores.
In
addition, the property used as our head office and corporate store is leased from a related party, whose ownership of the property
has been verified by our company. We paid a total of RMB3,010,667, RMB 720,000, and RMB 720,000, as rental fees for the existing
corporate stores during the fiscal years 2015, 2016 and 2017, respectively. The total area of these 18 corporate stores is 1972
square meters. The sales of each store and its location are shown below:
Area
|
|
Sales in fiscal year 2015(USD)
|
|
|
Sales in fiscal year 2016(USD)
|
|
|
Sales in fiscal year 2017(USD)
|
|
Company Shishi factory
|
|
|
1,527,019
|
|
|
|
1,240,354.74
|
|
|
|
772,299
|
|
Jinjiang Hankou
|
|
|
751,067
|
|
|
|
|
|
|
|
|
|
Shishizhixiang
|
|
|
759,464
|
|
|
|
|
|
|
|
|
|
ShishiYongning
|
|
|
635,127
|
|
|
|
|
|
|
|
|
|
ShishiJinshang
|
|
|
288,100
|
|
|
|
|
|
|
|
|
|
JinjiangLonghu
|
|
|
513,974
|
|
|
|
|
|
|
|
|
|
Nanan
|
|
|
165,351
|
|
|
|
|
|
|
|
|
|
Wukeng
|
|
|
201,032
|
|
|
|
|
|
|
|
|
|
Yinglin
|
|
|
253,078
|
|
|
|
|
|
|
|
|
|
Gouxi
|
|
|
322,989
|
|
|
|
|
|
|
|
|
|
Xiamen Wanda shop
|
|
|
714,777
|
|
|
|
|
|
|
|
|
|
XingjiangDongshi
|
|
|
568,377
|
|
|
|
|
|
|
|
|
|
Zhangzhou Wanda
|
|
|
451,091
|
|
|
|
|
|
|
|
|
|
Fuzhou Shimao
|
|
|
139,948
|
|
|
|
|
|
|
|
|
|
Putian Wanda Shop
|
|
|
479,082
|
|
|
|
|
|
|
|
|
|
Quanzhou Dayang
|
|
|
558,718
|
|
|
|
470,280.90
|
|
|
|
|
|
Quanzhou Wanda
|
|
|
244,218
|
|
|
|
|
|
|
|
|
|
Ningde Wanda
|
|
|
262,319
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
8,835,732
|
|
|
|
1,710,635.64
|
|
|
|
772,299
|
|
ITEM
4A.
|
UNRESOLVED
STAFF COMMENTS
|
Not
required.
ITEM
5.
|
OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
|
We
are engaged in the design, development, marketing and sale of casual menswear in China, including apparel and accessories, which
we market under the KBS brand. The KBS brand was developed in 2006. Before 2012, we were engaged in the design, development, marketing
and sale of fashion sportswear in China. Since our products feature a unique and stylish design that is more fashionable than
traditional sportswear, as well as quality fabrics and materials and the sportswear market was becoming more and more competitive,
in late 2011 we turned our focus on casual menswear market which has higher profit margin. KBS’s apparel products include
cotton and down jackets, sweaters, shirts, T-shirts, Jeans and trousers. Accessories include shoes, bags, belts and caps. In 2016,
the suggested retail prices of KBS’s products ranged from RMB 199 to RMB 1,499 for its apparel products and RMB 15 to RMB
899 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 2,536 collections of new products each year with a different theme to highlight the current trends
for the season. KBS’s marketing concept is “French origin, Korean design and made for Chinese.” KBS’s
customers are male middle-class consumers in the 20-40 age range, primarily located in tier two and tier three cities in China.
The company has adopted “KBS” as a uniform brand name, which stands for “Keep Best Style”, and KBS are
designed by us for a uniform look and feel that fits our brand image, with in-store displays that accentuate the quality and style
of our products across all stores in our distribution network and on all products sold in those stores. We believe that the KBS
brand has become a recognized brand name in the cities where their products are sold.
We
have established a nationwide distribution network covering 12 of China’s 32 provinces and centrally administered municipalities.
As of December 31, 2017, this network was comprised of 1 corporate store owned and operated by us and 40 franchised stores operated
by 14 third-party distributors or their sub-distributors. The number of stores grew significantly from 1 corporate store and 7
franchised stores as of December 31, 2006 to 31 corporate stores as of December 31, 2012 and 96 franchised stores as of December
31, 2013, and decreased to 84 stores as of December 31, 2014. Because of the recent softening of economic growing in China and
fierce competition from our competitors, online store sales of franchised stores and corporate stores went down in 2015 as compared
with the previous year. In 2016 and 2017, the distributors closed 14 and 15 franchised stores, respectively, and we closed 1 corporate
store in year 2016. We intend to generate more revenues from OEM and online sales directly to customers in 2018.
KBS
also acts as an original design manufacturer, or OEM, upon request. Income from such services accounted for 7.3%, 9% and 4.0%
of revenue for the years ended December 31, 2017, 2016 and 2015, respectively.
Relocated
from Shishi City, Fujian, China in March 2011, KBS’s production facility is currently located in Taihu City in Anhui Province,
China. The company believes that the shortage of labor and rising wage expectations in China, especially in the coastal area,
could have a material impact on our operations as well as its suppliers’ cost of manufacturing. By relocating from the coastal
area to inland Anhui Province, our new facility takes advantage of lower labor costs and a more stable labor supply. Since the
company’s original production team was not ready to produce the new style KBS products, KBS has outsourced its product manufacturing
to other established ODM manufacturers. As such, KBS’s own production facility in Taihu mainly takes OEM orders from other
sportswear companies, like Xtep. Our production facility in Taihu, Anhui Province includes three parcels of land with a total
area of 110,557 square meters. We have obtained land use rights for two parcels of land with an area of 9,845 square meters in
2012 and have finished the construction of 8,572 square meters of staff dormitories and 22,292 square meters as workshop buildings
and offices. We started to use the dormitory and factory in year 2015 and moved into the offices at the beginning of 2016. Due
to the local government’s need for additional time to conclude negotiations with local residents over appropriate resettlement
terms, the construction of the adjacent facility on the third parcel of land has been delayed. 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 the government settles with the local residents, the phase 3 and 4 can be continued. Once completed, our total production
capacity of the facility is expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per
year. We do not necessarily rely on our own production facility to satisfy the demand of our products as we may outsource some
or all of the production work to various ODM and OEM manufacturers in China.
|
A.
|
Principal
Factors Affecting Financial Performance
|
KBS’s
operating results are primarily affected by the following factors:
|
●
|
Growth
of Chinas menswear industry.
With approximately one-fifth of the worlds 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 mens apparel market in China in recent years. China
is currently one of the worlds largest mens apparel markets and it is larger than the
U.S. market based on retail sales of mens apparel products in 2011. As a leading provider
of casual menswear in China, KBS believes they are well positioned to capitalize on the
favorable economic, demographic and industry trends in this sector.
|
|
●
|
Brand
recognition.
KBS derives all of KBSs revenues from sales of the KBS branded products
in China, and KBSs 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 KBSs brand may affect the selling prices and market demand for KBSs products, the
profit margin of KBS can achieve, and KBSs ability to grow.
|
|
●
|
Ratio
of franchised stores to corporate stores in KBSs sales network.
The ratio of
franchised stores to corporate stores in terms of floor area in KBSs sales network affects
KBSs results of operations in a given period. The franchised stores operated by KBSs
distributors have been and will continue to be the main contributor to KBSs revenue for
the foreseeable future. Under the distribution business model, KBS sells directly to
KBSs distributors and recognize revenues upon delivery of KBSs products to them. Such
distribution network has enabled KBS to accelerate sales growth at a much lower cost
than opening direct stores and has limited KBSs inventory and sales risks. Corporate
stores operated by us, despite incurring more significant capital expenditures as compared
with franchised stores, allow KBS more control over our brand and the consumers shopping
experience, which are important factors for the overall success of KBSs business. In
addition, KBSs corporate store sales generally have a higher gross profit margin than
sales to distributors because KBS is able to sell the products at retail prices directly
to the end-consumers and because KBS recognizes expenses relating to KBSs corporate stores
as selling and distribution expenses. Therefore, the ratio of franchised stores to corporate
stores in KBSs sales network will affect KBSs gross profit margin.
|
|
●
|
Product
offering and pricing.
KBSs success depends on KBSs 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 KBSs products are subject to changing
consumer preferences and fashion trends that cannot be predicted with certainty. KBSs
new products may not receive consumer acceptance as consumer preferences could shift
rapidly, and KBSs future success depends in part on KBSs ability to anticipate and respond
to these changes.
|
|
●
|
Fluctuations
in raw material supply and prices.
The per unit cost of producing KBSs products
depends on the supply and price of raw materials, particularly fabrics such as cotton,
wool and polyester, which have experienced volatility in past years. Increases in the
price of raw materials would negatively impact KBSs gross margins if KBS is not able
to offset such price increases through increases in KBSs selling price or changes in
product offerings and mix.
|
KBS
believes that the global economic crisis and macroeconomic trends could continue to put significant pressure on consumer spending
in most markets worldwide, so KBS’s future performance remains subject to the inherent uncertainty presented by volatile
macroeconomic conditions. These conditions could continue to affect Target’s business in a number of direct and indirect
ways, including lower revenues from decreased product demand, compressed margins and/or increased costs, lack of credit availability
and business disruptions due to difficulties experienced by suppliers and customers. KBS strives to position ourselves, from both
a financial and an operational perspective, as a company that can react quickly and adapt effectively to evolving macroeconomic
conditions, fluctuations in product demand and changes in liquidity and capital demands.
Financial
Statement Presentation
Revenue.
During the periods covered by this section, we generated revenue from sales of our menswear products.
Cost
of sales.
During the periods covered by this section, our cost of sales primarily consisted of the costs of our outsourcing
cost, raw materials, labor and overhead. We did not have any inward or outward freight charges as these charges are borne by our
distributors and suppliers.
Gross
profit and gross margin.
For the periods covered by this section, our gross profit is equal to the difference between
our net sales and cost of sales. Our gross margin is equal to the gross profit divided by net sales. Our gross margin may not
be comparable to those of other retail entities since some retail entities include all of their distribution network costs in
cost of sales and others, like us, include these expenses in another statement of operations line item.
Administrative
expenses.
For the periods covered by this section, general and administrative expenses consisted primarily of compensation
and benefits to our general management, finance and administrative staff, professional advisor fees, audit fees and other expenses
incurred in connection with general operations.
Selling
expenses.
For the periods covered by this section, our selling and marketing expenses consisted primarily of compensation
and benefits to our sales and marketing staff, store rent, business travel, coordination with distributor marketing and promotions,
transportation costs and other sales related costs.
Comparison
of Fiscal Years Ended December 31, 2017, 2016 and 2015
The
following table sets forth key components of our results of operations, for the years ended December 31, 2017, 2016 and 2015,
both in U.S. dollars and as a percentage of or revenue.
|
|
Year ended December 31, 2017
|
|
|
Year ended December 31, 2016
|
|
|
Year ended December 31, 2015
|
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
23,762,536
|
|
|
|
|
|
|
|
41,200,205
|
|
|
|
|
|
|
|
61,343,681
|
|
|
|
|
|
Cost of sales
|
|
|
-35,274,352
|
|
|
|
-148
|
%
|
|
|
-39,041,932
|
|
|
|
-95
|
%
|
|
|
-46,511,274
|
|
|
|
-113
|
%
|
Gross profit
|
|
|
-11,511,816
|
|
|
|
-48
|
%
|
|
|
2,158,272
|
|
|
|
5
|
%
|
|
|
14,832,407
|
|
|
|
36
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution and selling expenses
|
|
|
-3,265,380
|
|
|
|
-14
|
%
|
|
|
-3,606,010
|
|
|
|
-9
|
%
|
|
|
-6,621,256
|
|
|
|
-16
|
%
|
Administrative expenses
|
|
|
-4,879,397
|
|
|
|
-21
|
%
|
|
|
-3,543,993
|
|
|
|
-9
|
%
|
|
|
-2,661,584
|
|
|
|
-6
|
%
|
Total operating expenses
|
|
|
-8,144,776
|
|
|
|
-34
|
%
|
|
|
-7,150,003
|
|
|
|
-17
|
%
|
|
|
-9,282,840
|
|
|
|
-23
|
%
|
Other income
|
|
|
461,564
|
|
|
|
2
|
%
|
|
|
555,051
|
|
|
|
1
|
%
|
|
|
305,645
|
|
|
|
1
|
%
|
Other gains and losses
|
|
|
-122,244
|
|
|
|
-1
|
%
|
|
|
-11,123,767
|
|
|
|
-27
|
%
|
|
|
-3,877,832
|
|
|
|
-9
|
%
|
Profit from operations
|
|
|
-19,317,272
|
|
|
|
-81
|
%
|
|
|
-15,560,447
|
|
|
|
-38
|
%
|
|
|
1,977,380
|
|
|
|
5
|
%
|
Finance costs
|
|
|
-96,385
|
|
|
|
0
|
%
|
|
|
-71,783
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
Change in fair value of warrant liabilities
|
|
|
0
|
|
|
|
0
|
%
|
|
|
3,409
|
|
|
|
0
|
%
|
|
|
11,978
|
|
|
|
0
|
%
|
Profit before tax
|
|
|
-19,413,657
|
|
|
|
-82
|
%
|
|
|
-15,628,821
|
|
|
|
-38
|
%
|
|
|
1,989,358
|
|
|
|
5
|
%
|
Income tax
|
|
|
4,598,061
|
|
|
|
19
|
%
|
|
|
3,726,133
|
|
|
|
9
|
%
|
|
|
-605,688
|
|
|
|
-1
|
%
|
Profit for the year
|
|
|
-14,815,596
|
|
|
|
-62
|
%
|
|
|
-11,902,688
|
|
|
|
-29
|
%
|
|
|
1,383,669
|
|
|
|
3
|
%
|
A
breakdown of revenue, percentage of revenue and percentage of gross margin by segment for the respective periods is as follows:
By business
|
|
Distribution
network
|
|
|
Corporate
stores
|
|
|
OEM
|
|
|
Consolidated
|
|
|
|
Year
ended December 31, 2017
|
|
|
Year
ended December 31, 2016
|
|
|
Year
ended December 31, 2015
|
|
|
Year
ended December 31, 2017
|
|
|
Year
ended December 31, 2016
|
|
|
Year
ended December 31, 2015
|
|
|
Year
ended December 31, 2017
|
|
|
Year
ended December 31, 2016
|
|
|
Year
ended December 31, 2015
|
|
|
Year
ended December 31, 2017
|
|
|
Year
ended December 31, 2016
|
|
|
Year
ended December 31, 2015
|
|
Sales to external customers
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
|
|
40,815,528
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
|
|
18,091,585
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
2,436,568
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
|
|
61,343,681
|
|
Segment
|
|
|
15,034,800
|
|
|
|
32,127,083
|
|
|
|
40,654,657
|
|
|
|
6,983,592
|
|
|
|
5,529,985
|
|
|
|
16,134,537
|
|
|
|
1,744,144
|
|
|
|
3,543,137
|
|
|
|
2,043,287
|
|
|
|
23,762,536
|
|
|
|
41,200,205
|
|
|
|
61,343,681
|
|
% of Sales
|
|
|
63
|
%
|
|
|
78
|
%
|
|
|
69
|
%
|
|
|
29
|
%
|
|
|
13
|
%
|
|
|
26
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
3
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Segments gross margins
|
|
|
2,277,858
|
|
|
|
6,623,617
|
|
|
|
9,668,518
|
|
|
|
-14,291,680
|
|
|
|
-5,727,349
|
|
|
|
4,239,168
|
|
|
|
502,007
|
|
|
|
1,262,005
|
|
|
|
924,722
|
|
|
|
-11,511,816
|
|
|
|
2,158,273
|
|
|
|
14,832,407
|
|
Gross margin rate
|
|
|
15
|
%
|
|
|
21
|
%
|
|
|
30
|
%
|
|
|
-205
|
%
|
|
|
-104
|
%
|
|
|
26
|
%
|
|
|
29
|
%
|
|
|
36
|
%
|
|
|
35
|
%
|
|
|
-48
|
%
|
|
|
5
|
%
|
|
|
24
|
%
|
Segment
sales
For
the year ended December 31, 2017, total revenue decreased by 32% from $41.2 million in 2016 to $23.8 million. Our total revenue
of 2016 decreased by 33% from $61.3 million to $41.3 million for the year ended December 31, 2015. The Company reports financial
and operating results in three segments: distributor network, corporate stores and OEM.
Distributor
Network —
there was a decrease of revenue from the Company’s distributor network in year 2017 by 53% from $32.1 million
in year 2016 primarily due to a decrease in sales volume. Revenue from the Company’s distributor network in year 2016 decreased
by 21% from $40.1 million in year 2015 primarily due to a decrease in sales volume and average unit selling price. The distributor
segment accounted for 63% of the total revenue in 2017, compared to 78% and 67% during years 2016 and 2015, respectively.
In
year 2017, gross profit margin for the company’s distributor network decreased to 15% from 21% for year 2017, the gross
profit for year 2017 decreased due to the company adjusted to same selling price to area and province, and the sales went down
in year 2017 because we suspended sales of new products to some distributors which failed to pay off debts to us due to overstock
during previous periods. We also terminated some cooperation with some distributors due to their failure to pay off debts owed
to us. .
In
year 2016, gross profit margin for the Company’s distributor network decreased to 21% from 24% for year 2015. The gross profit
of year 2016 decreased due to the increasing cost on improving quality of clothes which sold to our distributors at same prices
to help them improve their sales. Some distributors’ sales went down in year 2016 because they overbought stock at the end
of year 2014 and 2015. As they did not sell the stock well in 2016 and were unable to repay all debts to us, we suspended sales
of new products to them until they repaid the outstanding debts owed to the company. Gross profit margin for the Company’s distributor
network decreased to 24% in 2015 from 30% of year 2014. The gross profit decreased due to the reduction of unit price in year
2015. We had some new wholesale customers to whom we sold our products at lower selling prices in order to help our distributors
and wholesalers improve their sales. Revenue from old distributors decreased in year 2015 which was offset by the increase in
sales from the new wholesale distributors.
The
Company’s distributor network currently consists of 14 distributors in 12 provinces. Most of these distributors, either directly
or through their sub-distributors, operate KBS-branded stores. Some wholesale distributors sold the products to multi-branded
stores and online stores. As of December 31, 2017, distributors operated a total of 40 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 sales for fiscal year 2017 was $6.98 million, compared to $5.53 million
for year 2016. In 2017 sales from corporate stores increased as compared to 2016 due to an increase in sales volume, which in
turn was mainly attributable to the increase in promotion sales on repurchased inventory from certain distributors which are unable
to pay off the debts owed to us.
Total
revenue from corporate stores sales for fiscal year 2016 was $5.53 million, compared to $18.09 million year 2015. In 2016 sales
from corporate stores decreased as compared to 2015 due to a decrease in sales volume and average unit selling price. The decrease
in the sales volume was mainly attributable to the decrease in the number of our corporate stores. Total revenue from corporate
stores sales for fiscal year 2015 was $18.09 million, compared to $16.13 million year 2014. In 2015 sales from corporate stores
increased as compared to 2014 because of the increased promotion sales to improve the brand recognition. As of December 31, 2017,
the Company operated 1 corporate store which located in Fujian. Total revenue from corporate store sales of 2017 increased as
compared to 2016 because of the promotion sales of repurchased inventory.
The
corporate stores segment contributed 29% of total revenue in 2017, compared to 13% of 2016 and 29% in year 2015. Gross profit
margin for the Company’s corporate stores was -205% in 2017, compared to -104% in 2016 and 23% in 2015. The margin compression
from 2015 to 2017 is primarily due to (1) in 2015 we closed 16 and 1 corporate stores in 2016 and sold their inventory at a lower
price; (2) we reduced the sale price of our goods in corporate stores to stimulate sales;(3) the decrease was attributable to
loss from sales of repurchased inventory from certain distributors which sold at big discounted price in year 2017.
OEM
—
The OEM segment is comprised of products that are designed by the customers but manufactured by our Company. Revenue
from the OEM segment decreased by $1.79 million to $1.74 million for year ended December 31 2017, compared to $3.53 million for
year ended December 31, 2016. Gross profit margin decreased to 29% from 36% of year 2016. Revenue from the OEM segment increased
by $1.1 million to $3.5 million for year ended December 31 2016, compared to $2.44 million for year ended December 31, 2015. Gross
profit margin decreased to 36% from 38% of year 2015. Our revenues from sales of OEM represented 9%, 9% and 4%, respectively of
our total revenues for years ended December 31, 2017, 2016 and 2015.
Cost
of sales and gross profit rate
Cost
of sales comprises of purchasing materials, labor costs for personnel employed in production, depreciation of non-current assets
used for production purpose, outsourced manufacturing cost, taxes and surcharges and water and electricity.
Our
cost of sales decreased from $39 million in year 2016 to $35 million in year 2017. The decrease was consistent with the decrease
in our revenue, which resulted in a decrease in purchases by $7 million. The decrease in purchases was mainly due to a challenging
retail environment and close of some stores.
Our
cost of sales decreased from $46 million in year 2015 to $39 million in year 2016. The decrease was consistent with the decrease
in our revenue, which resulted in a decrease in purchases by $7 million. The decrease in purchases was mainly due to the slowdown
of China’s economic growth and a challenging retail environment.
The
gross profit rate decreased from 5% in year 2016 to -48% in year 2017 due to 1) a decrease in the number of our franchised stores
from 55 as of December 31, 2016 to 40 as of December 31, 2017; 2) in order to make more fair and friendly business environment for our all distributors, we adjusted
our price policy to have same price to our district distributors and province distributors in 2017, the price sell to the district
distributor is lower than before. 3) a slowdown
in demand in menswear resulted from competition from online sales and other international brand, which led to an oversupply in
recent years and our distributors faced difficulties in selling their products and paying back the balance owed to the company.
We reacquired excess inventory of RMB 141.42 million from certain distributors and sold at its net realizable value, which caused
a loss at RMB 98.52 million. Although we are not contractually obligated to buy back the excessive inventory from any our distributors,
in order to keep long-term relationships with our distributors and support their continued operation, we decided to do same in
2017 to buy back some excessive inventory from certain distributors and we may implement similar plans in the following years.
Our
cost of sales decreased from $46 million in year 2015 to $39 million in year 2016. The decrease was consistent with the decrease
in our revenue, which resulted in a decrease in purchases by $7 million. The decrease in purchases was mainly due to the slowdown
of China’s economic growth and a challenging retail environment.
The
gross profit rate decreased from 24% in year 2015 to 5% in year 2016 due to 1) a decrease in the number of our franchised stores
from 69 as of December 31, 2015 to 55 as of December 31, 2016; 2) the slowdown of China’s economic growth; 3) a slowdown
in demand in menswear resulted from competition from online sales and other international brand, which led to an oversupply in
recent years and our distributors faced difficulties in selling their products and paying back the balance owed to the company.
We reacquired excess inventory of RMB 68.36 million from certain distributors and sold at its net realizable value, which caused
a loss at RMB 43.05 million. Although we are not contractually obligated to buy back the excessive inventory from any our distributors,
in order to keep long-term relationships with our distributors and support their continued operation, we decided to buy back some
excessive inventory from certain distributors and we may implement similar plans in the following years.
Administrative
expenses
Administrative
expenses increased by $1.34 million or 37% to $4.88 million for year 2017 from $3.54 million for 2016. The increase was mainly
due to the increase in design staff expenses and the increase attributable to the company’s share-based compensation paid
to the directors of the company.
Administrative
expenses increased by $0.88 million or 33% to $3.54 million for year 2016 from $2.67 million for 2015. The increase was mainly
due to the new depreciation expense of Anhui office building which started operations in 2016. In addition, the increase was attributable
to our share-based compensation paid to the directors and officers of the company, increased non-recurring legal and professional
fees and allowance on bad debts based on an estimated amount.
Distribution
and selling expenses
The
selling and distribution expenses decreased by $0.34 million or 9.45% to $3.2 million for the year ended December 31, 2017 from
$ 3.6 million in 2016, primarily due to the decrease of promotion related expenses including shopping mall rental expenses and
staff bonus.
The
selling and distribution expenses decreased by $3 million or 46% to $3.6 million for the year ended December 31, 2016 from $6.6
million in 2015, primarily due to the reduction of staff salary, rental payments and renovation costs as a result of the close
of corporate stores. The decrease also attributed to the reduction of promotion related expenses including shopping mall rental
expenses and staff bonus.
The
advertisement expenses of 2017, 2016 and 2015 are relatively even and selling expenses accounted for 7.5%, 9% and 11% for 2017,
2016 and 2015, respectively.
Other
gains and losses
Other
gains and losses decreased by $11 million, or 98.9%, to $0.12 million for the year ended December 31, 2017 from -$11.1 million
for year 2016. The decrease was mainly due to the fact that there was no additional provision on bad debts from three clients
as in 2016.
Other
gains and losses decreased by $7.2 million, or 187%, to -$11.1 million for the year ended December 31, 2016 from -$3.9 million
for year 2015. The decrease was mainly due to the impairment on prepayment of land purchase in Anhui, prepayment of construction
on such land and additional provision on bad debts from three clients.
Change
in fair value of warrant liabilities
We
currently have 393,836 warrants outstanding. The fair value of outstanding warrants decreased to zero as of December 31, 2017
from zero as of December 31, 2016 and $3,409 as of December 31, 2015. Change in fair value of warrant liability decreased to zero
for the year ended December 31, 2017, from $3,409 and $11,920 for years ended December 31, 2016 and 2015, respectively.
Profit
for the year
We
had a loss of $14.81 million in 2017 as compared to a loss of $11.9 million for 2016, representing a decrease of $2.91 million
or -25%. Net margin was -62% for the year ended December 31, 2017, compared to -29% for the year ended December 31, 2016.
Profit
for the year was -$ 11.9 million in 2016 as compared to $1.38 million for 2015, representing a decrease of $13.3 million or -960%.Net
margin was -29% for the year ended December 31, 2016, compared to 2% for the year ended December 31, 2015.
Profit
for the year decreased from 2016 to 2017 mainly due to the following reasons: (1) the administrative expenses increased to a large
portion of total revenue; and (2) slowdown in demand in menswear resulted from competition from online sales and other international
brand, which led to an oversupply in recent years and our distributors faced difficulties in selling their products and paying
back the balance owed to the company. We reacquired an excess inventory of RMB 141.42 million from certain distributors and sold
at its net realizable value, which caused a loss at RMB 98.52 million.
Profit
for the year decreased from 2015 to 2016 mainly due to the following reasons: (1) the full impairment of prepayment on the land
use right of the third parcel of land of our Taihu facility and prepayment to the construction on such land; (2)the administrative
expenses increased to a large portion of total revenue; and (3) a slowdown in demand in menswear resulted from competition from
online sales and other international brand, which led to an oversupply in recent years and our distributors faced difficulties
in selling their products and paying back the balance owed to the company. We reacquired an excess inventory of RMB 68.36 million
from certain distributors and sold at its net realizable value, which caused a loss at RMB 43.05 million.
|
B.
|
Liquidity
and Capital Resources
|
As
of December 31, 2017, we had cash and cash equivalents of approximately $26.05 million. 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:
Cash Flow
(all
amounts in U.S. dollars)
|
|
Fiscal Year Ended
31-Dec
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net cash provided (used in) by operating activities
|
|
$
|
1,922,252
|
|
|
$
|
3,194,287
|
|
|
$
|
2,234,623
|
|
Net cash provided by (used in) investing activities
|
|
|
-865,365
|
|
|
|
45,445
|
|
|
|
-927,876
|
|
Net cash provided by (used in) financing activities
|
|
|
-1,095,910
|
|
|
|
1,679,509
|
|
|
|
330,099
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
-39,024
|
|
|
|
4,919,241
|
|
|
|
1,636,856
|
|
Effects of exchange rate change in cash
|
|
|
1,513,138
|
|
|
|
-1,556,980
|
|
|
|
-1,027,358
|
|
Cash and cash equivalents at beginning of the period
|
|
|
24,576,341
|
|
|
|
21,214,080
|
|
|
|
20,604,582
|
|
Cash and cash equivalent at end of the period
|
|
$
|
26,050,456
|
|
|
$
|
24,576,341
|
|
|
$
|
21,214,080
|
|
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 provided by operating activities in fiscal year 2017
was $1.9 million, compared with $3.2 million in the year ended December 31, 2016. The change is mainly due to the decrease in the
amount of collection of account receivable.
Net cash provided by operating activities in
fiscal year 2016 was $3.2 million, compared with $2.2 million in the year ended December 31, 2015. The change is mainly due to
the increase in the amount of collection of account receivable.
Investing Activities
Net cash provided by investing activities in fiscal year 2017
was -$865,365, compared with $45,445 net cash provided by investing activities in 2016. The net cash used in investing activities
in 2017 was to purchase fire protection facilities.
Net cash provided by investing activities in fiscal year 2016
was $45,445, compared with $0.9 million net cash used in investing activities in 2015. The net cash provided by investing activities
in 2016 was receipt of interest income.
Financing Activities
Net cash used in financing activities in
fiscal year 2017 was $1.1 million, compared with $1.68 million net cash provided by financing activities. It mainly consisted of
repayment to related parties in 2017.
Net cash provided by financing activities in
fiscal year 2016 was $1.68 million, compared with $0.3 million net cash provided by financing activities in 2015. It mainly consisted
of new bank loans in an amount of $1.58 million in 2016.
Loans, Other Commitments, Contingencies
As of December 31, 2017, we had bank loans
in an amount of $1,606,930. 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. For the years ended December 31,
2017, 2016 and 2015, our researched and development expenses amounted to $1.38 million, $0.67 million and $0.69 million, respectively,
accounting for approximately 5.8%, 1.6% and 1.1%, of our total revenue, respectively. These expenses consist primarily of outsourced
design service fee and salary expenses of research and design department.
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, 2017 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, 2017.
|
|
Payments Due by Period
|
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Obligations
|
|
$
|
67,315,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
$
|
101,660
|
|
|
|
231,138
|
|
|
|
2,337,061
|
|
|
|
|
|
Purchase of finished goods and material
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,416,768
|
|
|
|
231,138
|
|
|
|
2,337,061
|
|
|
|
|
|
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 $37.75million in total on the phase 1, 2,
3 of construction based on detailed phase contract and the balance of construction cost of the Anui factory need to be determined
based on the on time budget on every phase. The majority of funds for construction expenses will come from the cash balance on
the account as at December 31, 2017 and the new profit of following year.
Anhui Land Use Right Acquisition Contract
On September 2, 2010, Hongri PRC entered
into an agreement with a third party to acquire a land use right in relation to the development of factories in Taihu City, Anhui
Province, at a total consideration of RMB 43 million (approximately $6.3 million).Full consideration was paid in September 2010.
There are three parts of the land. The Company has obtained land use rights certificates for the first parcel of land with 7,405
square meters on March 19, 2012, and the second parcel of land with 2,440 square meters on May 26, 2012. The Company is currently
in the process of obtaining the land use right certificate for the third parcel of the land with 100,712 square meters.
Except as set forth above, we have no other material long-term
debt, capital or operating lease or fixed purchase obligations.
Inflation
Inflation and changing prices have not
had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business
in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the apparel industry
and continually maintain effective cost controls in operations.
Seasonality
Our business, like that of many retailers,
is seasonal. Historically, we have realized more of our revenue and earnings in the fourth quarter, which includes the majority
of the holiday shopping season, than in any other fiscal quarter.
Critical Accounting Policies
The preparation of financial statements
is in conformity with IFRS as issued by the IASB. It requires the Company’s management to make assumptions, estimates and
judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies,
if any. The Company has identified certain accounting policies that are significant to the preparation of Company’s financial
statements. These accounting policies are important for an understanding of the Company’s financial condition and results
of operation. Critical accounting policies are those that are most important to the portrayal of the Company’s financial
condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain
accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility
that future events affecting the estimate may differ significantly from management’s current judgments. The Company believes
the following critical accounting policies involve the most significant estimates and judgments used in the preparation of the
Company’s financial statements.
Revenue Recognition
We recognize our revenue when the amount
of revenue can be reliably measured, it is probable that future economic benefits will flow to us and when specific criteria have
been met for each of our activities as described below.
Sales of goods-wholesale.
Revenues
are recognized upon delivery of products to distributors, and when there is no unfulfilled obligation that could affect acceptance
of products by distributors. Delivery costs do not occur until the products have been delivered to the specific location and the
risk of loss has been transferred to distributors. Delivery costs incurred by us are recorded in selling and distribution expenses.
Revenues are recorded based on the price specified
in the sales contracts, net of value-added tax, and sales rebates and returns estimated at the time of sale. Provisions for estimated
sales return were estimated at nil 2015, 2016 and 2017. Sales rebates are estimated based on anticipated annual purchases and the
annual rebates are settled by offsetting the accounts receivables from each of these distributors at the end of the year. We accept
product returns from distributors for quality reasons and only if the distributors follow our procedures in processing the returned
products. Accumulated experience is used to estimate and provide for returns. No element of financing is deemed present as sales
are made with a credit term of 240 days for our distributors, which is consistent with market practice. Credit terms were 120 to
150 days in 2017.
Although none of the distributor agreements
contained or contains any right of return provisions or other similar rights, we implemented an initiative in 2016 and 2017 to
buyback certain excessive inventory from certain distributors so that the relationship with authorized retailers and distributors
can be developed in a healthier long-term manner.
Sales of goods-retail.
We had 2
corporate shops during the year 2016 and had 1 corporate stores as of December 31, 2017. Revenues generated from these corporate
shops are recognized at the time of register receipt. Retail sales returns within three days will be accepted only for quality
reasons. Accumulated experience is used to estimate and provide for such returns at the time of sale. We do not operate any retail
customer loyalty programs. Loyalty programs may be offered by distributors and authorized retailers, who bear all related program
costs.
Interest income Interest income is recognized
using the effective interest method.
Impairment of Trade and Other Receivables
We assess the collectability of trade and
other receivables. Such assessment is based on the credit history of our distributors and current market conditions. We reassess
the impairment losses at each statement of financial position date and make provisions, if necessary.
Net Realizable Value of Inventories
Net realizable value of inventories is
the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These
estimates are based on current market conditions and the historical expense of selling products of a similar nature. Changes in
selling price could be significant as a result of changed competitive conditions.
Provision for Estimated Sales Return
We reassess the provision for estimated
sales return at each statement of financial position date based on current market conditions and adjust provision, if necessary.
Provision for Liability
We reassess the provision for constructive
liability at each statement of financial position date based on current market conditions and adjust provision, if necessary.
Capital and Reserves
Share capital represents the nominal value
of shares that have been issued by the Group. Share capital is determined using the nominal value of shares that have been issued.
Retained profits include all current and
prior period results as determined in the combined statement of comprehensive income.
Foreign currency translation reserve arising
on the translation are included in the currency translation reserve.
In accordance with the relevant laws and
regulations of PRC, the subsidiaries of the Group established in PRC are required to transfer 10% of its annual statutory net profit
(after offsetting any prior years’ losses) to the statutory reserve. When the balance of such reserve reaches 50% of the
subsidiary’s share capital, any further transfer of its annual statutory net profit is optional. Such reserve may be used
to offset accumulated losses or to increase the registered capital of the subsidiary subject to the approval of the relevant authorities.
However, except for offsetting prior years’ losses, such statutory reserve must be maintained at a minimum of 25% of the
share capital after such usage. The statutory reserves are not available for dividend distribution to the shareholders.
All transactions with owners of the Group
are recorded separately within equity.
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
We are required to pay income taxes in
the PRC. In order to determine the provision for income taxes, we have to exercise critical judgment. During the ordinary course
of our business, there may be ultimate determinations on income taxes that contain uncertainty. We recognize liabilities for expected
taxes based on our estimates of whether additional taxes may be due. When the final tax outcome of these matters is different from
the amounts that were initially recognized, such differences will impact the current and deferred tax provisions in the period
in which such determination is made.
See “Introductory Notes—Forward-Looking Information.”
|
ITEM 6.
|
DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
Our current directors and executive officers, their ages and
positions are as follows:
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
Keyan Yan
|
|
46
|
|
Chairman, Director, President and Chief Executive Officer
|
|
|
|
|
|
Themis Kalapotharakos
|
|
43
|
|
Director
|
|
|
|
|
|
Lixia Tu
|
|
36
|
|
Chief Financial Officer, Secretary and Director
|
|
|
|
|
|
John Sano
|
|
48
|
|
Independent Director
|
|
|
|
|
|
Matthew C. Los
|
|
53
|
|
Independent Director
|
|
|
|
|
|
Zhongmin Zhang
|
|
75
|
|
Independent Director
|
|
|
|
|
|
Yuet Mei Chan
|
|
37
|
|
Independent Director
|
Mr. Keyan Yan
. Mr. Yan has been
the Chairman of our board of directors since the closing of the Share Exchange on August 1, 2014. Mr. Yan has over 16 years of
senior management experience. He served as Chairman and Chief Executive Officer of KBS International between March 2011 and August
2014. From 1994 to present, Mr. Yan has served as general manager of Hongri PRC. Prior to joining us, Mr. Yan served as workshop
manager, production manager and marketing manager of Zhenshi Knitting Factory in Shishi, China from 1989-1994. Mr. Yan obtained
a certificate of corporate management from Xiamen University in 1992.
Ms. Lixia Tu.
Ms. Tu became the
Company’s Chief Financial Officer on June 25, 2015. Ms. Tu has more than night years of accounting and audit experience,
familiar with IFRS, US GAAP, Sarbanes-Oxley and the compliance requirements of SEC. After she worked as a project manager at BDO
China Fu Jian SHU LUN PAN Certified Public Accountants for four years, she worked as a CFO or a financial consultant for some other
companies. Ms. Tu holds a Master’s degree in professional accounting from the University of Deakin in Australia. Ms. Tu is
also a member of the Chartered Association of Certified Accountants.
Mr. Themis Kalapotharakos.
Mr. Kalapotharakos
became our director on June 15, 2015. Mr. Kalapotharakos has acquired a range of expertise of a wide spectrum of business activities.
He has extensive high-level experience at the Shipping, Trading and Finance industries where he has founded, developed and operated
various businesses starting from the ground up. His roles involved regular communication and coordination with investors,
financial institutions, capital market authorities, custodian and administrative banks, auditors and legal counsel. He holds a
Bachelor’s degree from Cardiff University and an MSc Degree from Cass Business School in the UK.
John Sano.
Mr. Sano has been an
independent director of the Company since the closing of the Share Exchange on August 1, 2014. Mr. Sano has over 20 years of experience
in apparel & home furnishings concept, design, sourcing, production, and e-commerce. He has extensive experience in all aspects
of the retail clothing supply chain, from conceptualization to final production and distribution. Mr. Sano has also advised and
worked closely with numerous top brands in the US. He has been General Director of Sano Design Services since 2002. Mr. Sano has
an associate’s degree in interior design from Traphagen School of Design.
Mr. Matthew C. Los.
Mr. Los became
our director on October 8, 2015. Mr. Los has acquired a range of expertise of a wide spectrum of business activities. He has over
20 years’ experience at high level management, and has founded, developed and operated various businesses in the shipping,
energy, telecommunications real estate industries starting from the ground up. He also has experience in the capital markets
and was the CEO of Aquasition Corp., the predecessor of the Company, prior to the Share Exchange. Mr. Los has a BSc in Mechanical
Engineering and Computer Aided Design from University of Westminster in the UK.
Mr. Zhongmin Zhang.
Mr. Zhang became our director on
July 10, 2017. He has over 45 years of extensive experience in many facets of textile business, including in production, marketing,
and management. Currently, Mr. Zhang is the president of Zhengzhou Guangda Textile Printing & Dyeing Co., Ltd. which has an
annual production of 216 million meters of various textile products, with a value of RMB 800 million. Holding a title of Senior
Engineer, Mr. Zhang graduated from Harbin Institute of Technology in 1965. He also has certificates in finance management and civil
law.
Ms. Yuet Mei Chan.
Ms. Chan became our director on July
10, 2017. She has over 15 years of experience in the banking industry. She held several senior positions in a prestigious bank
in Hong Kong from 2001-2016. She is currently a financial consultant at AIA and specializes in analyzing financial situations and
market trends. Ms. Chan holds a diploma in Computing and Business Studies from Hong Kong St. Perth College.
No family relationship exists between any
of the persons named above.
In 2017, we paid an aggregate of approximately
$318,728 in cash as compensation to our directors and senior management as a group, and some of our directors and executive officers
also received compensation in the form of annual salaries and bonuses. We do not set aside or accrue any amounts for pension, retirement
or other benefits for our directors and senior management. However, we reimburse our directors for out-of-pocket expenses incurred
in connection with their services in such capacity.
On July 10, 2017, we granted an aggregate
of 215,000 restricted shares of common stock to certain executive officers and directors of the Company as compensations for their
services in 2017. All the shares vested immediately upon granting. On February 10, 2018, we granted an additional 285,000 restricted
shares of common stock to our executive officers and directors as compensations for their services in 2018.
Employment Agreements
Please refer to Item 10 “Additional
Information—C. Material Contracts.”
Our board of directors currently consists of seven members,
Keyan Yan, Lixia Tu, John Sano, Themis Kalapotharakos, Matthew C. Los, Yuet Mei Chan and Zhongmin Zhang.
The Board has established the Audit Committee,
which is comprised entirely of independent directors. From time to time, the Board may establish other committees.
Audit Committee
Our Audit Committee is currently composed
of three members: Yuet Mei Chan, John Sano and Matthew C. Los. Our Board of Directors determined that each member of the Audit
Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership.
Each Audit Committee member also meets NASDAQ’s financial literacy requirements. Matthew C. Los serves as Chair of the Audit
Committee.
Our Board of Directors has determined that
Matthew C. Los is the “audit committee financial expert” as such term is defined in Item 407(d) of Regulation S-K promulgated
by the SEC and also meets NASDAQ’s financial sophistication requirements.
The Audit Committee oversees our accounting
and financial reporting processes and the audits of the financial statements of our Company. The Audit Committee is responsible
for, among other things:
|
●
|
the appointment, compensation, retention
and oversight of the work of the independent auditor;
|
|
●
|
reviewing and pre-approving all auditing
services and permissible non-audit services (including the fees and terms thereof) to be performed by the independent auditor;
|
|
●
|
reviewing and approving all proposed related-party
transactions;
|
|
●
|
discussing the interim and annual financial
statements with management and our independent auditors;
|
|
●
|
reviewing and discussing with management
and the independent auditor (a) the adequacy and effectiveness of the Company’s internal controls, (b) the Company’s
internal audit procedures, and (c) the adequacy and effectiveness of the Company’s disclosure controls and procedures, and
management reports thereon;
|
|
●
|
reviewing reported violations of the Company’s
code of conduct and business ethics; and
|
|
●
|
reviewing and discussing with management
and the independent auditor various topics and events that may have significant financial impact on the Company or that are the
subject of discussions between management and the independent auditors.
|
As of December 31, 2017, we employed 192
full-time employees, of which 127 employees at our production facility in Anhui Province, China, are contracted with through a
labor agency. The following table sets forth the number of our full-time employees by function.
Function
|
|
Number of Employees of 2017
|
|
Management and Administration
|
|
|
27
|
|
Marketing, Sales and Distribution
|
|
|
17
|
|
Design and Product Development
|
|
|
22
|
|
Production
|
|
|
98
|
|
Procurement, Warehousing and Logistics
|
|
|
19
|
|
Quality and Assurance
|
|
|
9
|
|
TOTAL
|
|
|
192
|
|
We believe that we have maintained a satisfactory
working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting
staff for company’s operations. None of company’s employees is represented by a labor union.
Our employees in China participate in a
state pension plan organized by Chinese municipal and provincial governments. The company is required to make monthly contributions
to the plan for each employee at the rate of 23% of his or her average assessable salary. In addition, the company is required
by Chinese law to cover employees in China with various types of social insurance. The company believes that it is in material
compliance with the relevant PRC laws.
The following table sets forth information
regarding beneficial ownership of each class of our voting securities as of April 27, 2018 (i) by each person who is known by us
to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of our
officers and directors as a group.
Name
|
|
Office, If Any
|
|
Title of Class
|
|
Amount
and Nature of Beneficial Ownership
(1)
|
|
|
Percent
of Class
(2)
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
Keyan Yan
(3)
|
|
Chairman, CEO and President
|
|
Common Stock
|
|
|
1,094,320
|
|
|
|
48.16
|
%
|
Lixia Tu
|
|
Chief Financial Officer and Director
|
|
Common Stock
|
|
|
100,000
|
|
|
|
4.40
|
%
|
Themis Kalapotharakos
|
|
Director
|
|
Common Stock
|
|
|
35,000
|
|
|
|
1.54
|
%
|
John Sano
|
|
Director
|
|
Common Stock
|
|
|
5,000
|
|
|
|
*
|
|
Matthew C. Los
|
|
Director
|
|
Common Stock
|
|
|
35,000
|
|
|
|
1.54
|
%
|
Zhongmin Zhang
|
|
Director
|
|
Common Stock
|
|
|
5,000
|
|
|
|
*
|
|
Yuet Mei Chan
|
|
Director
|
|
Common Stock
|
|
|
5,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All officers and directors as a group
(7 persons named above)
|
|
|
|
|
|
|
1,279,321
|
|
|
|
56.32
|
%
|
5% Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Keyan Yan
(3)
|
|
|
|
Common Stock
|
|
|
1,094,320
|
|
|
|
48.16
|
%
|
* 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 April 27, 2018, a total of 2,271,299 shares of commons stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the denominator.
|
(3)
|
Including 844,320 shares owned by Mr. Chan Sun Keung. On March 9, 2011, Keyan Yan entered into an option agreement with Mr. Chan Sun Keung, which was amended on August 1, 2014. Pursuant to the option agreement, as amended, upon his request, Mr. Yan has the option to acquire all of the shares of common stock of the Company that Chan Sun Keung acquired at any time.
|
None of our existing shareholders has voting rights that
differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result
in our change in control.
|
ITEM 7.
|
MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS
|
Please refer to Item 6 “Directors,
Senior Management and Employees—E. Share Ownership.”
|
B.
|
Related Party Transactions
|
From time to time, KBS and its all subsidiaries
borrowed money from our Chairman and Chief Executive Officer, Mr. Keyan Yan, to pay for Company expenses. These amounts are interest-free,
unsecured and repayable on demand. In years 2017 and 2016, Mr. Yan paid all the Company expenses in connection with the Company’s
Nasdaq continued listing and SEC reporting out of his pocket. As of December 31, 2017 and 2016, the balance of these amounts we
borrowed from Mr. Yan was $154,137 and $1,125,912, the balance of amounts we borrowed from Chen Bizhen, Mr. Yan’s wife, was
$0 and $24,416, respectively.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
ITEM 8.
|
FINANCIAL
INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information
|
Financial Statements
We have appended consolidated financial statements filed as
part of this report. See Item 18 “Financial Statements.”
Legal Proceedings
We may be subject to legal proceedings,
investigations and claims incidental to the conduct of our business from time to time. We are currently not party to any legal
or arbitration proceedings, including those relating to bankruptcy, receivership or similar proceedings and those involving any
third party, which may have, or have had in the recent past, significant effects on our financial position or profitability.
Dividend Policy
To date, we have not paid any cash dividends
on our shares. As a Marshall Islands company, we may only declare and pay dividends except when the corporation is insolvent or
would thereby be made insolvent or when the declaration or payment would be contrary to any restrictions contained in our Articles
of Incorporation. Dividends may be declared and paid out of surplus only; but in case there is no surplus, dividends may be declared
or paid out of the net profits for the fiscal year in which the dividend is declared and for the preceding fiscal year. We currently
anticipate that we will retain any available funds to finance the growth and operation of our business and we do not anticipate
paying any cash dividends in the foreseeable future. Additionally, our cash held in foreign countries may be subject to certain
control limitations or repatriation requirements, limiting our ability to use this cash to pay dividends.
No significant change has occurred since the date of our consolidated
financial statements filed as part of this annual report.
|
ITEM 9.
|
THE OFFER
AND LISTING
|
Our common stock is listed on the NASDAQ
Capital Market and trade under the symbol “KBSF.” Between January 23, 2013 and November 3, 2014, our common stock was
traded on the NASDAQ Capital Market under the symbol “AQU.” Our Warrants and Units are quoted on the OTC Markets under
the symbols “KBSFW” and “KBSFU”, respectively. Prior to November 3, 2014, our Warrants and Units were quoted
on the OTC Markets under the symbols “AQUUF” and “AQUUU”, respectively. Before their quotation on the OTC
Markets, our Units commenced to trade on the Nasdaq Stock Market on October 26, 2012 and our Warrants commenced to trade separately
from its Units on January 23, 2013.
On February 3, 2017, a special shareholder
meeting was held at the Company’s headquarters in China and at the meeting, our shareholders approved a proposal to grant
discretionary authority to the Board of Directors of the Company to effect a reverse stock split of issued and outstanding shares
of common stock at a ratio within the range from one-for-two up to one-for-twenty; and determine whether to pay in cash the fair
value of fractions of a share of common stock as of the time when those entitled to receive such fractions are determined, or to
entitle shareholders to receive, in lieu of any fractional share, the number of shares of common stock rounded up to the next whole
number. On February 3, 2017, after the special shareholder meeting, our Board of Directors approved a one-for-fifteen reverse stock
split of the Company’s issued and outstanding common stock. In addition, in lieu of issuing any fractional share, the Board of
Directors decided that shareholders are entitled to receive the number of shares of common stock rounded up to the next whole number.
Our common stock began trading on the NASDAQ Stock Market on a split-adjusted basis when the market opened on February 9, 2017.
The following table provides the high and
low reported market prices of our securities as reported by Nasdaq Stock Market for the periods indicated. Prices of common stock
have been adjusted to reflect the one-for-fifteen reverse stock split effected in February 2017.
|
|
Units
|
|
|
Common Stocks
|
|
|
Warrants
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
10.38
|
|
|
$
|
10.00
|
|
|
$
|
164.70
|
|
|
$
|
135.00
|
|
|
$
|
7.50
|
|
|
$
|
0.20
|
|
2014
|
|
|
10.74
|
|
|
|
5.50
|
|
|
|
156.00
|
|
|
|
63.75
|
|
|
|
5.25
|
|
|
|
0.11
|
|
2015
|
|
|
4.25
|
|
|
|
2.11
|
|
|
|
206.40
|
|
|
|
31.80
|
|
|
|
2.85
|
|
|
|
0.02
|
|
2016
|
|
|
4.20
|
|
|
|
4.20
|
|
|
|
35.10
|
|
|
|
2.40
|
|
|
|
0.03
|
|
|
|
0.00
|
|
2017
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
18.00
|
|
|
|
1.41
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarterly Highs and Lows 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.50
|
|
|
$
|
5.50
|
|
|
$
|
83.10
|
|
|
$
|
42.45
|
|
|
$
|
2.70
|
|
|
$
|
0.14
|
|
Second Quarter
|
|
|
4.25
|
|
|
|
3.00
|
|
|
|
206.40
|
|
|
|
47.25
|
|
|
|
0.17
|
|
|
|
0.25
|
|
Third Quarter
|
|
|
4.25
|
|
|
|
2.11
|
|
|
|
97.50
|
|
|
|
45.30
|
|
|
|
0.07
|
|
|
|
0.02
|
|
Fourth Quarter
|
|
|
4.20
|
|
|
|
2.11
|
|
|
|
89.40
|
|
|
|
31.80
|
|
|
|
0.19
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarterly Highs and Lows 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.20
|
|
|
$
|
4.20
|
|
|
$
|
35.10
|
|
|
$
|
4.05
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
Second Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.75
|
|
|
|
2.40
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.30
|
|
|
|
4.20
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.75
|
|
|
|
4.20
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarterly Highs and Lows 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
18.00
|
|
|
$
|
2.70
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Second Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.49
|
|
|
|
2.28
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Third Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.45
|
|
|
|
1.41
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Fourth Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
15.00
|
|
|
|
2.10
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarterly Highs and Lows 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
11.70
|
|
|
$
|
3.53
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct-17
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.03
|
|
|
|
2.10
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Nov-17
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
15.00
|
|
|
|
2.03
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Dec-17
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
9.00
|
|
|
|
7.07
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Jan-18
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.24
|
|
|
|
3.06
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Feb-18
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
6.33
|
|
|
|
4.59
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Mar-18
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
11.70
|
|
|
|
4.76
|
|
|
|
N/A
|
|
|
|
N/A
|
|
April 2018
(through April 27, 2018)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8.44
|
|
|
|
4.60
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Approximate Number of Holders of Our
Securities
On April 27, 2018, there was 1 holder of
record of our Units, 401 shareholders of record of our common stock and 1 holders of record of our Warrants. Certain of our securities
are held in nominee or street name so the actual number of beneficial owners of our securities is greater than the number of record
holders set forth above.
Not applicable.
See our disclosures above under “A. Offer and Listing
Details.”
Not applicable.
Not applicable.
Not applicable.
|
ITEM 10.
|
ADDITIONAL
INFORMATION
|
Our Amended and Restated Articles of Incorporation
authorize the Company to issue up to 155,000,000 shares with a par value of $0.0001, consisting of 150,000,000 shares of common
stock and 5,000,000 shares of preferred stock. As of date of this report, there are 2,271,299 shares of common stock issued and
outstanding. We have never issued any preferred stock.
|
●
|
As of date of this report, we have 717
IPO Units outstanding.
|
|
●
|
As of date of this report, we have 393,836
warrants outstanding (including 369,302 IPO Warrants and 24,534 Placement Warrants) and each warrant entitles the holder to purchase
one share of common stock at a purchase price of $172.5.
|
|
B.
|
Memorandum and Articles of Association
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The following represents a summary of
certain key provisions of our articles of incorporation and bylaws. The summary does not purport to be a summary of all of the
provisions of our articles of incorporation and bylaws. For more complete information you should read our amended and restated
articles of incorporation and bylaws, each listed as an exhibit to this report.
We were incorporated in the Marshall Islands
on January 26, 2012 under the Marshall Islands Business Corporations Act (“BCA”). The purpose of the Company is to
engage in any lawful act or activity for which corporations may now or hereafter be organized under the BCA. Our amended and restated
articles of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.
Description of Common Stock
Each outstanding
share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Upon our dissolution,
liquidation or winding up of the affairs of the Company, after payment in full of all amounts required to be paid to creditors
and to the holders of preferred stock having liquidation preferences, if any, the holders or our common stock will be entitled
to receive pro rata our remaining assets available for distribution. Holders of common stock do not have conversion, redemption
or preemptive rights to subscribe to any of our securities.
Blank Check Preferred Stock.
Our Board of Directors is authorized, without
any further vote or action by our stockholders, to issue up to 5,000,000 shares of preferred stock in different classes and series
and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other rights, including
dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the
powers and rights associated with the common stock, at such times and on such other terms as they think proper. Our Board of Directors
may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the
removal of our management.
Warrants
As of date of this report, we have 393,836
warrants outstanding, among which 369,302 warrants were issued to the public in our IPO (the “IPO Warrants”). Each
of the IPO Warrants entitles the holder to purchase one share of common stock at a price of $172.5 expiring on July 31, 2019, provided
that there is an effective registration statement covering the shares of common stock underlying the IPO Warrants.
The Company may redeem the IPO Warrants
at a price of $0.01 per warrant upon 30 days’ notice, after they become exercisable and prior to their expiration, only in
the event that the last sale price of the shares of common stock is at least $17.50 per share for any 20 trading days within a
30-trading day period (“30-Day Trading Period”) ending three business days prior to the date on which notice of redemption
is given, provided there is a current registration statement in effect with respect to the shares of common stock underlying such
IPO Warrants throughout the 30-day redemption period. The Company is only required to use its best efforts to maintain the effectiveness
of the registration statement covering the underlying common stock of the IPO Warrants. There are no contractual penalties for
failure to deliver securities if a registration statement is not effective at the time of exercise. Additionally, in the event
that a registration statement is not effective at the time of exercise, the holder of such warrant shall not be entitled to exercise
such warrant for cash and in no event (whether in the case of a registration statement not being effective or otherwise) will the
Company be required to net cash settle the warrant exercise.
In addition, Aqua Investments Corp., an
entity controlled by certain founding shareholders of the Company, acquired 24,534warrants, each entitles the holder to purchase
one share of common stock at a price of $172.50, expiring on July 31, 2019 (the “Placement Warrants”). The Placement
Warrants are identical to the IPO Warrants except that the Placement Warrants (i) may be exercised for cash or on a cashless basis;
(ii) will not be redeemable by the Company and (ii) may be exercised even if there is not an effective registration statement relating
to the shares underlying the warrants, so long as they are held by the initial purchaser or any of its permitted transferees.
As of date of this report, we also have
717 IPO Units outstanding and publicly trading, each including one IPO Warrant and one share of our common stock.
Directors
The business and affairs of the Company
are managed by or under the direction of our Board of Directors.
Our directors are elected by the holders
of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled to
vote generally in the election of directors (“Voting Stock”). Our amended and restated articles of incorporation provide
that cumulative voting shall not be used to elect directors. Each director will be elected to serve until the next annual meeting
of shareholders and until his/her successor shall have been duly elected and qualified, except in the event of his/her death, resignation,
removal or the earlier termination of his/her term of office.
Any director or the entire Board of Directors
may be removed at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the total voting
power of the Voting Stock entitled to vote thereon or with cause by directors constituting at least two-thirds of the entire Board.
Vacancies in the Board of Directors occurring
by death, resignation, the creation of new directorships, the failure of the shareholders to elect the whole board at any annual
election of directors, or, except as herein provided, for any other reason, including removal of directors for cause, may be filled
either by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, at any special
meeting called for that purpose or at any regular meeting of the Board. Vacancies occurring by removal of directors without cause
may be filled only by vote of the shareholders.
Shareholder Meetings
Annual stockholder meetings will be held
at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands.
Under our amended and restated articles
of incorporation, special meetings may be called by the board of directors, or by the secretary of the Company requested by stockholders
representing certain amount of voting power. Our board of directors shall give not less than 15 days and not more than 60 days
prior written notice of a shareholders’ meeting to each shareholder of record entitled to vote thereat and to each shareholder
of record who, by reason of any action proposed at such meeting would be entitled to have his/her shares appraised if such action
were taken, and the notice shall include a statement of that purpose and to that effect.
Our bylaws provide that a meeting of shareholders
is duly constituted if, at the commencement of the meeting, there are shareholders present in person or by proxy representing not
less than a majority of the votes of the shares issued and outstanding and entitled to vote on resolutions of shareholders to be
considered at the meeting.
If a quorum is present, the affirmative
vote of a majority of the shares of stock represented at the meeting will be the act of the shareholders. At any meeting of shareholders,
each shareholder entitled to vote any shares on any manner to be voted upon at such meeting shall be entitled to one vote on such
matter for each such share. Any action required or permitted to be taken at a meeting, may be taken without a meeting if a consent
in writing setting forth the action so taken, is signed by all the shareholders entitled to vote with respect to the subject matter
thereof.
Dissenters’ Rights of Appraisal and Payment.
Under the BCA, our stockholders have the
right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made
in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting
stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation.
In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive
payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must
follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree
on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court
in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the
dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed
appraiser.
Stockholders’ Derivative Actions
Under the BCA, any of our stockholders
may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder
bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction
to which the action relates.
Indemnification of Officers and Directors
The BCA authorizes
corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for
monetary damages for breaches of directors’ fiduciary duties. Our amended and restated articles of incorporation include
a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest
extent permitted by law. We must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly
authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and
offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain
employees for some liabilities.
The limitation
of liability and indemnification provisions in our amended and restated articles of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect
of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent
we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
Information concerning our material contracts
governing the business of the Company is included elsewhere in this report or in the information incorporated by reference herein.
On April 23, 2018, the Company entered
into an employment agreement with Keyan Yan, pursuant to which Mr. Yan agreed to act as the Chief Executive Officer of the Company.
The employment agreement has an initial term of three years, which will be automatically extended by a year at the expiration of
the initial term and at the expiration of every one-year extension, until terminated in accordance with the termination provisions
of the agreement. His compensation will be determined by the Board and reviewed from time to time according to the Company’s
policies. Mr. Yan is eligible to participate in annual performance bonus plans as may be established by the Company from time to
time as well as the Company’s equity incentive plan when and if such a plan is adopted by the Board.
On April 23, 2018, the Company entered
into an employment agreement with Lixia Tu, pursuant to which Ms. Tu agreed to act as the Chief Financial Officer of the Company.
The employment agreement has an initial term of three years, which will be automatically extended by a year at the expiration of
the initial term and at the expiration of every one-year extension, until terminated in accordance with the termination provisions
of the agreement. Her compensation will be determined by the Board and reviewed from time to time according to the Company’s
policies. Ms. Tu is eligible to participate in annual performance bonus plans as may be established by the Company from time to
time as well as the Company’s equity incentive plan when and if such a plan is adopted by the Board.
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 ordinary shares 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 ordinary shares. 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 ordinary shares.
PRC Exchange Controls
Under the Foreign Currency Administration
Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities,
RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as
trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion
of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items,
such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office.
Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate
foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated
foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises
must convert all of their foreign currency proceeds into RMB.
On October 21, 2005, SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special
purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose
of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control
of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established
or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas
investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with
the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment
or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material
change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result
in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends
and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange
administration regulations.
On August 29, 2008, SAFE promulgated Circular
142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted
RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of Circular
142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not
be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital
converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed
without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans
have not been used. On April 9, 2015, SAFE released the Notice on the Reform of the Administration Method for the Settlement of
Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, which came into force and superseded SAFE Circular
142 on June 1, 2015. Circular 19 allows foreign invested enterprises to settle their foreign exchange capital on a discretionary
basis according to the actual needs of their business operation and provides the procedures for foreign invested companies to use
Renminbi converted from foreign currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the
principle that Renminbi converted from foreign currency-denominated capital of a foreign-invested company may not be directly or
indirectly used for purposes beyond its business scope.
SAFE also promulgated Circular 59 in November 2010, which tightens
the regulation over settlement of net proceeds from overseas offerings and requires, among other things, the authenticity of settlement
of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the
offering documents.
In May, 2013 SAFE promulgated Circular 21 which provides for
and simplifies the operational steps and regulations on foreign exchange matters related to direct investment by foreign investors,
including foreign exchange registration, account opening and use, receipt and payment of funds, and settlement and sales of foreign
exchange.
See also “Item 4.B. Information on the Company—Business
Overview—Regulation—Dividend Distributions” and “Item 4.B. Information on the Company—Business Overview—Regulation—Circular
37.”
The following is a general summary of
the material Marshall Islands, Hong Kong, BVI, PRC and U.S. federal income tax consequences relevant to an investment in our units,
shares of common stock and warrants to acquire our shares of common stock, sometimes referred to collectively in this summary as
our “securities”. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular
prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this prospectus,
all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address
United States state or local tax laws, or tax laws of jurisdictions other than the Marshall Islands, Hong Kong, the BVI, the PRC
and the United States. We recommend that you consult your own tax advisors with respect to the consequences of acquisition, ownership
and disposition of our securities.
Marshall Islands Taxation
The following are the material Marshall
Islands tax consequences of our activities to us and to our stockholders and warrant holders of investing in our Common Stock and
warrants. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding
tax or income tax will be imposed upon payments of dividends by us to our stockholders or proceeds from the disposition of our
common stock and warrants, provided such stockholders or warrant holders, as the case may be, are not residents in the Marshall
Islands. There is no tax treaty between the United States and the Republic of the Marshall Islands.
BVI Taxation
The BVI does not impose a withholding tax
on dividends paid to us by our BVI subsidiary, nor does the BVI levy any capital gains or income taxes on us or our BVI subsidiary.
However, our BVI subsidiary is required to pay the BVI government an annual license fee based on the number of shares it is authorized
to issue.
There is no income tax treaty or convention currently in effect
between the United States and the BVI.
Hong Kong Taxation
Our Hong Kong subsidiaries, under the current laws of Hong Kong,
are subject to profits tax of 16.5%. No provision for Hong Kong profits tax has been made as our Hong Kong subsidiaries have no
taxable income.
PRC Taxation
We are a holding company incorporated in
the Marshall Islands, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation
rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax
rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent,
will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s
jurisdiction of incorporation and China to reduce such rate.
Under the Arrangement between the Mainland
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax
rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the
aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject
to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below.
However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under
the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration
of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding
tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to
be received by us and ultimately by shareholders.
According to the Notice Regarding Interpretation
and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the
right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner”
may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit
company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established
for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country
of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations
as manufacturing, distribution and management. As our Hong Kong holding companies are controlling companies and are not engaged
in substantial business operations, they could be considered as conduit companies by tax authorities and we do not expect them
to be a beneficial owner.
In addition to the changes to the current tax structure, under
the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered
a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term
“de facto management bodies” as “an establishment that exercises, in substance, overall management and control
over the production, business, personnel, accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax
authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently
consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income
would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends
paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax,
have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
U.S. Federal Income Taxation
The following is a discussion of certain
material U.S. federal income tax consequences of the acquisition, ownership and disposition of our securities. It does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation.
The discussion applies only to holders that hold their securities as capital assets (generally property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based on the Code,
income tax regulations promulgated thereunder, judicial positions, published positions of the Internal Revenue Service, or the
IRS, and other applicable authorities, all as in effect as of the date hereof and all of which are subject to change, possibly
with retroactive effect. This discussion is general in nature and is not exhaustive of all possible tax considerations, nor does
the discussion address any state, local or foreign tax considerations or any U.S. tax considerations (e.g., estate or gift tax)
other than U.S. federal income tax considerations, that may be applicable to particular holders.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal
income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
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banks, insurance companies or other financial
institutions;
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persons subject to the alternative minimum
tax;
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tax-exempt organizations;
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controlled foreign corporations, passive
foreign investment companies and corporations that accumulate earnings to avoid United States federal income tax;
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certain former citizens or long-term residents
of the United States;
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dealers in securities or currencies;
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traders in securities that elect to use
a mark-to-market method of accounting for their securities holdings;
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persons that own, or are deemed to own,
more than five percent of our capital stock;
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holders who acquired our stock as compensation
or pursuant to the exercise of a stock option; or
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persons who hold our shares as a position
in a hedging transaction, “straddle,” or other risk reduction transaction.
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For purposes of this discussion, a U.S.
holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation,
or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the
United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an estate
the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S. court is able
to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control
all substantial decisions of the trust, or (b) it has a valid election in effect under applicable law and regulations to be treated
as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is neither a U.S. holder nor a partnership
or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity
classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally
will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax
advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our shares.
As a result of consummation of the Share
Exchange, (i) we acquired substantially all the properties of KBS International, a U.S. corporation, and (ii) the former shareholders
of KBS International held at least 80 percent of our common stock by reason of having held stock of KBS International. Accordingly,
under Section 7874 of the Code, we are treated for U.S. federal tax purposes as a U.S. corporation and, among other consequences,
are subject to U.S. federal income tax on our worldwide income. This discussion assumes that Section 7874 of the Code continues
to apply to treat us as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal of Section
7874 of the Code), we were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences described
herein could be materially and adversely affected.
U.S. Federal Income Tax Consequences
for U.S. Holders
Distributions
In the event that distributions are paid
on our common stock, the gross amount of such distributions will be included in the gross income of the U.S. holder as dividend
income on the date of receipt to the extent that the distribution is paid out of current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. Such dividends will be eligible for the dividends-received deduction allowed
to corporations in respect of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders,
including individuals, may be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a
foreign tax credit with respect to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules
are complex, and their application in connection with Section 7874 of the Code and the Agreement Between the Government of the
United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the
Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S.
holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit
rules and the U.S.-PRC Tax Treaty.
To the extent that dividends paid on our
common stock exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return
of tax basis on our common stock, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated
as gain from the disposition of those common stock. Because Section 7874 of the Code has applied to treat us as a U.S. corporation
only since consummation of the Share Exchange in 2014, we may not be able to demonstrate to the IRS the extent to which a distribution
on our common stock exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles),
in which case all of such distribution will be treated as a dividend for U.S. federal income tax purposes.
Sale or Other Disposition
U.S. holders of our common stock will recognize
taxable gain or loss on any sale, exchange, or other taxable disposition of common stock equal to the difference between the amount
realized for the common stock and the U.S. holder’s tax basis in the common stock. This gain or loss generally will be capital
gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax rates if the common
stock has been held for more than one year. The deductibility of capital losses is subject to limitations. A U.S. holder may be
eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale or other disposition
of common stock. However, the foreign tax credit rules are complex, and their application in connection with Section 7874 of the
Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect
to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
Unearned Income Medicare
Contribution
Certain U.S. holders who are individuals,
trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains from
the sale or other disposition of shares of stock for taxable years beginning after December 31, 2012. U.S. holders should consult
their own advisors regarding the effect, if any, of this legislation on their ownership and disposition of our common stock.
Passive Foreign Investment Company Rules
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In general, a foreign corporation will be a passive foreign
investment company (“PFIC”) for any taxable year in which (1) 75% or more of its gross income consists of passive income
(such as dividends, interest, rents royalties and certain gains) or (2) 50% or more of the average quarterly value of its assets
consists of assets that produce, or are held for the production of, passive income.
If we own at least 25% (by value) of the stock of another corporation,
we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving
our proportionate share of the other corporation’s income. Although we do not expect to be a PFIC, it is not entirely clear how
the contractual arrangements between us and our variable interest entities will be treated for purposes of the PFIC rules. If it
were determined that we do not own the stock of our variable interest entities for United States federal income tax purposes (for
instance, because the relevant PRC authorities do not respect these arrangements), we may be treated as a PFIC.
If we were a PFIC for any taxable year
during which a U.S. Holder owned our ordinary shares, the U.S. Holder may be subject to adverse tax consequences. Generally, gain
recognized upon a disposition (including, under certain circumstances, a pledge) of ordinary shares by the U.S. Holder would be
allocated ratably over the U.S. Holder’s holding period for such share. The amounts allocated to the taxable year of disposition
and to taxable years prior to the first taxable year in which we became a PFIC would be taxed as ordinary income. The amount allocated
to each other taxable year would be subject to tax at the highest tax rate in effect for that taxable year for individuals or corporations,
as appropriate, and an interest charge would be imposed on the tax attributable to the allocated amounts. Further, to the extent
that any distribution received by a U.S. Holder on ordinary shares exceeded 125% of the average of the annual distributions received
on such shares during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution
would be subject to taxation in the same manner. Certain elections may be available that would result in alternative treatments
(such as a mark-to-market treatment) of the shares. U.S. Holders should consult their tax advisers to determine whether such elections
are available and, if so, what the consequences of the alternative treatments would be in those holders’ particular circumstances.
U.S. Holders should also consult their tax advisers regarding the determination of whether we are a PFIC and the potential application
of the PFIC rules.
U.S. Federal Income Tax Consequences
for Non-U.S. Holders
Distributions
The rules applicable to non-U.S. holders
for determining the extent to which distributions on our common stock, if any, constitute dividends for U.S. federal income tax
purposes are the same as for U.S. holders.
See “–U.S. Federal Income Tax Consequences for U.S. Holders– Distributions.”
Any dividends paid to a non-U.S. holder
by us are treated as income derived from sources within the United States and generally will be subject to U.S. federal income
tax withholding at a rate of 30% of the gross amount of the dividends, or at a lower rate provided by an applicable income tax
treaty if non-U.S. holders provide proper certification of eligibility for the lower rate (usually on IRS Form W-8BEN or W-8BEN-E).
Dividends received by a non-U.S. holder that are effectively connected with such holder’s conduct of a U.S. trade or business
(and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the U.S.)
are exempt from such withholding tax, provided that applicable certification requirements are satisfied. In such case, however,
non-U.S. holders will be subject to U.S. federal income tax on such dividends, net of certain deductions, at the rates applicable
to U.S. persons. In addition, corporate non-U.S. holders may be subject to an additional branch profits tax equal to 30% or such
lower rate as may be specified by an applicable tax treaty on dividends received that are effectively connected with the conduct
of a trade or business in the United States.
If non-U.S. holders are eligible for a
reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, such non-U.S. holders may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the IRS.
Sale or Other Disposition
Except as described below for a reduced
rate of U.S. withholding tax pursuant to an applicable income tax treaty, any gain realized by a non-U.S. holder upon the sale
or other disposition of our common stock generally will not be subject to U.S. federal income tax unless:
|
●
|
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 ordinary shares 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 ordinary shares may be subject to information reporting and backup withholding
at a current rate of 28% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate
withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally
be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar
report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available
to tax authorities in the holder’s country of residence.
Backup withholding is not an additional
tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld.
If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the
required information is furnished to the IRS in a timely manner.
|
F.
|
Dividends and Paying Agents
|
Not applicable.
Not applicable.
We have filed this 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 free.
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.
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 $1.18 million based
on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2017. As of December
31, 2017, our accumulated other comprehensive income was $4.8 million. We have not entered into any hedging transactions in an
effort to reduce our exposure to foreign exchange risk.
The value of RMB against the U.S. dollar
and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July
2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift
restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.
Inflation
Inflationary factors such as increases
in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
|
ITEM 12.
|
DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not applicable.
Not applicable.
Not applicable.
|
D.
|
American Depositary Shares
|
We do not have any American Depositary Shares.
(Stated in U.S. Dollars)
Amendments to IFRS 12 included
in Annual Improvements to IFRS Standards 2014-2016 cycle
Amendments to IFRS 10 and IAS
28 Sale or contribution of assets between an investor and its associate or joint venture
(1)
Amendments to IFRS 2 Classification
and Measurement of Share-based Payment Transactions
(2)
*The IASB has also issued Amendments
to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts, which is effective for the accounting period beginning
on January 1, 2018; however, this is not applicable to the Company since the Company does not issue any insurance contracts.
The Company will apply the above
new standards and amendments to standards when they become effective. The Company is in the process of making an assessment of
the impact of the above new standards and amendments to standards.
In relation to IFRS 9, the Company
does not expect the new guidance to have a significant impact on the classification and measurement of its financial assets.
In relation to IFRS 15, the standard
will replace IAS 18 which covers contracts for goods and services and IAS 11 which covers construction contracts. The new standard
is based on the principle that revenue is recognised when control of a good or service transfers to a customer. IFRS 15 specifies
how and when the Group will recognize revenue as well as requiring the Group to provide users of financial statements with more
informative and relevant disclosures. The standard permits either a full retrospective or a modified retrospective approach for
the adoption.
Management is currently analyzing
the impact of the new standard on the Group’s financial statements and has initially identified areas which are likely to
be affected, including identification of separate performance obligations, the determination of stand-alone selling price and its
relative allocation. The Company will continue to assess the impact of the new rules on the Group’s financial statements.
IFRS 15 is mandatory for the accounting periods commencing on or after 1 January 2018. At this stage, the Group does not intend
to adopt the standard before its effective date.
In relation to IFRS 16, the
standard will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance
leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals
are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change.
The standard will affect primarily the accounting for Company’s operating leases. As at the reporting date, the Company
has non-cancellable operating lease commitments of 2,669,859, see Note 35. However, the Company has not yet determined to what
extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect
the Group’s profit and classification of cash flows. Some of the commitments may be covered by the exception for short-term
and low value leases and some commitments may relate to arrangements that will not qualify as leases under IFRS 16.
KBS Fashion Group Limited
Notes to Financial Statements
|
20.
|
PROPERTIES. PLANT AND EQUIPMENT
|
|
|
Plant
|
|
|
Machinery
|
|
|
Office equipment
|
|
|
Motor vehicles
|
|
|
Furniture and fixtures
|
|
|
Leasehold improvements-factories and offices
|
|
|
Leasehold improvements-shops
|
|
|
Distributor shops’ furniture and fixtures
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2016
|
|
|
30,479,750
|
|
|
|
1,040,458
|
|
|
|
130,975
|
|
|
|
130,681
|
|
|
|
156,349
|
|
|
|
750,464
|
|
|
|
3,920,325
|
|
|
|
3,203,483
|
|
|
|
39,812,485
|
|
Additions
|
|
|
-
|
|
|
|
27,637
|
|
|
|
14,495
|
|
|
|
-
|
|
|
|
317
|
|
|
|
141,271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
183,720
|
|
Disposals
|
|
|
-
|
|
|
|
(142,425
|
)
|
|
|
(2,397
|
)
|
|
|
-
|
|
|
|
(699
|
)
|
|
|
-
|
|
|
|
(3,416,591
|
)
|
|
|
(2,998,722
|
)
|
|
|
(6,560,834
|
)
|
Translation adjustment
|
|
|
(1,948,208
|
)
|
|
|
(66,504
|
)
|
|
|
(8,372
|
)
|
|
|
(8,353
|
)
|
|
|
(9,994
|
)
|
|
|
(47,968
|
)
|
|
|
(250,580
|
)
|
|
|
(204,761
|
)
|
|
|
(2,544,740
|
)
|
At December 31, 2016
|
|
|
28,531,542
|
|
|
|
859,166
|
|
|
|
134,701
|
|
|
|
122,328
|
|
|
|
145,973
|
|
|
|
843,767
|
|
|
|
253,154
|
|
|
|
-
|
|
|
|
30,890,631
|
|
Additions
|
|
|
965,792
|
|
|
|
15,893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
981,685
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,490
|
)
|
|
|
(43,215
|
)
|
|
|
(1,836
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57,541
|
)
|
Translation adjustment
|
|
|
1,758,824
|
|
|
|
52,963
|
|
|
|
8,304
|
|
|
|
7,541
|
|
|
|
8,999
|
|
|
|
52,014
|
|
|
|
15,606
|
|
|
|
-
|
|
|
|
1,904,251
|
|
At December 31, 2017
|
|
|
31,256,158
|
|
|
|
928,022
|
|
|
|
130,515
|
|
|
|
86,654
|
|
|
|
153,136
|
|
|
|
895,781
|
|
|
|
268,760
|
|
|
|
-
|
|
|
|
33,719,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 1, 2016
|
|
|
(1,199,268
|
)
|
|
|
(765,500
|
)
|
|
|
(75,573
|
)
|
|
|
(111,127
|
)
|
|
|
(134,786
|
)
|
|
|
(358,958
|
)
|
|
|
(3,920,325
|
)
|
|
|
(2,710,227
|
)
|
|
|
(9,275,764
|
)
|
Provided for the year
|
|
|
(1,283,919
|
)
|
|
|
(69,007
|
)
|
|
|
(20,528
|
)
|
|
|
(5,867
|
)
|
|
|
(10,812
|
)
|
|
|
(99,622
|
)
|
|
|
-
|
|
|
|
(374,763
|
)
|
|
|
(1,864,518
|
)
|
Eliminated upon disposal of assets
|
|
|
-
|
|
|
|
85,455
|
|
|
|
1,351
|
|
|
|
-
|
|
|
|
357
|
|
|
|
-
|
|
|
|
3,416,591
|
|
|
|
2,911,757
|
|
|
|
6,415,511
|
|
Translation adjustment
|
|
|
76,655
|
|
|
|
48,929
|
|
|
|
4,830
|
|
|
|
7,103
|
|
|
|
8,615
|
|
|
|
22,944
|
|
|
|
250,580
|
|
|
|
173,233
|
|
|
|
592,889
|
|
At December 31, 2016
|
|
|
(2,406,532
|
)
|
|
|
(700,123
|
)
|
|
|
(89,920
|
)
|
|
|
(109,891
|
)
|
|
|
(136,626
|
)
|
|
|
(435,636
|
)
|
|
|
(253,154
|
)
|
|
|
-
|
|
|
|
(4,131,882
|
)
|
Provided for the year
|
|
|
(1,377,553
|
)
|
|
|
(48,120
|
)
|
|
|
(14,495
|
)
|
|
|
(174
|
)
|
|
|
(3,202
|
)
|
|
|
(114,764
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,558,308
|
)
|
Eliminated upon disposal of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
10,071
|
|
|
|
38,893
|
|
|
|
1,432
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,396
|
|
Translation adjustment
|
|
|
(148,350
|
)
|
|
|
(43,159
|
)
|
|
|
(5,543
|
)
|
|
|
(6,774
|
)
|
|
|
(8,422
|
)
|
|
|
(26,855
|
)
|
|
|
(15,606
|
)
|
|
|
-
|
|
|
|
(254,709
|
)
|
At December 31, 2017
|
|
|
(3,932,435
|
)
|
|
|
(791,402
|
)
|
|
|
(99,887
|
)
|
|
|
(77,946
|
)
|
|
|
(146,818
|
)
|
|
|
(577,255
|
)
|
|
|
(268,760
|
)
|
|
|
-
|
|
|
|
(5,894,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARRYING AMOUNT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
26,125,010
|
|
|
|
159,043
|
|
|
|
44,781
|
|
|
|
12,437
|
|
|
|
9,347
|
|
|
|
408,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,758,749
|
|
At December 31, 2017
|
|
|
27,323,723
|
|
|
|
136,620
|
|
|
|
30,628
|
|
|
|
8,708
|
|
|
|
6,318
|
|
|
|
318,526
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,824,523
|
|
KBS Fashion Group Limited
Notes to Financial Statements
Net exchange differences from
translating the financial statements from functional currency to presentation currency were $(1,649,540) and $(1,669,507) as at
December 31, 2017 and 2016.
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 were $1,510,213, $1,942,735,
and $2,015,437, respectively. There was no impairment loss charged for the periods presented.
Depreciation is provided on straight-line
basis for all property, plant and equipment over their estimated useful lives of the assets as follows:
|
|
|
Useful life
|
|
Residual Value
|
|
|
Plant
|
|
20 years
|
|
|
10
|
%
|
|
Machinery
|
|
5 years
|
|
|
10
|
%
|
|
Office equipment
|
|
5 years
|
|
|
10
|
%
|
|
Motor vehicles
|
|
5 years
|
|
|
10
|
%
|
|
Furniture and fixtures
|
|
5 years
|
|
|
10
|
%
|
|
Leasehold improvements-factories and offices
|
|
Shorter of estimated useful life of 5 years or lease term
|
|
|
10
|
%
|
|
Leasehold improvements-shops
|
|
Shorter of estimated useful life of 5 years or lease term
|
|
|
Nil
|
|
|
Distributor shops’ furniture and fixtures
|
|
1.5 years
|
|
|
Nil
|
|
Plant includes buildings owned by Anhui Kaixin built
on the following land:
|
Location
|
|
Description
|
|
Gross area (m
2
)
|
|
Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC
|
|
Dormitory
|
|
8,573
|
|
Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC
|
|
Factory
|
|
22,292
|
The buildings were pledged as
security for the outstanding bank loans as set forth in note 31.
The gross carrying amount of
the fully depreciated property, plant and equipment that is still in use is $38,851 and $32,803 as at December 31, 2017 and 2016,
respectively.
KBS Fashion Group Limited
Notes to Financial Statements
In 2012, the Company performed
a revaluation of certain equipment. The revaluation was performed by an independent appraiser on November 10, 2012 and, as a result
of the revaluation, the Company recognized a revaluation surplus in the amount of 184,272. The amount is classified as revaluation
reserve. Since the surplus has not been realized, the amount recognized is not available for distribution. There was no movement
in the revaluation reserve during 2017 and 2016. The carrying amount that would have been recognized had the assets been carried
under the cost model is as follows:
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Machinery
|
|
|
95,826
|
|
|
|
141,075
|
|
|
Motor Vehicles
|
|
|
35
|
|
|
|
33
|
|
|
Office Equipment
|
|
|
2,661
|
|
|
|
3,202
|
|
|
Furniture and fixtures
|
|
|
739
|
|
|
|
1,844
|
|
|
|
|
|
99,261
|
|
|
|
146,154
|
|
|
21.
|
PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES
|
|
|
|
Amount
|
|
|
At January 1, 2016
|
|
|
2,820,458
|
|
|
additions for the year
|
|
|
38,300
|
|
|
charge for the year
|
|
|
(118,783
|
)
|
|
translation adjustment
|
|
|
(169,293
|
)
|
|
At December 31, 2016
|
|
|
2,570,682
|
|
|
additions for the year
|
|
|
30,672
|
|
|
charge for the year
|
|
|
(105,340
|
)
|
|
translation adjustment
|
|
|
156,092
|
|
|
At December 31, 2017
|
|
|
2,652,106
|
|
Analyzed for reporting purposes as:
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Current asset
|
|
|
83,907
|
|
|
|
79,035
|
|
|
Non-current asset
|
|
|
2,568,199
|
|
|
|
2,491,647
|
|
|
|
|
|
2,652,106
|
|
|
|
2,570,682
|
|
|
22.
|
PREPAYMENT FOR CONSTRUCTION OF NEW PLANT
|
On November 20, 2010, Hongri
Fujian entered into an agreement with a third party, Anqing Zhongfang Construction and Installation Co., Ltd., for the construction
of the new plant in Anhui at a consideration of $17,826,251. In 2012, Kaixin Anhui made a prepayment of $6,363,853 for the second
phase of the project. In 2013, Kaixin Anhui made another prepayment of $9,747,897 for the second phase of the project. The amount
of $16,401,778 was recognized in Construction in progress.
In 2014, Kaixin Anhui made another
prepayment of $15,525,413 for the second and third phase of the project, and an amount of $6,537,016 was recognized in construction
in progress.
KBS Fashion Group Limited
Notes to Financial Statements
In 2015, an amount of $110,041
was recognized in construction in progress, which was subsequently recognized as fixed asset along with the completion of the second
phase of the project. The total amount transferred to fixed assets from construction in progress amounted to $22,960,220.
The third phase of the project
is related to the construction of a building. The construction site is located on a piece of land whose land use right was to be
acquired by the Company. Due to reasons as set forth in note 23, the anticipated completion date of the project is expected to
be delayed and, in the worst case, may be terminated. Accordingly, management provided a provision of impairment loss against the
carrying value of such prepayment. The detail of estimation of such provision is explained in note 6.
As at December 31, 2017, the
carrying amount of the prepayment for construction of new plant is as follows:
|
|
|
As at
December 31,
2017
|
|
|
Prepaid in 2015
|
|
|
8,469,878
|
|
|
Recognized as construction in progress
|
|
|
(110,041
|
)
|
|
|
|
|
8,359,837
|
|
|
Impairment loss in 2015:
|
|
|
(1,199,314
|
)
|
|
|
|
|
7,160,523
|
|
|
Impairment loss in 2016:
|
|
|
(6,989,200
|
)
|
|
Translation adjustment:
|
|
|
(171,323
|
)
|
|
|
|
|
-
|
|
|
23.
|
PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT
|
On September 2, 2010, Hongri
Fujian entered into an agreement with a third party, Taihu Weiqi Sports Apparel Co., Ltd., to acquire a land use right in relation
to the development of factories in Anhui Kaixin for a total consideration of $6,340,456. As of December 31, 2015, the transaction
has not been completed yet due to disputes between the original owner of the land and the government regarding the compensation
for vacating the premises. In relation to this dispute, the Company expected that the project would be delayed or, in the worst
case, be terminated. Accordingly, the Company provided a provision of impairment loss against the carrying value for such prepayment.
The detail estimation of such provision is explained in note 6.
KBS Fashion Group Limited
Notes to Financial Statements
As at December 31, 2017, the
carrying amount of the prepayment for acquisition of land use right is as follows:
|
|
|
As at
December 31,
2017
|
|
|
Prepaid in 2010
|
|
|
6,039,930
|
|
|
Impairment loss:
|
|
|
(1,265,867
|
)
|
|
|
|
|
4,774,063
|
|
|
Impairment loss in 2016:
|
|
|
(4,659,838
|
)
|
|
Translation adjustment:
|
|
|
(114,225
|
)
|
|
|
|
|
-
|
|
|
|
|
Amount
|
|
|
COST
|
|
|
|
|
At January 1, 2016
|
|
|
769,643
|
|
|
additions for the year
|
|
|
-
|
|
|
translation adjustment
|
|
|
(78,025
|
)
|
|
At December 31, 2016
|
|
|
691,618
|
|
|
additions for the year
|
|
|
-
|
|
|
translation adjustment
|
|
|
42,635
|
|
|
At December 31, 2017
|
|
|
734,253
|
|
|
|
|
|
|
|
|
AMORTIZATION
|
|
|
|
|
|
At January 1, 2016
|
|
|
(82,605
|
)
|
|
charge for the year
|
|
|
(19,009
|
)
|
|
translation adjustment
|
|
|
34,890
|
|
|
At December 31, 2016
|
|
|
(66,724
|
)
|
|
charge for the year
|
|
|
(14,307
|
)
|
|
translation adjustment
|
|
|
(4,569
|
)
|
|
At December 31, 2017
|
|
|
(85,600
|
)
|
|
|
|
|
|
|
|
CARRYING AMOUNTS
|
|
|
|
|
|
At December 31, 2016
|
|
|
624,894
|
|
|
At December 31, 2017
|
|
|
648,653
|
|
The amounts represent the prepayment of rentals for
land use right (industrial use) situated in the PRC. The land use rights have the term of 50 years.
All the land use rights mentioned above were owned
by Anhui Kaixin.
KBS Fashion Group Limited
Notes to Financial Statements
The land use right is comprised of the following:
|
Location
|
|
Expiry date of tenure
|
|
Land area (m
2
)
|
|
Longshan Road, Economic development District, Taihu County
|
|
2062-05-23
|
|
2,440
|
|
Longshan Road, Economic development District, Taihu County
|
|
2061-11-06
|
|
7,405
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Raw materials
|
|
|
1,186,467
|
|
|
|
1,985,131
|
|
|
Finished goods
|
|
|
726,373
|
|
|
|
467,757
|
|
|
Provision for obsolete inventories
|
|
|
(106,628
|
)
|
|
|
(2,022
|
)
|
|
|
|
|
1,806,212
|
|
|
|
2,450,866
|
|
|
26.
|
TRADE RECEIVABLES, OTHER RECEIVABLES AND PREPAYMENTS
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Trade receivables
|
|
|
11,860,798
|
|
|
|
24,763,795
|
|
|
Bad debt provision for trade receivables
|
|
|
(1,359,255
|
)
|
|
|
(1,280,330
|
)
|
|
|
|
|
10,501,543
|
|
|
|
23,483,465
|
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Other receivables
|
|
|
2,849
|
|
|
|
2,251
|
|
|
Prepayments
|
|
|
1,898,419
|
|
|
|
5,361,869
|
|
|
|
|
|
1,901,268
|
|
|
|
5,364,120
|
|
The fair value of trade and other
receivables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized in the
consolidated statements of financial position to be reasonable approximation of their fair values.
Prepayments include advances
to suppliers and prepaid income tax.
Before accepting any new customer,
the Group assesses the potential customer’s credit quality and defined credit limits by customer. Limits attributed to customers
are reviewed once a year. The aging analysis of trade receivables is as follows:
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Current
|
|
|
1,791,936
|
|
|
|
1,496,397
|
|
|
Past due for less than 4 months
|
|
|
2,721,633
|
|
|
|
9,306,568
|
|
|
Past due for more than 4 months
|
|
|
7,347,229
|
|
|
|
13,960,830
|
|
|
|
|
|
11,860,798
|
|
|
|
24,763,795
|
|
KBS Fashion Group Limited
Notes to Financial Statements
The Group allows an average credit
period of 90 -120 days to its trade customers. For the overdue trade receivable, the Company provided a bad debt allowance amounting
to $nil and $331,196 during the years ended December 31, 2017 and 2016, respectively. The provision for doubtful debts is recorded
using a provision account unless the Group is satisfied that recovery is remote, in which case the unrecovered loss is written
off against trade receivables and the provision for doubtful debts directly. The Group does not hold any collateral over these
balances.
The movement in the provision
for doubtful debts during the year is as follows:
|
|
|
2017
|
|
|
2016
|
|
|
As at Janaury 1
|
|
|
1,280,330
|
|
|
|
1,028,439
|
|
|
Provision provided in the year
|
|
|
-
|
|
|
|
331,196
|
|
|
Translation adjustment
|
|
|
78,925
|
|
|
|
(79,305
|
)
|
|
As at December 31
|
|
|
1,359,255
|
|
|
|
1,280,330
|
|
Among the amounts of trade receivables,
$1,723,364 and $3,598,158 of output VAT was included as of December 31, 2017 and 2016, respectively.
|
27.
|
SUBSIDIES PREPAID TO DISTRIBUTORS
|
|
|
|
Amount
|
|
|
At January 1, 2016
|
|
|
516,231
|
|
|
additions for the year
|
|
|
779,991
|
|
|
charge for the year
|
|
|
(873,231
|
)
|
|
translation adjustment
|
|
|
(32,995
|
)
|
|
At December 31, 2016
|
|
|
389,996
|
|
|
additions for the year
|
|
|
-
|
|
|
charge for the year
|
|
|
(389,996
|
)
|
|
translation adjustment
|
|
|
-
|
|
|
At December 31, 2017
|
|
|
-
|
|
Subsidies were paid to major
distributors for compensating their rental expenses. Such subsidies would vest to distributors when they met the sales targets
predetermined by the Company. Until June 2017, Subsidies prepaid to distributors were recognized when payments were made and amortized
over the agreement term on a straight-line basis in selling expenses. After June 2017, the Company no longer prepay such subsidies
to its major distributors; therefore, no such prepayment is outstanding as of December 31, 2017. The amortization expense for 2017
and 2016 were $401,258 and $910,537, respectively.
KBS Fashion Group Limited
Notes to Financial Statements
|
28.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Cash on hand
|
|
|
16,413
|
|
|
|
15,066
|
|
|
Bank deposits
|
|
|
26,034,043
|
|
|
|
24,561,275
|
|
|
|
|
|
26,050,456
|
|
|
|
24,576,341
|
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Renminbi
|
|
|
26,040,572
|
|
|
|
24,566,443
|
|
|
Hong Kong Dollars
|
|
|
8,914
|
|
|
|
8,921
|
|
|
United States Dollars
|
|
|
970
|
|
|
|
977
|
|
|
|
|
|
26,050,456
|
|
|
|
24,576,341
|
|
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, 2017 carry interest at market rates which ranged from 0.35% to 0.50% (2016: 0.35%-0.50%) per annum. Majority of our cash is
deposited with financial institution in the PRC. Remittance of funds out of the PRC is subject to the exchange restrictions imposed
by the PRC government.
|
29.
|
TRADE AND OTHER PAYABLES
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Trade payables
|
|
|
104,258
|
|
|
|
78,994
|
|
|
Employee benefits payable
|
|
|
226,210
|
|
|
|
207,671
|
|
|
Other payables
|
|
|
1,648,060
|
|
|
|
1,531,532
|
|
|
Subtotal financial liabilities
|
|
|
1,978,528
|
|
|
|
1,818,197
|
|
|
Other taxes payable
|
|
|
3,473,302
|
|
|
|
2,956,431
|
|
|
|
|
|
5,451,830
|
|
|
|
4,774,628
|
|
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,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
23,587
|
|
|
|
31,083
|
|
|
Past due for less than 4 months
|
|
|
57,637
|
|
|
|
16,211
|
|
|
Past due for over 4 months
|
|
|
23,034
|
|
|
|
31,700
|
|
|
|
|
|
104,258
|
|
|
|
78,994
|
|
The Company was granted a credit term of 30 days.
The balances past due were mainly for the Company’s high bargaining power.
KBS Fashion Group Limited
Notes to Financial Statements
|
30.
|
RELATED PARTIES PAYABLE
|
|
(1)
|
Nature of relationship with related parties
|
|
Name
|
|
Relationship with the Group
|
|
Yan, Keyan
|
|
Chairman, Director, and CEO
|
|
Chen, Bizhen
|
|
Wife of Yan, Keyan
|
|
KBS International
|
|
Ex-shareholder of Hongri
|
|
Shishi City Lingxiu Hongri Knitwear Factory
|
|
Company owned by Chen, Bizhen
|
|
(2)
|
Significant balances between the Group and the above related parties:
|
|
|
|
|
|
As at December 31,
|
|
|
Name
|
|
Nature
|
|
2017
|
|
|
2016
|
|
|
Yan, Keyan
|
|
Borrowing of funds
|
|
|
154,137
|
|
|
|
1,125.912
|
|
|
Chen, Bizhen
|
|
Borrowing of funds
|
|
|
-
|
|
|
|
24,416
|
|
|
|
|
|
|
|
154,137
|
|
|
|
1,150,328
|
|
Related parties payables were
unsecured, non-interest bearing and repayment on demand.
During 2017, Mr. Yan and Ms.
Chen provided personal guarantees for the loans as set forth in Note 31.
*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
35.
|
31.
|
SHORT-TERM BANK LOANS
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Secured bank borrowings
|
|
|
1,606,930
|
|
|
|
1,513,623
|
|
|
Carrying amount repayable within 1 year
|
|
|
1,606,930
|
|
|
|
1,513,623
|
|
The borrowings are fixed-rate and denominated in RMB.
|
Bank loans
|
|
Amount
USD
|
|
|
Period
|
|
Interest rate
|
|
|
Mortgage
|
|
Personal guarantee
|
|
#1
|
|
|
459,123
|
|
|
4/6/2017
|
|
4/5/2018
|
|
|
6.09
|
%
|
|
Land use right and buildings
|
|
Yan, Keyan/
Chen, Bizhen
|
|
#2
|
|
|
1,147,807
|
|
|
3/24/2017
|
|
3/21/2018
|
|
|
6.09
|
%
|
|
Land use right and buildings
|
|
Yan, Keyan/
Chen, Bizhen
|
|
|
|
|
1,606,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KBS Fashion Group Limited
Notes to Financial Statements
On November 1, 2012, the Company
sold 5,000,000 Units at an offering price of $10.00 per Unit generating gross proceeds of $50,000,000 in the Public Offering. Each
Unit consisted of one share of common stock of the Company and one warrant to purchase one share of common stock of the Company
(“Redeemable Warrants”). Each Redeemable Warrant entitled the holder to purchase one share of common stock at a price
of $11.50 which would commence on the later of either the completion of an initial Acquisition Transaction or October 24, 2013,
and would expire five years from the completion date of an initial Acquisition Transaction, provided that there is an effective
registration statement covering the shares of common stock underlying the Redeemable Warrants. The Company is entitled to redeem
the Redeemable Warrants at a price of $0.01 per Redeemable Warrant upon providing 30 days’ notice, subject to the last sale
price of the common stock was at a minimum of $17.50 per share for any 20 trading days within a 30-trading day period (“30-Day
Trading Period”) that ended on the third day prior to the date on which notice of redemption is given, provided that there
is a current registration statement in effect with respect to the shares of common stock underlying such Redeemable Warrants commencing
ten days prior to the 30-Day Trading Period and continuing each day thereafter until the date of redemption. The Company is required
to use its best efforts to maintain the effectiveness of the registration statement covering the Redeemable Warrants. However,
there are no contractual penalties for failure to deliver securities if a registration statement is not effective at the time of
exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such
Redeemable Warrant shall not be entitled to exercise such Redeemable Warrant for cash and in no event (whether in the case of a
registration statement not being effective or otherwise) will the Company be required to net cash settle the Redeemable Warrant
exercise.
Simultaneously with the consummation
of the Public Offering, the Company consummated a Private Placement for the sale of 337,750 Placement Units to its Founders at
a price of $10.00 per share, generating total proceeds of $3,377,500. The Placement Units are identical to the Units sold in the
Public Offering except that the warrants included in the Placement Units (i) were not redeemable by the Company and (ii) may be
exercised for cash, or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted transferees.
Additionally, the Placement Units have been placed in escrow and the purchasers have agreed not to transfer, assign or sell any
of the Placement Units, including the underlying securities (except to certain permitted transferees) until 30 days following the
completion of an initial Acquisition Transaction. The securities held in the escrow account will only be released prior to the
end of the escrow period if following the initial Acquisition Transaction, the Company consummates a subsequent transaction that
results in all stockholders having a right to exchange their shares for cash or other consideration.
KBS Fashion Group Limited
Notes to Financial Statements
The Company granted the underwriter
in the Public Offering a 45-day option to purchase up to an additional 750,000 Units solely to cover over-allotments, if any. On
November 7, 2012, the underwriters exercised a portion of their option and the Company sold an additional 550,000 Units at a price
of $10.00 per Unit generating gross proceeds of $5,500,000. In addition, the Company sold an additional 30,250 Private Placement
Units generating gross proceeds of $302,500.
The table below provides a reconciliation
of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs:
|
Balance – January 26, 2012 (inception)
|
|
|
-
|
|
|
Correction of an error
|
|
|
3,200,223
|
|
|
Issuance of warrants as part of Units on November 7, 2012
|
|
|
322,884
|
|
|
Change in fair value
|
|
|
(45,225
|
)
|
|
Balance – December 31, 2012
|
|
|
3,477,882
|
|
|
Change in fair value
|
|
|
(45,442
|
)
|
|
Balance – December 31, 2013
|
|
|
3,432,440
|
|
|
Change in fair value
|
|
|
(3,417,053
|
)
|
|
Balance – December 31, 2014
|
|
|
15,387
|
|
|
Change in fair value
|
|
|
(11,978
|
)
|
|
Balance – December 31, 2015
|
|
|
3,409
|
|
|
Change in fair value
|
|
|
(3,409
|
)
|
|
Balance – December 31, 2016
|
|
|
-
|
|
|
Change in fair value
|
|
|
-
|
|
|
Balance – December 31, 2017
|
|
|
-
|
|
The fair value of warrants was
determined using a binomial-lattice model. This model requires the input of highly subjective assumptions, including price volatility
of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value of the warrants
and the Company’s results of operations could be impacted. This model is dependent upon several variables such as the instrument’s
expected term, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend
yield rate over the expected instrument term, and the expected volatility of the Company’s stock price over the expected
term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected
strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result
of the down round protection. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected
terms of the options at the date of valuation. Expected dividend yield is based on historical trends. The Company measures volatility
using the volatility rates of market index.
KBS Fashion Group Limited
Notes to Financial Statements
The inputs to the model were
as follows:
|
|
|
December 31.
2017
|
|
|
December 31,
2016
|
|
|
Stock price
|
|
$
|
4.14
|
|
|
$
|
0.28
|
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Risk-free rate
|
|
|
1.89
|
%
|
|
|
1.28
|
%
|
|
Expected term (in years)
|
|
|
1.58
|
|
|
|
2.58
|
|
|
Expected volatility
|
|
|
22.3
|
%
|
|
|
23.6
|
%
|
The quoted price of the warrants on the over-the-counter-markets
(“OTC”) were $0.001 and $0.02 as at December 31, 2017 and 2016, respectively.
At December 31, 2017, there were 393,835 unexpired warrants outstanding.
|
33.
|
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, 2016
|
|
|
1,767,821
|
|
|
$
|
177
|
|
|
$
|
6,056,240
|
|
|
Issuance of shares
|
|
|
218,478
|
|
|
|
21
|
|
|
|
629,930
|
|
|
Shares outstanding as December 31, 2017
|
|
|
1,986,299
|
|
|
$
|
198
|
|
|
$
|
6,686,170
|
|
|
|
|
Number of shares
|
|
|
Share capital
|
|
|
Share premium
|
|
|
Authorized Common shares of US$0.0001 as at December 31, 2017
|
|
|
150,000,000
|
|
|
$
|
15,000
|
|
|
$
|
-
|
|
|
Issue and fully paid common shares of US$0.0001 as at December 31, 2016, retroactively adjusted
|
|
|
1,767,821
|
|
|
$
|
177
|
|
|
$
|
6,056,240
|
|
|
Issue and fully paid common shares of US$0.0001 as at December 31, 2017
|
|
|
1,986,299
|
|
|
$
|
198
|
|
|
$
|
6,686,170
|
|
Preferred Stock
The Company is authorized to issue 5,000,000
preferred shares with a par value of $0.0001 per share with such designation, rights and preferences as may be determined by the
Company’s board of directors. No preferred shares are currently issued or outstanding.
KBS Fashion Group Limited
Notes to Financial Statements
Common Stock
The Company is authorized to
issue 150,000,000 shares of common stock with a par value of $0.0001 per share.
On March 29, 2016, the Company
granted 1,100,000 of common stock to its executive officers and directors as compensation of their past services. The shares were
vested immediately. The fair value of the award was calculated on the date of grant using the quoted price of the Company’s
common stock. Total expense recognized in connection with this share-based payment amounted to $429,000.
On January 20, 2017, the Company
granted and issued 57,600 shares to its employees.
On February 6, 2017, the 1-15
reverse stock split took effect and, as a result, the number of issued and outstanding shares of the Company’s Common Stock
is reduced from 26,517,329 shares to approximately 1,767,821 shares. The accompanying financial statements have been retroactively
adjusted to reflect the effects of the reverse stock split.
On July 10, 2017, the Company granted,
and subsequently issued, 215,000 shares to its directors. The shares are for services rendered in 2017. The shares are vested immediately
upon granting.
On February 10, 2018, the Company
granted, and subsequently issued, 285,000 shares to its directors. The shares are for services rendered in 2018. The shares are
vested immediately upon granting.
Statutory surplus reserve
As stipulated by the relevant
laws and regulations applicable to China’s foreign investment enterprises, the Company’s PRC subsidiaries are required
to maintain a statutory surplus reserve which is non-distributable. Appropriations to such reserve are made out of net profit after
tax of the statutory financial statements of the PRC subsidiaries at the amounts determined by their respective boards of directors
annually up to 50% of authorized capital, but must not be less than 10% of the net profit after tax.
The statutory surplus reserve
can be used for making up losses of the group entities in Mainland China, if any. The statutory surplus reserve may also be used
to increase capital or to meet unexpected or future losses. The statutory surplus reserve is non-distributable other than upon
liquidation.
The statutory surplus reserve
of the Group amounts to $6,084,836 and $6,084,836 at December 31, 2017 and 2016, respectively. The statutory surplus reserve of
the Group is related to Hongri Fujian and Anhui Kaixin.
KBS Fashion Group Limited
Notes to Financial Statements
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.
|
35.
|
RISK MANAGEMENT AND FAIR VALUES
|
The Group manages its capital
to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to owners through
the optimization of the debt and equity balance. The Group’s overall strategy remains unchanged during the year.
The capital structure of the
Group consisted of borrowings net of bank balances and cash, and equity attributable to owners of the Company comprising issued
share capital and various reserves.
The directors of the Company
review the capital structure regularly. As part of this review, the Group considers the cost of capital and the risks associated
with each class of capital, and will balance its overall capital through the payment of dividends, new share issues as well as
the issue of new debt or the redemption of existing debt.
The Group monitors capital using
the Gearing Ratio, which is net debt divided by total equity. Net debt represents borrowings less cash and cash equivalents. The
Company met its objective by minoring borrowing activities.
KBS Fashion Group Limited
Notes to Financial Statements
The Company and its subsidiaries
are not subject to externally imposed capital requirements.
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Total borrowing
|
|
|
1,609,930
|
|
|
|
1,513,623
|
|
|
Less: cash and cash equivalents
|
|
|
(26,050,456
|
)
|
|
|
(24,576,341
|
)
|
|
Net debt
|
|
|
(24,443,526
|
)
|
|
|
(23,062,718
|
)
|
|
Total equity
|
|
|
74,027,196
|
|
|
|
83,402,126
|
|
|
Total capital
|
|
|
49,583,670
|
|
|
|
60,339,408
|
|
|
Gearing ratio
|
|
|
(33
|
)%
|
|
|
(28
|
)%
|
Financial risk management objectives
and policies
The Group’s major financial instruments
include trade and other receivables, related parties receivables, cash and cash equivalents, trade and other payables, related
parties payables and short-term loans. Details of these financial instruments are disclosed in the respective notes. The risks
associated with these financial instruments include credit risk, market risk (interest rate risk and currency risk) and liquidity
risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure
appropriate measures are implemented on a timely and effective manner.
|
(i)
|
Foreign currency risk
|
While our reporting currency is the
U.S. dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially
all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations
may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against the U.S.
dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets
and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average
exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are not included in
determining net income but are included in determining other comprehensive income, a component of equity. An average appreciation
(depreciation) of the RMB against the U.S. dollar of 6% would increase (decrease) our comprehensive income by $0.8 million based
on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2017. As of December
31, 2017, our accumulated other comprehensive loss was $(3.0) million. We have not entered into any hedging transactions in an
effort to reduce our exposure to foreign exchange risk.
KBS Fashion Group Limited
Notes to Financial Statements
We deposit surplus funds with
Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments
carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently
do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions
in an effort to reduce our exposure to interest rate risk.
As at December 31, 2017, the Group’s
maximum exposure to credit risk which will cause a financial loss to the Group due to failure to perform an obligation by the counterparties
is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated statement of financial
position.
In order to minimize the credit
risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other
monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable
amount of each individual trade debt at the end of each reporting period to ensure that adequate impairment losses are made for
irrecoverable amounts. In this regard, the directors of the Group consider that the Group’s credit risk is significantly
reduced.
The Group has concentration of
credit risk on the Group’s trade receivables. The outstanding balance of the five largest customers represented approximately
26% of the trade receivables of the Group at December 31, 2017 (2016: 28%). In order to minimize the credit risk, management continuously
monitors the level of exposure to ensure that follow-up actions and/or corrective actions are taken promptly to lower the risk
exposure or to recover overdue balances.
KBS Fashion Group Limited
Notes to Financial Statements
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, 2017 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, 2017
|
|
|
Within 1 year
|
|
|
Over 1 year
|
|
|
Total
|
|
|
Short-term bank loans and related interests
|
|
|
1,606,930
|
|
|
|
-
|
|
|
|
1,606,930
|
|
|
Trade and other payables
|
|
|
5,451,830
|
|
|
|
-
|
|
|
|
5,521,442
|
|
|
Related parties payables
|
|
|
154,137
|
|
|
|
-
|
|
|
|
154,137
|
|
|
Income tax payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
7,212,897
|
|
|
|
-
|
|
|
|
7,282,509
|
|
As at December 31, 2016
|
|
|
Within 1 year
|
|
|
Over 1 year
|
|
|
Total
|
|
|
Short-term bank loans and related interests
|
|
|
1,535,053
|
|
|
|
-
|
|
|
|
1,535,053
|
|
|
Trade and other payables
|
|
|
4,774,628
|
|
|
|
-
|
|
|
|
4,774,628
|
|
|
Related parties payables
|
|
|
1,150,129
|
|
|
|
-
|
|
|
|
1,150,129
|
|
|
Income tax payable
|
|
|
258,259
|
|
|
|
-
|
|
|
|
258,259
|
|
|
Total
|
|
|
7,718,069
|
|
|
|
-
|
|
|
|
7,718,069
|
|
The fair value of financial assets
and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.
KBS Fashion Group Limited
Notes to Financial Statements
The following table presents the
fair value of the Group’s financial instruments measured at the end of the reporting period on a recurring basis, categorized
into the three-level fair value hierarchy as defined in IFRS 13, Fair Value Measurement. The level into which a fair value measurement
is classified is determined with reference to the observability and significance of the inputs used in the valuation technique
as follows:
|
-
|
Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices
in active markets for identical assets or liabilities at the measurement date.
|
|
-
|
Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail
to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available.
|
|
-
|
Level 3 valuations: Fair value measured using significant unobservable inputs.
|
|
|
|
December 31,
2017
Level 2
|
|
|
December 31,
2016
Level 2
|
|
|
Recurring far value measurements
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
During the years ended December
31, 2017 and 2016, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3. The Group’s
policy is to recognize transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
Valuation
techniques and inputs used in Level 2 fair value measurements
The fair value of financial assets
in Level 2 is determined by the model as disclosed in note 32.
The directors of the Company consider
that the carrying amounts of financial assets and financial liabilities recorded at amortized cost approximate their fair values.
|
36.
|
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,
2017
|
|
|
As at
December 31,
2016
|
|
|
Contracted and authorized, in RMB
|
|
|
439,850,378
|
|
|
|
439,850,378
|
|
|
Contracted and authorized, in USD
|
|
|
67,315,108
|
|
|
|
63,406,426
|
|
KBS Fashion Group Limited
Notes to Financial Statements
|
(2)
|
As at December 31, 2017, the Company had lease commitments as follows:
|
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Within 1 year
|
|
|
101,660
|
|
|
|
79,035
|
|
|
2-5 years
|
|
|
231,138
|
|
|
|
290,289
|
|
|
Thereafter
|
|
|
2,337,061
|
|
|
|
2,237,645
|
|
|
|
|
|
2,669,859
|
|
|
|
2,606,969
|
|
The amount of $101,660 as of December
31, 2017 represents leases of two offices, four units of staff quarters, and one warehouse. There is no contingent rent payable
for all of the leases. All leases are within one year except for one of the offices, which is leased by a related party as disclosed
in note 30. The commitment pertains to this particular lease is as follows:
|
|
|
As at December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Within 1 year
|
|
|
77,046
|
|
|
|
72,252
|
|
|
2-5 years
|
|
|
231,138
|
|
|
|
290,289
|
|
|
Thereafter
|
|
|
2,337,061
|
|
|
|
2,237,645
|
|
|
|
|
|
2,645,245
|
|
|
|
2,600,506
|
|
The Company has prepaid this lease in the full amount.
The lease commenced on January 1, 2009 and will expire on April 22, 2052. The lease does not specify the terms of renewal, purchase
options, or escalation clauses. The Company may not sublease the office to a third party.
|
37.
|
EVENTS AFTER THE BALANCE SHEET
|
Shares issuance
On February 10, 2018, the Company
granted, and subsequently issued, 285,000 shares to its directors.
* * * * *
F-53
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