We are offering 2,845,000
of our ordinary shares, $0.0001 par value per share, and warrants to purchase up to 1,809,420 ordinary shares directly to the investors
in this offering at a price of $1.62 for one ordinary share and a corresponding warrant pursuant to this prospectus supplement
and the accompanying prospectus. The investor warrants will be exercisable immediately following the date of issuance for a period
of five years at an exercise price of $1.86 per share. This prospectus supplement also relates to the offering of ordinary shares
upon the exercise, if any, of the warrants issued in this offering.
For a more detailed
description of the ordinary shares, see the section entitled “Description of Our Securities We Are Offering” beginning
on page S-29.
Our ordinary shares
are currently traded on the NASDAQ Capital Market under the symbol “MYT.” On May 23, 2019, the closing sale price of
our ordinary shares was $2.38 per share.
The aggregate market
value of our outstanding ordinary shares held by non-affiliates was approximately $44.7 million based on 23,295,314 outstanding
ordinary shares, of which 18,020,192 shares are held by non-affiliates, and a per share price of $2.48, which was the last reported
price on the NASDAQ Capital Market of our ordinary shares on March 25, 2019. We have not offered any securities pursuant to
General Instruction I.B.6. of Form S-3 during the prior 12 calendar month period that ends on and includes the date of this prospectus
supplement and accordingly we may sell up to approximately $14.9 million of ordinary shares hereunder.
We have retained FT
Global Capital, Inc. to act as our exclusive placement agent in connection with this offering to use its “commercially reasonable
best efforts” to solicit offers to purchase of our ordinary shares and warrants. The placement agent is not purchasing or
selling any of our ordinary shares or warrants offered pursuant to this prospectus supplement or the accompanying prospectus. See
“Plan of Distribution” beginning on page S-30 of this prospectus supplement for more information regarding these arrangements.
Investing in our
securities involves a high degree of risk. You should purchase our securities only if you can afford a complete loss of your
investment. See “Risk Factors” beginning on page S-4 of this prospectus supplement and on page 4 of the
accompanying prospectus.
We expect that delivery
of the ordinary shares and warrants being offered pursuant to this prospectus supplement and the accompanying prospectus will be
made on or about May 29, 2019.
RISK FACTORS
Before you make
a decision to invest in our securities, you should consider carefully the risks described below, together with other information
in this prospectus supplement, the accompanying prospectus and the information incorporated by reference herein and therein. If
any of the following events actually occur, our business, operating results, prospects or financial condition could be materially
and adversely affected. This could cause the trading price of our ordinary shares to decline and you may lose all or part of your
investment. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we
currently deem immaterial may also significantly impair our business operations and could result in a complete loss of your investment.
Risks Related to Our Business and Our
Industry
We may not be able to successfully implement
our growth strategy on a timely basis or at all, which could harm our results of operations.
Our continued growth
depends, in large part, on our ability to open new stores and to operate those stores successfully. We believe there is a significant
opportunity to expand our store base in the PRC from the 8 locations in the Hunan province as of April 2019 to potentially add
up to an additional 70 stores in across the PRC by 2021, based on management estimates. In fiscal 2019, we expect to open approximately
20 additional stores in the Hunan province. Over the longer term, we believe that we have the ability to open approximately 25
stores annually. Our growth depends, in part, on increasing consumer awareness and consumption of tea in the PRC, as well as successfully
expanding our operating experience from the Hunan province to other regions of the PRC.
Our ability to successfully
open and operate new stores depends on many factors, including:
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Our
ability to increase brand awareness in Hunan and to increase tea consumption in areas where we open stores;
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the
identification and availability of suitable sites for store locations, the availability of which is beyond our control;
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the
negotiation of acceptable lease terms;
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the
maintenance of adequate distribution capacity, information systems and other operational system capabilities;
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integrating
new company owned stores and managed and JV stores into our existing buying, distribution and other support operations;
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the
hiring, training and retention of store management and other qualified personnel;
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assimilating
new store employees into our corporate culture;
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the
effective sourcing and management of inventory to meet the needs of our stores on a timely basis; and
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the
availability of sufficient levels of cash flow and financing to support our expansion.
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Unavailability of attractive
store locations, delays in the acquisition or opening of new stores, delays or costs resulting from a decrease in commercial development
due to capital constraints, difficulties in staffing and operating new store locations or lack of customer acceptance of stores
in new market areas may negatively impact our new store growth and the costs or the profitability associated with new stores.
Additionally, some
of our new stores may be located in areas where we have little experience or a lack of brand recognition, particularly in first-tier
cities such as Beijing and Shanghai. Those markets may have different competitive conditions, market conditions, consumer tastes
and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores
in our existing markets. Other new stores may be located in areas where we have existing stores. Although we have experience in
these markets, increasing the number of locations in these markets may result in inadvertent over-saturation of markets and temporarily
or permanently divert customers and sales from our existing stores, thereby adversely affecting our overall financial performance.
Accordingly, we cannot
assure you that we will achieve our planned growth or, even if we are able to grow our store base as planned, that any new stores
will perform as planned. If we fail to successfully implement our growth strategy, we will not be able to sustain the rapid growth
in sales and profits that we expect, which would likely have an adverse impact on the price of our ordinary shares.
Our business largely depends on a
strong brand image, and if we are unable to maintain and enhance our brand image, particularly in new markets where we have limited
brand recognition, we may be unable to increase or maintain our level of sales.
We believe that our
brand image and brand awareness has contributed significantly to the success of our business. We also believe that maintaining
and enhancing our brand image, particularly in new markets where we have limited brand recognition, is important to maintaining
and expanding our customer base. Our ability to successfully integrate new stores into their surrounding communities, to expand
into new markets or to maintain the strength and distinctiveness of our brand in our existing markets will be adversely impacted
if we fail to connect with our target customers. Maintaining and enhancing our brand image may require us to make substantial investments
in areas such as merchandising, marketing, store operations, community relations, store graphics and employee training, which could
adversely affect our cash flow and which may ultimately be unsuccessful. Furthermore, our brand image could be jeopardized if we
fail to maintain high standards for merchandise quality, if we fail to comply with local laws and regulations or if we experience
negative publicity or other negative events that affect our image and reputation. Some of these risks may be beyond our ability
to control, such as the effects of negative publicity regarding our suppliers. Failure to successfully market and maintain our
brand image in new and existing markets could harm our business, results of operations and financial condition.
Our limited operating experience
and limited brand recognition in other regions of the PRC may limit our expansion strategy and cause our business and growth to
suffer.
Our future growth depends,
to a considerable extent, on our expansion efforts outside of Hunan province into other regions of the PRC. Our current operations
are based largely in the Hunan province. We have a limited number of customers and limited experience in operating outside of Hunan.
We also have limited experience with market practices outside of Hunan and cannot guarantee that we will be able to penetrate or
successfully operate in any market outside of Hunan. We may also encounter difficulty expanding in other regions’ markets
because of limited brand recognition. In particular, we have no assurance that our marketing efforts will prove successful outside
of the narrow geographic regions in which they have been used. In addition, because tea consumption is greater in Hunan
than some other regions of the PRC on a per capita basis, we may encounter challenges in those regions in establishing consumer
awareness and loyalty or interest in our products and our brand to a different degree than in Hunan. The expansion into other regions
may also present competitive, merchandising, forecasting and distribution challenges that are different from or more severe than
those we currently face. Failure to develop new markets outside of Hunan or disappointing growth outside of Hunan may harm our
business and results of operations.
We face significant competition from
other specialty tea and beverage retailers and retailers of grocery products, which could adversely affect us and our
growth plans.
The Chinese tea market
is highly fragmented. We compete directly with a large number of relatively small independently owned tea retailers and
a number of regional and national tea retailers, as well as retailers of grocery products, including loose-leaf tea and tea bags
and other beverages. We compete with these retailers on the basis of taste, quality and price of product offered, atmosphere, location,
customer service and overall customer experience. We must spend considerable resources to differentiate our customer experience.
Some of our competitors may have greater financial, marketing and operating resources than we do. Therefore, despite our efforts,
our competitors may be more successful than us in attracting customers. In addition, as we continue to drive growth in our category
in Hunan, our success, combined with relatively low barriers to entry, may encourage new competitors to enter the market. As we
continue to expand geographically, we expect to encounter additional regional and local competitors.
We plan to use primarily cash from
our prior offering as well as our operations to finance our growth strategy, and if we are unable to maintain sufficient levels
of cash flow we may not meet our growth expectations.
We intend to finance
our growth through the cash flows generated by our existing stores and the net proceeds from our previous and future financings.
Our primary source of financing for our growth will be cash from our prior offering as well as our operations. However, if our
stores are not profitable or if our store profits decline, we may not have the cash flow necessary in order to pursue or maintain
our growth strategy. We may also be unable to obtain any necessary financing on commercially reasonable terms to pursue or maintain
our growth strategy. If we are unable to pursue or maintain our growth strategy, the market price of our ordinary shares could
decline and our results of operations and profitability could suffer.
The planned addition of a significant
number of new stores each year will require us to continue to expand and improve our operations and could strain our operational,
managerial and administrative resources, which may adversely affect our business.
Our growth strategy
calls for the opening of a significant number of new stores each year and our continued expansion will place increased demands
on our operational, managerial, administrative and other resources, which may be inadequate to support our expansion. Our senior
management team may be unable to effectively address challenges involved with expansion forecasts for fiscal 2019 and 2020. Managing
our growth effectively will require us to continue to enhance our store management systems, financial and management controls and
information systems and to hire, train and retain regional directors, district managers, store managers and other personnel. Implementing
new systems, controls and procedures and these additions to our infrastructure and any changes to our existing operational, managerial,
administrative and other resources could negatively impact our results of operations and financial condition.
As we expand our store base we may
not experience the same increases in comparable sales or profitability that we have experienced in the past.
We may not be able
to maintain the levels of comparable sales that we have experienced historically. If our future comparable sales decline or fail
to meet market expectations, the price of our ordinary shares could decline. In addition, the aggregate results of operations of
our stores have fluctuated in the past and can be expected to continue to fluctuate in the future. A variety of factors affect
comparable sales including consumer tastes, competition, current economic conditions, pricing, inflation and weather conditions.
These factors may cause our comparable sales results to be materially lower than recent periods and our expectations, which could
harm our results of operations and result in a decline in the price of our ordinary shares.
Any decrease in customer traffic
in the shopping malls or other locations in which our stores are located could cause our sales to be less than expected.
Our stores are located
in shopping malls, other shopping centers and street locations. Sales at these stores are derived, to a significant degree, from
the volume of customer traffic in those locations and in the surrounding area. Our stores benefit from the current popularity of
shopping malls and centers as shopping destinations and their ability to generate customer traffic in the vicinity of our stores.
Our sales volume and customer traffic may be adversely affected by, among other things:
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economic
downturns in the PRC or regionally;
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changes
in consumer demographics;
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a
decrease in popularity of shopping malls or centers in which a significant number of our stores are located;
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the
closing of a shopping mall’s or center’s “anchor” store or the stores of other key tenants; or
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a
deterioration in the financial condition of shopping mall and center operators or developers which could, for example, limit their
ability to maintain and improve their facilities.
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A reduction in customer
traffic as a result of these or any other factors could have a material adverse effect on us.
In addition, severe
weather conditions and other catastrophic occurrences in areas in which we have stores may have a material adverse effect on our
results of operations. Such conditions may result in physical damage to our stores, loss of inventory, decreases in customer traffic
and closure of one or more of our stores. Any of these factors may disrupt our business and have a material adverse effect on our
financial condition and results of operations.
If we are unable to attract, train,
assimilate and retain employees that embody our culture, including store personnel, store and district managers and regional directors,
we may not be able to grow or successfully operate our business.
Our success depends
in part upon our ability to attract, train, assimilate and retain a sufficient number of employees, including store managers, district
managers and regional directors, who understand and appreciate our culture, are able to represent our brand effectively and establish
credibility with our customers. If we are unable to hire and retain store personnel capable of consistently providing a high level
of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of tea beverages,
light meals, baked goods, tea accessories and other tea-related merchandise we offer, our ability to open new stores
may be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may
be negatively impacted. In addition, the rate of employee turnover in the retail industry is typically high and finding qualified
candidates to fill positions may be difficult. Our planned growth will require us to attract, train and assimilate even more personnel.
Any failure to meet our staffing needs or any material increases in team member turnover rates could have a material adverse effect
on our business or results of operations. We also rely on temporary or seasonal personnel to staff our stores and distribution
centers, especially during Chinese New Year. We cannot guarantee that we will be able to find adequate temporary or seasonal personnel
to staff our operations when needed, which may strain our existing personnel and negatively impact our operations.
Because our business is highly concentrated
on a single, discretionary product category, tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise, we are vulnerable to changes in consumer preferences and in economic conditions affecting disposable income that could
harm our financial results.
Our business is not
diversified and consists primarily of developing, sourcing, producing, marketing and selling tea beverages, light meals, baked
goods and tea-related gifts and accessories. Consumer preferences often change rapidly and without warning, moving from one
trend to another among many retail concepts. Therefore, our business is substantially dependent on our ability to educate consumers
on the many positive attributes of tea and anticipate shifts in consumer tastes. Any future shifts in consumer preferences
away from the consumption of tea beverages would also have a material adverse effect on our results of operations. In particular,
there has been an increasing focus on health and wellness by consumers, which we believe has increased demand for products, such
as our teas, that are perceived to be healthier than other beverage alternatives. If such consumer preference trends change, or
if our teas are not perceived to be healthier than other beverage alternatives, our financial results could be adversely affected.
Consumer purchases
of specialty retail products, including our products, are historically affected by economic conditions such as changes in employment,
salary and wage levels, the availability of consumer credit, inflation, interest rates, tax rates, fuel prices and the level of
consumer confidence in prevailing and future economic conditions. These discretionary consumer purchases may decline during recessionary
periods or at other times when disposable income is lower. Our financial performance may become susceptible to economic and other
conditions in regions or states where we have a significant number of stores. Our continued success will depend, in part, on our
ability to anticipate, identify and respond quickly to changing consumer preferences and economic conditions.
Our success depends, in part, on
our ability to source, develop and market new varieties of teas and tea blends, tea accessories and other tea-related
merchandise that meet our high standards and customer preferences.
We currently offer
approximately 30 varieties of tea beverages, including 10 to 15 new teas and tea blends each year, and a wide assortment
of light meals, baked goods, tea accessories and other tea-related merchandise. Our success depends in part on our
ability to continually innovate, develop, source and market new varieties of tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise that both meet our standards for quality and appeal to customers’ preferences. Failure
to innovate, develop, source and market new varieties of tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise that consumers want to buy could lead to a decrease in our sales and profitability.
We may experience negative effects
to our brand and reputation from real or perceived quality or safety issues with our tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise, which could have an adverse effect on our operating results.
We believe our customers
rely on us to provide them with high-quality tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise. Concerns regarding the safety of our tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise or the safety and quality of our supply chain could cause consumers to avoid purchasing certain products from us or
to seek alternative sources of tea, even if the basis for the concern has been addressed or is outside of our control. Adverse
publicity about these concerns, whether or not ultimately based on fact, and whether or not involving tea beverages, light meals,
baked goods, tea accessories and other tea-related merchandise sold at our stores, could discourage consumers from
buying our tea beverages, light meals, baked goods, tea accessories and other tea-related merchandise and have an
adverse effect on our brand, reputation and operating results.
Furthermore, the sale
of tea beverages, light meals, baked goods, tea accessories and other tea-related merchandise entails a risk
of product liability claims and the resulting negative publicity. For example, tea supplied to us may contain contaminants
that, if not detected by us, could result in illness or death upon their consumption. Similarly, light meals, baked goods,
tea accessories and other tea-related merchandise could contain contaminants or contain design or manufacturing defects that
could result in illness, injury or death. We cannot assure you that product liability claims will not be asserted against us or
that we will not be obligated to perform product recalls in the future.
Any loss of confidence
on the part of our customers in the safety and quality of our tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise would be difficult and costly to overcome. Any such adverse effect could be exacerbated
by our position in the market as a purveyor of quality tea beverages, light meals, baked goods, tea accessories and other tea-related
merchandise and could significantly reduce our brand value. Issues regarding the safety of any teas, tea accessories
or other tea-related merchandise sold by us, regardless of the cause, could have a substantial and adverse effect on our sales
and operating results.
Use of social media may adversely
impact our reputation or subject us to fines or other penalties.
There has been a substantial
increase in the use of social media platforms and similar devices, including blogs, social media websites, and other forms of Internet-based
communications, which allow individuals access to a broad audience of consumers and other interested persons. As laws and regulations
rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our
direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely affect our reputation
or subject us to fines or other penalties.
Consumers value readily
available information concerning retailers and their goods and services and often act on such information without further investigation
and without regard to its accuracy. Information concerning us may be posted on social media platforms and similar devices by unaffiliated
third parties, whether seeking to pass themselves off as us or not, at any time, which may be adverse to our reputation or business.
The harm may be immediate without affording us an opportunity for redress or correction.
While we do not rely on a limited
number of third-party suppliers and manufacturers, we may not be able to obtain quality products on a timely basis or in sufficient
quantities.
We do not rely on a
limited number of vendors to supply us with our raw materials on a continuous basis. However, our financial performance depends
in large part on our ability to purchase tea in sufficient quantities at competitive prices from vendors. In general,
we do not have long-term purchase contracts or other contractual assurances of continued supply, pricing or exclusive access to
products from these vendors.
Any of our suppliers
or manufacturers could discontinue supplying us with teas in sufficient quantities for a variety of reasons. The benefits we currently
experience from our supplier and manufacturer relationships could be adversely affected if they:
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raise
the prices they charge us;
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discontinue
selling products to us;
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sell
similar or identical products to our competitors; or
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enter
into arrangements with competitors that could impair our ability to sell our suppliers’ and manufacturers’ products,
including by giving our competitors exclusive licensing arrangements or exclusive access to tea blends or limiting our
access to such arrangements or blends.Events that adversely affect our vendors could impair our ability to obtain inventory in
the quantities and at the quality that we desire. Such events include difficulties or problems with our vendors’ businesses,
finances, labor relations, ability to import raw materials, costs, production, insurance and reputation, as well as natural disasters
or other catastrophic occurrences.
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More generally, if
we experience significant increased demand for our teas, tea accessories and other tea-related merchandise, or need
to replace an existing vendor, there can be no assurance that additional supplies or additional manufacturing capacity will be
available when required on terms that are acceptable to us, or at all, or that any vendor would allocate sufficient capacity to
us in order to meet our requirements, fill our orders in a timely manner or meet our strict quality requirements. In the event
we are required to find new sources of supply, we may encounter delays in production, inconsistencies in quality and added costs
as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards.
Any delays, interruption or increased costs in the supply of raw materials could have an adverse effect on our ability to meet
customer demand for our products and result in lower sales and profitability both in the short and long term.
A shortage in the supply, a decrease
in the quality or an increase in the price of tea as a result of weather conditions, earthquakes, crop disease, pests
or other natural or manmade causes could impose significant costs and losses on our business.
The supply and price
of tea is subject to fluctuation, depending on demand and other factors outside of our control. The supply, quality and
price of our teas can be affected by multiple factors, including political and economic conditions, civil and labor unrest, adverse
weather conditions, including floods, drought and temperature extremes, earthquakes, tsunamis, and other natural disasters and
related occurrences. In extreme cases, entire tea harvests may be lost or may be negatively impacted in some geographic
areas. These factors can increase costs and decrease sales, which may have a material adverse effect on our business, results of
operations and financial condition.
Tea may be vulnerable
to crop disease and pests, which may vary in severity and effect. The costs to control disease and pest damage vary depending on
the severity of the damage and the extent of the plantings affected. Moreover, there can be no assurance that available technologies
to control such conditions will continue to be effective. These conditions can increase costs and decrease sales, which may have
a material adverse effect on our business, results of operations and financial condition.
Our success depends substantially
upon the continued retention of our senior management.
Our future success
is substantially dependent on the continued service of certain members of our senior management, including Long Yi, our President,
Chief Executive Officer, and Kan Lu, our Chief Financial Officer, Mr. Jun Jiang, our General Manager and Raibo, our Chief Product
Officer . These officers play an integral role in determining our strategic direction and for executing our growth strategy and
are important to our brand, culture and the positive business reputation we enjoy with our customers and vendors. The loss of the
services of any of these executives without qualified replacement could have a material adverse effect on our business and prospects,
as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure
could be viewed negatively by investors and analysts, which could cause the price of our ordinary shares to decline.
We rely significantly on information
technology systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to operate
our business effectively.
We rely on our information
technology systems to effectively manage our business data, communications, point-of-sale, supply chain, order entry and fulfillment,
inventory and distribution centers and other business processes. The failure of our systems to perform as we anticipate could disrupt
our business and result in transaction errors, processing inefficiencies and the loss of sales, causing our business to suffer.
Despite any precautions we may take, our information technology systems may be vulnerable to damage or interruption from circumstances
beyond our control, including fire, natural disasters, systems failures, power outages, viruses, security breaches, cyber-attacks
and terrorism, including breaches of our transaction processing or other systems that could result in the compromise of confidential
company, customer or employee data. Any such damage or interruption could have a material adverse effect on our business, cause
us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers, require
us to expend significant time and expense developing, maintaining or upgrading our information technology systems or prevent us
from paying our vendors or employees, receiving payments from our customers or performing other information technology, administrative
or outsourcing services on a timely basis. Furthermore, our ability to conduct our website operations may be affected by changes
in foreign, state, provincial and federal privacy laws and we could incur significant costs in complying with the multitude of
foreign, state, provincial and federal laws regarding the unauthorized disclosure of personal information. Although we carry business
interruption insurance, our coverage may not be sufficient to compensate us for potentially significant losses in connection with
the risks described above.
Our marketing programs, e-commerce
initiatives and use of consumer information are governed by an evolving set of laws and enforcement trends and unfavorable changes
in those laws or trends, or our failure to comply with existing or future laws, could substantially harm our business and results
of operations.
We collect, maintain
and use data, including personally identifiable information, provided to us through online activities and other customer interactions
in our business. Our current and future marketing programs depend on our ability to collect, maintain and use this information,
and our ability to do so is subject to evolving international and China laws and enforcement trends with respect to the foregoing.
We strive to comply with all applicable laws and other legal obligations relating to privacy, data protection and consumer protection,
including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another, may conflict with other rules or may conflict with
our significant amounts to defend our practices, distract our management, increase our costs of doing business and result in monetary
liability.
In addition, as data
privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. If applicable data privacy
and marketing laws become more restrictive, our compliance costs may increase, our ability to effectively engage customers via
personalized marketing may decrease, our opportunities for growth may be curtailed by our compliance capabilities or reputational
harm and our potential liability for security breaches may increase.
Data security breaches and attempts
thereof could negatively affect our reputation, credibility and business.
We collect and store
personal information relating to our customers and employees, including their personally identifiable information, and rely on
third parties for the operation of the various social media tools and websites we use as part of our marketing strategy. Consumers
are increasingly concerned over the security of personal information transmitted over the Internet (or through other mechanisms),
consumer identity theft and user privacy. Any perceived, attempted or actual unauthorized disclosure of personally identifiable
information regarding our employees or customers could harm our reputation and credibility, reduce our ability to attract and retain
customers and could result in litigation against us or the imposition of significant fines or penalties. We cannot assure you that
any of our third-party service providers with access to such personally identifiable information will maintain policies and practices
regarding data privacy and security in compliance with all applicable laws, or that they will not experience data security breaches
or attempts thereof which could have a corresponding adverse effect on our business.
Recently, data security
breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting new
foreign legislative proposals addressing data privacy and security, as well as increased data protection obligations imposed on
merchants by credit card issuers. As a result, we may become subject to more extensive requirements in the future to protect the
customer information that we process in connection with the purchase of our products, resulting in increased compliance costs.
Third-party failure to deliver merchandise
from our distribution centers to our stores could result in lost sales or reduced demand for our teas, tea accessories
and other tea-related merchandise.
We currently partly
rely upon third-party transportation providers for all of our product shipments from our distribution centers to our stores. Our
utilization of third-party delivery services for shipments is subject to risks, including increases in fuel prices, which would
increase our shipping costs, and employee strikes and inclement weather, which may impact third parties’ abilities to provide
delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties
that could adversely affect deliveries, and we would incur costs and expend resources in connection with such change. Moreover,
we may not be able to obtain terms as favorable as those we receive from the third-party transportation providers that we currently
use, which in turn would increase our costs and thereby adversely affect our operating results.
A widespread health epidemic could
adversely affect our business.
Our business could
be severely affected by a widespread regional, national or global health epidemic. A widespread health epidemic may cause customers
to avoid public gathering places such as our stores or otherwise change their shopping behaviors. Additionally, a widespread health
epidemic could adversely affect our business by disrupting production of products to our stores and by affecting our ability to
appropriately staff our stores.
Litigation may adversely affect our
business, financial condition, results of operations or liquidity.
Our business is subject
to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government
agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation.
The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is inherently
difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts,
and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition,
certain of these lawsuits, if decided adversely to us or settled by us, may result in liability material to our financial statements
as a whole or may negatively affect our operating results if changes to our business operation are required. Regardless of the
outcome or merit, the cost to defend future litigation may be significant and result in the diversion of management and other company
resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our
business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may
adversely affect our business, financial condition, results of operations or liquidity.
Our failure to comply with existing
or new regulations in the PRC, or an adverse action regarding product claims or advertising could have a material adverse effect
on our results of operations and financial condition.
Our business operations,
including labeling, advertising, sourcing, distribution and sale of our products, are subject to regulation by the Food Safety
Law and Product Quality Law of the PRC. From time to time, we may be subject to challenges to our marketing, advertising or product
claims in litigation or governmental, administrative or other regulatory proceedings. Failure to comply with applicable regulations
or withstand such challenges could result in changes in our supply chain, product labeling, packaging or advertising, loss of market
acceptance of the product by consumers, additional recordkeeping requirements, injunctions, product withdrawals, recalls, product
seizures, fines, monetary settlements or criminal prosecution. Any of these actions could have a material adverse effect on our
results of operations and financial condition.
In addition, consumers
who allege that they were deceived by any statements that were made in advertising or labeling could bring a lawsuit against us
under consumer protection laws. If we were subject to any such claims, while we would defend ourselves against such claims, we
may ultimately be unsuccessful in our defense. Defending ourselves against such claims, regardless of their merit and ultimate
outcome, would likely result in a significant distraction for management, be lengthy and costly and could adversely affect our
results of operations and financial condition. In addition, the negative publicity surrounding any such claims could harm our reputation
and brand image.
We may not be able to protect our
intellectual property adequately, which could harm the value of our brand and adversely affect our business.
We believe that our
intellectual property has substantial value and has contributed significantly to the success of our business. In particular, our
trademarks, including our registered Buoyance Manor, Your Ladyship Tea, and Meet Honey trademarks and the unregistered names of
a significant number of the varieties of tea beverages that we sell, are valuable assets that reinforce the distinctiveness of
our brand and our customers’ favorable perception of our stores.
We also strive to protect
our intellectual property rights by relying on PRC laws, as well as contractual restrictions with our employees, contractors (including
those who develop, source, manufacture, store and distribute our tea beverages, light meals, baked goods, tea accessories
and other tea-related merchandise), vendors and other third parties. However, we may not enter into confidentiality and/or
invention assignment agreements with every employee, contractor and service provider to protect our proprietary information and
intellectual property ownership rights. Those agreements that we do execute may be breached, resulting in the unauthorized use
or disclosure of our proprietary information. Individuals not subject to invention assignments agreements may make adverse ownership
claims to our current and future intellectual property, and even the existence of executed confidentiality agreements may not deter
independent development of similar intellectual property by others. Unauthorized disclosure of or claims to our intellectual property
or confidential information may adversely affect our business.
From time to time,
third parties may our trade dress and/or sell our products using our name without our consent, and, we believe, may infringe or
misappropriate our intellectual property rights. We will respond to these actions on a case-by-case basis and where appropriate
may commence litigation to protect our intellectual property rights. However, we may not be able to detect unauthorized use of
our intellectual property or to take appropriate steps to enforce, defend and assert our intellectual property in all instances.
Effective trade secret,
patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, both in terms of initial
and ongoing registration or prosecution requirements and expenses and the costs of defending our rights. Our trademark rights and
related registrations may be challenged in the future and could be opposed, canceled or narrowed. Our failure to register or protect
our trademarks could prevent us in the future from using our trademarks or challenging third parties who use names and logos similar
to our trademarks, which may in turn cause customer confusion, impede our marketing efforts, negatively affect customers’
perception of our brand, stores and products, and adversely affect our sales and profitability. Moreover, intellectual property
proceedings and infringement claims brought by or against us could result in substantial costs and a significant distraction for
management and have a negative impact on our business. We cannot assure you that we are not infringing or violating, and have not
infringed or violated, any third-party intellectual property rights, or that we will not be accused of doing so in the future.
In addition, although
we have also taken steps to protect our intellectual property rights in the PRC, other entities may have rights to trademarks that
contain portions of our marks or may have registered similar or competing marks in foreign countries. There may also be other prior
registrations in other foreign countries of which we are not aware. We may need to expend additional resources to defend our trademarks
in these countries, and the inability to defend such trademarks could impair our brand or adversely affect the growth of our business
internationally.
We are subject to the risks associated
with leasing substantial amounts of space and are required to make substantial lease payments under our operating leases. Any failure
to make these lease payments when due would likely harm our business, profitability and results of operations.
We do not own any real
estate. Instead, we lease all of our store locations, corporate offices and distribution center. Our store leases typically have
three to five-year terms and generally require us to pay total rent per square foot that is reflective of our small average store
square footage and premium locations. Many of our lease agreements have defined escalating rent provisions over the initial term
and any extensions. As our stores mature and as we expand our store base, our lease expense and our cash outlays for rent under
our lease agreements will increase. Our substantial operating lease obligations could have significant negative consequences, including:
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requiring
that an increased portion of our cash from operations and available cash be applied to pay our lease obligations, thus reducing
liquidity available for other purposes;
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increasing
our vulnerability to adverse general economic and industry conditions;
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limiting
our flexibility to plan for or react to changes in our business or in the industry in which we compete; and
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limiting
our ability to obtain additional financing.
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We depend on cash flow
from operations and cash from our prior offering to pay our lease expenses, finance our growth capital requirements and fulfill
our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these requirements
or we use up the proceeds from our prior offering, we may not be able to achieve our growth plans, fund our other liquidity and
capital needs or ultimately service our lease expenses, which would harm our business.
If an existing or future
store is not profitable, and we decide to close it, we may nonetheless remain committed to perform our obligations under the applicable
lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early
cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, as our
leases expire, we may fail to negotiate renewals on commercially acceptable terms or at all, which could cause us to close stores
in desirable locations. Even if we are able to renew existing leases, the terms of such renewal may not be as attractive as the
expiring lease, which could materially and adversely affect our results of operations. Our inability to enter into new leases or
renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could
materially adversely affect us.
Our Chief Executive Officer may be subject to conflicts of
interest.
Our Chief Executive
Officer, Mr. Long Yi, provides his services on a non-exclusive, part-time basis to other companies, and may therefore
become subject to conflicts of interest resulting from his other activities. Because Mr. Yi works part-time, instances may occur
where he may not be immediately available to provide solutions to problems or address concerns that arise in the course of us conducting
our business and thus adversely affect our business. In addition, Mr. Yi can become subject to conflicts of interest because he
devotes part of his working time to other business endeavors, including serving as chief financial officer of China Bat Group,
Inc. (NASDAQ: GLG) and chief financial officer of iFresh Inc. (NASDAQ: IFMK), and have responsibilities to these other entities.
Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented
to us. Because of these relationships, Mr. Yi could be subject to conflicts of interest.
The directors and officers
of our company, including Mr. Yi, are aware of the existence of laws governing the accountability of directors and officers for
corporate opportunity and requiring disclosures by the directors and officers of conflicts of interest, and we will rely upon such
laws in respect of any conflicts of interest or in respect of any breaches of duty by any of our directors and officers. All such
conflicts are to be disclosed by such directors or officers in accordance with applicable laws and the directors and officers are
to govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.
Currently, we have no policy in place to address such conflicts of interest. In the event Mr. Yi fails to comply with these laws,
our business and results of operations could be materially adversely affected.
Risks Relating to Doing Business in the
PRC
Our subsidiaries, main operations
and assets are located in the PRC. Shareholders may not be accorded the same rights and protection that would be accorded under
the US law. In addition, it would be difficult to enforce a U.S. judgment against our PRC subsidiaries and our officers and directors.
We are a holding company
and all of our operations and assets are held in overseas subsidiaries. Our PRC subsidiaries, Shanghai MYT and Hunan MYT were established
in the PRC, and their main operations and assets are located in the PRC. Our PRC subsidiaries, main operations and assets are therefore
subject to the relevant laws and regulations of the PRC. In addition, a majority of our officers and directors are non-residents
of the United States and substantially all their assets are located outside the United States. As a result, it could be more difficult
for investors to effect service of process in the United States, or to enforce a judgment obtained in the United States against
any of our PRC subsidiaries or any of these persons.
Our business is subject to certain
PRC laws and regulations.
Our business and operations
in the PRC are subject to government rules and regulations, including environmental, working safety, road transportation and health
regulations. Any changes in such government regulations may have a negative impact on our business.
Breaches or non-compliance
with these PRC laws and regulations may result in the suspension, withdrawal or termination of our business licenses or permits,
or the imposition of penalties, by the relevant authorities. Our PRC subsidiaries’ business licenses are also granted for
a finite period and any extension thereof is subject to the approval of the relevant authorities. Any suspension, withdrawal, termination
or refusal to extend our PRC subsidiaries’ business licenses or permits would cause the cessation of production of certain
or all of our products, and this would adversely affect our PRC subsidiaries’ business, financial performance and prospects.
Uncertainty in the PRC legal system
may make it difficult for us to predict the outcome of any disputes that we may be involved in.
The PRC legal system
is based on the PRC Constitution and is made up of written laws, regulations, circulars and directives. The PRC government is still
in the process of developing its legal system, so as to meet the needs of investors and to encourage foreign investment. As the
PRC economy is generally developing at a faster pace than its legal system, some degree of uncertainty exists in connection with
whether and how existing laws and regulations will apply to certain events or circumstances.
Some of the laws and
regulations, and the interpretation, implementation and enforcement thereof, are still subject to policy changes. There is no assurance
that the introduction of new laws, changes to existing laws and the interpretation or application thereof or the delays in obtaining
approvals from the relevant authorities will not have an adverse impact on our PRC subsidiaries’ business, financial performance
and prospects.
Further, precedents
on the interpretation, implementation and enforcement of the PRC laws and regulations are limited, and unlike other common law
countries such as the United States, decisions on precedent cases are not binding on lower courts. As such, the outcome of dispute
resolutions may not be consistent or predictable as in the other more developed jurisdictions and it may be difficult to obtain
swift or equitable enforcement of the laws in the PRC, or obtain enforcement of judgment by a court of another jurisdiction.
Failure of our PRC resident shareholders
to comply with regulations on foreign exchange registration of overseas investment by PRC residents could cause us to lose our
ability to contribute capital to our PRC subsidiaries and remit profits out of the PRC as dividends.
The Notice on Relevant
Issues Concerning Foreign Exchange Administration for Domestic Residents to Engage in Overseas Financing and Round Trip Investment
via Overseas Special Purpose Vehicles (“Circular 75”), issued by the SAFE and effective on November 1, 2005, regulates
the foreign exchange matters in relation to the use of a “special purpose vehicle” by PRC residents to seek offshore
equity financing and conduct a “round trip investment” in China. Under Circular 75, a “special purpose vehicle”
refers to an offshore entity directly established or indirectly controlled by PRC resident natural or legal persons (“PRC
residents”) for the purpose of seeking offshore equity financing using assets or interests owned by such PRC residents in
onshore companies, while “round trip investment” refers to the direct investment in China by such PRC residents through
the “special purpose vehicles,” including, without limitation, establishing foreign-invested enterprises and using
such foreign-invested enterprises to purchase or control onshore assets through contractual arrangements. Circular 75 requires
that, before establishing or controlling a “special purpose vehicle”, PRC residents and PRC entities are required to
complete a foreign exchange registration with the competent local branches of the SAFE for their overseas investments. After the
completion of a round-trip investment or the overseas equity financing, the PRC residents are required to go through foreign exchange
registration alteration formalities of overseas investment in respect of net assets of special purpose vehicles that such PRC residents
hold and the variation thereof.
In addition, an amendment
to the registration is required if there is a material change in the “special purpose vehicle,” such as increase or
reduction of share capital and transfer of shares. Failure to comply with the registration procedures set forth in Circular 75
may result in restrictions on the foreign exchange activities of the relevant foreign-invested enterprises, including the payment
of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore
parent or affiliate and the capital inflow from the offshore parent, and may also subject the relevant PRC residents to penalties
under PRC foreign exchange administration regulations.
We have requested our
current PRC resident shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners
fall within the scope of the Circular 75 and urged PRC residents to register with the local SAFE branch as required under the Circular
75. Our affiliates subject to the SAFE registration requirements, including Mr. Xin Chao and Mr. Lei Shen, have informed us that
they have made their initial registrations with SAFE dated June 5, 2013. The failure of our PRC resident shareholders and/or beneficial
owners to timely amend their SAFE registrations pursuant to the Circular 75 or the failure of our future shareholders and/or beneficial
owners who are PRC residents to comply with the registration requirement set forth in the Circular 75 may subject such shareholders,
beneficial owners and/or our PRC subsidiaries to fines and legal sanctions. Any such failure may also limit our ability to contribute
additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us or otherwise
adversely affect our business.
The PRC government
could restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses
as they come due or may restrict which limit the payment of dividends from the Company.
Our results and financial conditions
are highly susceptible to changes in the PRC’s political, economic and social conditions as our revenue is currently wholly
derived from our operations in the PRC.
Since 1978, the PRC
government has undertaken various reforms of its economic systems. Such reforms have resulted in economic growth for the PRC in
the last three decades. However, many of the reforms are unprecedented or experimental, and are expected to be refined and modified
from time to time. Other political, economic and social factors may also lead to further readjustment of the reform measures. This
refinement and adjustment process may consequently have a material impact on our operations in the PRC or a material adverse impact
on our financial performance. Our results and financial condition may be adversely affected by changes in the PRC’s political,
economic and social conditions and by changes in policies of the PRC government or changes in laws, regulations or the interpretation
or implementation thereof.
Dividends payable to us by our PRC
subsidiaries may be subject to PRC withholding taxes, dividends distributed to our non-PRC investors and gains realized by our
non-PRC shareholders from the transfer of our securities may be subject to PRC withholding taxes under the Enterprise Income Tax
Law.
The Enterprise Income
Tax Law (“EIT Law”) imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed
by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprises without
any establishment or place of business within China or if the received dividends have no connection with such foreign investors’
establishment or place of business within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty
with China that provides for a different withholding arrangement. The British Virgin Islands, where we are incorporated, does not
have such tax treaty with China. According to the Arrangement between Mainland of China and the Hong Kong Special Administrative
Region on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income in August 2006,
dividends paid by a foreign invested enterprise, or FIE, to its foreign investors in Hong Kong will be subject to withholding tax
at a preferential rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). The State
Administration of Taxation further promulgated a circular, or Circular 601, on October 27, 2009, which provides that tax treaty
benefits will be denied to “conduit” or shell companies without business substance and that a beneficial ownership
analysis will be used based on a “substance-over-form” principle to determine whether or not to grant the tax treaty
benefits. Our subsidiaries in China are directly invested in and held by a Hong Kong registered entity. If we are regarded as a
non-resident enterprise and our Hong Kong entity regarded as resident enterprise, then our Hong Kong entity may be required to
pay a 10% withholding tax on any dividends payable to it. If our Hong Kong entity is regarded as non-resident enterprises, then
our subsidiaries in China will be required to pay a 5% withholding tax for any dividends payable to our Hong Kong entities provided
that specific conditions are met. However, it is still unclear at this stage whether Circular 601 applies to dividends from our
PRC subsidiaries paid to our Hong Kong subsidiary and if our Hong Kong subsidiary were not considered as “beneficial owner”
of any dividends from our PRC subsidiaries, the dividends payable to our Hong Kong subsidiary would be subject to withholding tax
at a rate of 10%. In either case, the amount of funds available to us, including the payment of dividends to our shareholders,
could be materially reduced. In addition, because there remains uncertainty regarding the concept of “the place of de facto
management body,” if we are regarded as a resident enterprise, under the EIT Law, any dividends to be distributed by us to
our non-PRC shareholders will be subject to PRC withholding tax. We also cannot guarantee that any gains realized by such non-PRC
shareholders from the transfer of our shares will not be subject to PRC withholding tax. If we are required under the EIT Law to
withhold PRC income tax on dividends payable to our non-PRC shareholders or any gains realized by our non-PRC shareholders from
transfer of our shares, their investment in our shares may be materially and adversely affected.
We may be subject to a significant
withholding tax should equity transfers by our non-resident enterprises be determined to have been done without a reasonable business
purpose.
In December 2009, the
State Administration of Tax in China issued a circular on strengthening the management of proceeds from equity transfers by non-resident
enterprises and requires foreign entities to report indirect sales of resident enterprises. If the existence of the overseas intermediary
holding company is disregarded due to lack of reasonable business purpose or substance, gains on such sale are subject to PRC withholding
tax. Due to limited guidance and implementation history of the circular, significant judgment is required in determining the existence
of a reasonable business purpose by considering multiple factors, such as the form and substance of the arrangement, time of establishment
of the foreign entity, relationship between each step of the arrangement, relationship between each component of the arrangement,
implementation of the arrangement and the changes in the financial position of all parties involved in the transaction. Although
we believe that our transactions during all the periods presented would be determined to have reasonable business purposes, should
this not be the case, we would be subject to a significant withholding tax that could materially and adversely impact our financial
position, results of operations and cash flows.
Uncertainty in the interpretation
of PRC tax regulations may have a negative impact on our business operations, our acquisition or restructuring strategy or the
value of our investment in it.
Pursuant to the Notice
on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698,
issued by the State Administration of Taxation in December 2009, with retroactive effect from January 1, 2008, where a non-resident
enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an
overseas non-public holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction
that: (i) has an effective tax rate of less than 12.5% or (ii) does not impose income tax on foreign income of its residents, the
non-resident enterprise, being the transferor, must report to the competent tax authority of the PRC resident enterprise this Indirect
Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas
holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring
PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. SAT
Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise
to its related parties at a price lower than fair market value, the relevant tax authority has the power to make a reasonable adjustment
to the taxable income of the transaction.
On March 28, 2011,
the State Administration of Taxation released SAT Public Notice (2011) No. 24, or SAT Public Notice 24, to clarify several issues
related to Circular 698. SAT Public Notice 24 became effective on April 1, 2011. According to SAT Public Notice 24, the term “effective
tax rate” refers to the effective tax rate on the gain derived from disposition of the equity interests of an overseas holding
company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the
equity interests of an overseas holding company is not subject to income tax in the country/region where the overseas holding company
is a resident.
There is uncertainty
as to the application of SAT Circular 698. For example, while the term “Indirect Transfer” is not clearly defined,
it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of
foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions
or made any formal declaration as to the process and format for reporting an Indirect Transfer to the competent tax authority of
the relevant PRC resident enterprise. In addition, there are no formal declarations with regard to how to determine whether a foreign
investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. SAT Circular 698 may be determined by the
tax authorities to be applicable to previous investments by non-resident investors in its company, if any of such transactions
were determined by the tax authorities to lack reasonable commercial purpose. As a result, we and our existing non-resident investors
may be at risk of being taxed under SAT Circular 698 and may be required to expend valuable resources to comply with SAT Circular
698 or to establish that we should not be taxed under SAT Circular 698, which may have a material adverse effect on our financial
condition and results of operations or such non-resident investors’ investments in us. We have conducted and may conduct
transactions involving our corporate structure. We cannot assure you that the PRC tax authorities will not, at their discretion,
adjust any capital gains and impose tax return filing obligations on us or require us to provide assistance for the investigation
of PRC tax authorities with respect thereto. Any PRC tax imposed on a transfer of our shares or any adjustment of such gains would
cause us to incur additional costs and may have a negative impact on the value of your investment in us.
PRC regulation of loans and direct
investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds from the offerings of
any securities to make loans or additional capital contributions to our PRC operating subsidiaries.
As an offshore holding
company, our ability to make loans or additional capital contributions to our PRC operating subsidiaries is subject to PRC regulations
and approvals. These regulations and approvals may delay or prevent us from using the proceeds we received in the past or will
receive in the future from the offerings of securities to make loans or additional capital contributions to our PRC operating subsidiaries,
and impair our ability to fund and expand our business which may adversely affect our business, financial condition and result
of operations.
For example, the SAFE
promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign
Currency Capital of Foreign-Invested Enterprises, or Circular 142, on August 29, 2008. Under Circular 142, registered capital of
a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved
by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies
may not change how they use such capital without the SAFE’s approval, and may not in any case use such capital to repay RMB
loans if they have not used the proceeds of such loans. Furthermore, the SAFE promulgated a circular on November 9, 2010, or Circular
59, which requires 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 addition, to strengthen Circular 142, on November 9, 2011,
the SAFE promulgated the Circular on Further Clarifying and Regulating Relevant Issues Concerning the Administration of Foreign
Exchange under Capital Account, or Circular 45, which prohibits a foreign invested company from converting its registered capital
in foreign exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying
inter-company loans, and repaying bank loans that have been transferred to a third party. Circular 142, Circular 59 and Circular
45 may significantly limit our ability to transfer the net proceeds from offerings of our securities or any future offering to
our PRC subsidiaries and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and
expand our business in the PRC.
Currency fluctuations and restrictions
on currency exchange may adversely affect our business, including limiting our ability to convert RMB into foreign currencies and,
if RMB were to decline in value, reducing our revenues and profits in U.S. dollar terms.
Our reporting currency
is the U.S. dollar and our operations in China use RMB as functional currencies. The majority of our revenues derived and expenses
incurred are in Chinese RMB with a relatively small amount in U.S. dollars. We are subject to the effects of exchange rate fluctuations
with respect to any of these currencies. For example, the value of the RMB depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as well as supply and demand in the local market.
Starting July 2005, the Chinese government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new
policy, the RMB has fluctuated within a narrow and managed band against a basket of certain foreign currencies. It is possible
that the Chinese government will adopt a more flexible currency policy, which could result in more significant fluctuations of
the RMB against the U.S. dollar.
The income statements
of our China operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent
the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results
in reduced revenues, operating expenses and net income for our non-U.S. operations. Similarly, to the extent the U.S. dollar weakens
against foreign currencies, the translation of RMB denominated transactions results in increased revenues, operating expenses and
net income for our non-U.S. operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements
of our non-U.S. subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion
of the non-U.S. subsidiaries’ financial statements will similarly be affected.
We have not entered
into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability
and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental
policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion
of RMB into foreign exchange for most of the capital items, such as foreign direct investment, loans or securities, requires the
approval of the State Administration of Foreign Exchange, or SAFE. These approvals, however, do not guarantee the availability
of foreign currency. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that
Chinese regulatory authorities will not impose greater restrictions on the convertibility of RMB in the future. Because a significant
amount of our future revenues are in the form of RMB, our inability to obtain the requisite approvals or any future restrictions
on currency exchanges could limit our ability to utilize revenue generated in RMB to fund our business activities outside China,
or to repay non-RMB-denominated obligations, including our debt obligations, which would have a material adverse effect on our
financial condition and results of operations.
Restrictions on paying dividends
or making other payments to us by our subsidiaries in China.
We are a holding company
and do not have any assets or conduct any business operations in China other than our investments in our subsidiaries in China.
As a result, if our non-China operations require cash from China, we would depend on dividend payments from our subsidiaries in
China. We cannot make any assurance that we can continue to receive payments from our subsidiaries in China. In addition, under
Chinese law, our subsidiaries are only allowed to pay dividends to us out of their distributable earnings, if any, as determined
in accordance with Chinese accounting standards and regulations. Moreover, our Chinese subsidiaries are required to set aside at
least 10% of their respective after-tax profit each year, if any, to fund certain mandated reserve funds, unless these reserves
have reached 50% of their registered capital. These reserve funds are not payable or distributable as cash dividends. For Chinese
subsidiaries with after-tax profits for the periods presented, the difference between after-tax profits as calculated under PRC
accounting standards and U.S. GAAP relates primarily to share-based compensation expenses and intangible assets amortization expenses,
which are not pushed down to our subsidiaries under PRC accounting standards. In addition, under the EIT Law and its implementing
Rules, dividends generated from our PRC subsidiaries after January 1, 2008 and payable to their immediate holding company incorporated
in Hong Kong generally will be subject to a withholding tax rate of 10% (unless the PRC tax authorities determine that our Hong
Kong subsidiary is a resident enterprise). If certain conditions and requirements under the Arrangement between the Mainland of
China 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 entered into between Hong Kong and the PRC and other related PRC laws and regulations are met,
the withholding rate could be reduced to 5%.
The Chinese government
also imposes controls on the convertibility of RMB into foreign currencies and the remittance of currency out of China in certain
cases. We have experienced and may continue to experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency. If we or any of our subsidiaries are unable to receive substantially all of the economic benefits
from our operations through these contractual or dividend arrangements, we may be unable to effectively finance our operations
or pay dividends on our ordinary shares.
PRC laws and regulations establish
more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for
us to pursue growth through acquisitions in China.
A number of PRC laws
and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors adopted by
six PRC regulatory agencies in 2006, or the M&A Rules, the Antimonopoly Law, and the Rules of Ministry of Commerce on Implementation
of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the Ministry
of Commerce in August 2011, or the Security Review Rules, have established procedures and requirements that are expected to make
merger and acquisition activities in China by foreign investors more time consuming and complex. These include requirements in
some instances that the Ministry of Commerce be notified in advance of any change of control transaction in which a foreign investor
takes control of a PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where
overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and
regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.
The Security Review
Rules were formulated to implement the Notice of the General Office of the State Council on Establishing the Security Review System
for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known as Circular 6, which was promulgated in 2011.
Under these rules, a security review is required for mergers and acquisitions by foreign investors having “national defense
and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control”
of domestic enterprises have “national security” concerns. In addition, when deciding whether a specific merger or
acquisition of a domestic enterprise by foreign investors is subject to the security review, the Ministry of Commerce will look
into the substance and actual impact of the transaction. The Security Review Rules further prohibit foreign investors from bypassing
the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control
through contractual arrangements or offshore transactions.
There is no requirement
for foreign investors in those mergers and acquisitions transactions already completed prior to the promulgation of Circular 6
to submit such transactions to the Ministry of Commerce for security review. As we have already obtained the “de facto control”
over our affiliated PRC entities prior to the effectiveness of these rules, we do not believe we are required to submit our existing
contractual arrangements to the Ministry of Commerce for security review.
However, as these rules
are relatively new and there is a lack of clear statutory interpretation on the implementation of the same, there is no assurance
that the Ministry of Commerce will not apply these national security review-related rules to the acquisition of equity interest
in our PRC subsidiaries. If we are found to be in violation of the Security Review Rules and other PRC laws and regulations with
respect to the merger and acquisition activities in China, or fail to obtain any of the required approvals, the relevant 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. Further, if the business of any target company that we plan
to acquire falls into the ambit of security review, we may not be able to successfully acquire such company either by equity or
asset acquisition, capital contribution or through any contractual arrangement. We may grow our business in part by acquiring other
companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions
could be time consuming, and any required approval processes, including approval from the Ministry of Commerce, may delay or inhibit
our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
The PRC Labor Contract Law and its
implementing rules may adversely affect our business and results of operations.
The PRC Labor Contract
Law became effective and was implemented on January 1, 2008. The PRC Labor Contract Law has reinforced the protection for employees
who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor contracts
with no fixed terms under certain circumstances, to receive overtime wages and to terminate or alter terms in labor contracts.
Furthermore, the PRC Labor Contract Law establishes additional restrictions and increases the costs involved with dismissing employees.
As the PRC Labor Contract Law is relatively new, there remains significant uncertainty as to its interpretation and application
by the PRC Government. In the event that we decide to significantly reduce our workforce, the PRC Labor Contract Law could adversely
affect our ability to do so in a timely and cost effective manner, and our results of operations could be adversely affected. In
addition, for employees whose contracts include non-competition terms, the Labor Contract Law requires us to pay monthly compensation
after such employment is terminated, which will increase our operating expenses.
Failure by our PRC shareholders or
beneficial owners to make required foreign exchange filings and registrations may prevent us from distributing dividends and expose
us to liabilities under the PRC laws.
The Circular on Relevant
Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic
Residents through Overseas Special Purpose Vehicles (“SAFE Circular No. 37”), which was promulgated by SAFE and became
effective on July 14, 2014, requires a PRC individual resident (“PRC Resident”) to register with the local SAFE branch
before he or she contributes assets or equity interests in an overseas special purpose vehicle (“Offshore SPV”) that
is directly established or controlled by the PRC Resident for the purpose of conducting investment or financing. Following the
initial registration, the PRC Resident is also required to register with the local SAFE branch for any major change in respect
of the Offshore SPV, including, among other things, any major change of a PRC Resident shareholder, name or term of operation of
the Offshore SPV, or any increase or reduction of the Offshore SPV’s registered capital, share transfer or swap, merger or
division. Failure to comply with the registration procedures of SAFE Circular No. 37 may result in penalties and sanctions, including
the imposition of restrictions on the ability of the Offshore SPV’s PRC subsidiary to distribute dividends to its overseas
parent.
Our existing PRC Resident
shareholders and beneficial owners currently are subject to the registration procedures under SAFE Circular No. 37. However, as
SAFE Circular No. 37 was recently promulgated, it is unclear how this regulation and any future regulation concerning offshore
or cross-border transactions will be interpreted, amended or implemented by the relevant government authorities. It cannot be predicted
that how these regulations will affect our business operations or future strategies. Any failure by our PRC Resident shareholders
or beneficial owners to make the updates with SAFE may subject the relevant PRC Resident shareholders or beneficial owners to penalties,
restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or
pay dividends, or affect our ownership structure and capital inflow from our offshore subsidiaries. As such, our business, financial
condition, results of operations and liquidity as well as our ability to pay dividends or make other distributions to our shareholders
may be materially and adversely affected.
We may not be able to adequately
protect our intellectual property rights, and any failure to protect our intellectual property rights could adversely affect our
revenues and competitive position.
We believe that trademarks,
trade secrets, patents, copyrights, and other intellectual property we use are important to our business. We rely on a combination
of trademark, copyright, patent and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures
and contractual provisions to protect our intellectual property and our brand. We have invested significant resources to develop
our own intellectual property and acquire licenses to use and distribute the intellectual property of others. A failure to maintain
or protect these rights could harm our business. In addition, any unauthorized use of our intellectual property by third parties
may adversely affect our current and future revenues and our reputation.
The validity, enforceability
and scope of protection available under intellectual property laws in the PRC are uncertain and still evolving. Implementation
and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection
of intellectual property rights in the PRC may not be as effective as in the United States or other western countries. Furthermore,
policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce
or defend patents issued to us or our other intellectual property or to determine the enforceability, scope and validity of our
proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result
in substantial costs and diversion of resources and management attention.
Risks Relating to Our Securities
The market price of our ordinary
shares is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of
our ordinary shares and warrants is volatile, and this volatility may continue. Numerous factors, many of which are beyond our
control, may cause the market price of our ordinary shares to fluctuate significantly. These factors include:
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our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
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speculation about our business in the press or the investment community;
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significant developments relating to our relationships with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the same industry as we are;
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customer demand for our products;
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investor perceptions of the chemical industry in general and our company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
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changes in accounting standards, policies, guidance, interpretation or principles;
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loss of external funding sources;
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failure to maintain compliance with NASDAQ rules;
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sales of our ordinary shares, including sales by our directors, officers or significant shareholders; and
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additions or departures of key personnel.
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Securities class action
litigation is often instituted against companies following periods of volatility in their share price. This type of litigation
could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets
may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular
companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced the
largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our ordinary
shares, warrants and other interests in our company at a time when you want to sell your interest in us.
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 ordinary shares
are traded and listed on the NASDAQ Capital Market under the symbol “MYT”. The ordinary shares and warrants may be
delisted if we fail to maintain certain listing requirements of the Nasdaq Stock Market, or NASDAQ.
On September 14, 2018,
we received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“NASDAQ”) notifying us that
for the preceding 30 consecutive business days our ordinary share did not maintain a minimum closing bid price of at least $1.00
per share as required by Nasdaq Listing Rule 5550(a)(2). We have a grace period of 180 calendar days, or until March 13, 2019,
to regain compliance with the minimum closing bid price requirement for continued listing.
On February 20, 2019,
we received a notification letter from NASDAQ notifying the us that we will be granted an extension until April 15, 2019 to regain
compliance with Nasdaq Listing Rule 5550(b) (“Rule”), which required us to maintain either a minimum of $2,500,000
in shareholders’ equity or $35,000,000 market value of listed securities of $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently completed fiscal years. The notification stated that
we must complete the disposition of its specialty chemical business on or before April 15, 2019, and demonstrate compliance through
the filing of our Form 6-K.
On April 15, 2019,
we filed a Form 6-K disclosing that we have completed the disposition of our specialty chemical business, and we believe we have
regained compliance with the Rule since management believes the stockholders’ equity is approximately $7.62 million and the
market value of listed securities is approximately $51 million. NASDAQ advised us it would continue to monitor the Company’s
ongoing compliance with the stockholders’ equity requirement for ongoing compliance.
If we fail to comply
with the requirements for continued listing on The NASDAQ Capital Market again in the future, we cannot assure you that we will
be able to regain compliance. If our securities lose their status on The NASDAQ Capital Market, our securities would likely trade
in the over-the-counter market. If our securities were to trade on the over-the-counter market, selling our securities could be
more difficult because smaller quantities of securities 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 securities are delisted, broker-dealers have certain
regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our securities, further
limiting the liquidity of our securities. These factors could result in lower prices and larger spreads in the bid and ask prices
for our securities. 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.
While we believe that we currently
have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies
to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
Under the supervision
and with the participation of our management, we have evaluated our internal controls systems in order to allow management to report
on the system and process evaluation and testing required in an effort to comply with the management certification and auditor
attestation requirements of Section 404. As a result, we have incurred additional expenses and a diversion of management’s
time.
If we fail to maintain
effective internal control over financial reporting in the future, a material misstatement of our financial statements may not
be prevented or detected on a timely basis. In addition, we may not be able to conclude on an ongoing basis that we have effective
internal control over financial reporting in accordance with Section 404. This could in turn result in the loss of investor confidence
in the reliability of our financial statements and negatively impact the trading price of our shares. Furthermore, if we are not
able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to
sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ. Any such action could adversely affect our
financial results and the market price of our ordinary shares and warrants.
As a foreign private issuer, we have
limited reporting requirements under the Securities Exchange Act of 1934, which makes us less transparent than a United States
issuer.
As a foreign private
issuer, the rules and regulations under the Exchange Act provide us with certain exemptions from the reporting obligations of United
States issuers. We are exempt from the rules prescribing the furnishing and content of proxy statements, and our officers, directors
and principal stockholders are exempt from the reporting and short-swing profit recovery provisions. Also, we are not required
to publish financial statements as frequently, as promptly or containing the same information as United States companies. The result
is that we will be less transparent than a U.S. issuer.
As a foreign private issuer, we are
not subject to certain NASDAQ corporate governance rules applicable to public companies organized in the United States.
We rely on a provision
in the NASDAQ Stock Market’s Listed Company Manual that allows us to follow BVI law with regard to certain aspects of corporate
governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate
governance requirements applicable to U.S. companies listed on the NASDAQ Stock Market.
For example, we are
exempt from regulations of the NASDAQ Stock Market that require listed companies organized in the United States to:
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have
a majority of the board of directors consist of independent directors;
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have
an audit committee consisting solely of independent directors;
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have
a compensation committee consisting solely of independent directors;
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have
a nominating committee consisting solely of independent directors.
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As a foreign private
issuer, we are permitted to follow home country practice in lieu of the above requirements. Accordingly, our shareholders may not
have the same protections afforded to shareholders of companies that are subject to these NASDAQ Stock Market requirements.
We are an “emerging growth
company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence
in us and our securities.
We are an “emerging
growth company” as defined in the Jumpstart Our Business Act of 2012, or the JOBS Act, and, for as long as we continue to
be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to
other public companies, including an exemption from the requirement to comply with the auditor attestation requirements of Section
404 and an exemption from the requirement to adopt and comply with new or revised accounting standards at the same time as other
public companies. We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which
we have total annual gross revenues of at least US$1.0 billion; (b) the last day of our fiscal year following the fifth anniversary
of the completion of our initial public offering; (c) the date on which we have, during the previous three-year period, issued
more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer”
under the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million
as of the last business day of our most recently completed second fiscal quarter.
The JOBS Act provides
that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of
certain accounting standards until those standards would otherwise apply to private companies. However, we will elect to “opt
out” of this provision and, as a result, we will comply with any new or revised accounting standards as required when they
are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
If some investors find
our securities less attractive because we may rely on these exemptions, there may be a less active trading market for our securities
and their price may be more volatile.
We may be classified as a passive
foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income
tax consequences to U.S. Holders.
Based on the market
price of our ordinary shares, the value of our assets, and the composition of our assets and income, we do not believe that we
were a passive foreign investment company (a “PFIC”) for United States federal income tax purposes for our taxable
year ended June 30, 2018 and we do not expect to be one for our taxable year ending June 30, 2019 or to become one in the foreseeable
future. Nevertheless, the application of the PFIC rules is subject to ambiguity in several respects and, in addition, we must make
a separate determination each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot assure
you that we will not be a PFIC for the current or any other taxable year. Moreover, although we do not believe we would be treated
as a PFIC, we have not engaged any U.S. tax advisers to determine our PFIC status. In addition, if you owned our ordinary shares
at any time prior to our acquisition of Elite, you may be considered to own stock of a PFIC by virtue of the fact that we may have
been a PFIC during the period prior to our acquisition of Elite, unless you made certain elections to opt out of PFIC treatment.
A non-United States
corporation, such as us, will be classified as a PFIC for United States federal income tax purposes for any taxable year, if either
(1) 75% or more of its gross income for such year consists of certain types of “passive” income, or (2) 50% or more
of its average quarterly assets as determined on the basis of fair market value during such year produce or are held for the production
of passive income. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive
determination made on an annual basis, no assurance can be given with respect to our PFIC status for the current or any other taxable
year.
If we are characterized
as a PFIC for any year, a U.S. holder may incur significantly increased United States income tax on gain recognized on the sale
or other disposition of our ordinary shares and on the receipt of distributions on our ordinary shares to the extent such gain
or distribution is treated as an “excess distribution” under the United States federal income tax rules.
Risk Relating to British Virgin Islands
Rights of shareholders under British
Virgin Islands law differ from those under United States law, and, accordingly, our shareholders may have fewer protections.
Our corporate affairs
are governed by our Memorandum and Articles of Association, the BVI Business Companies Act, 2004 (as amended, the “BVI Act”)
and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions
by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent
governed by the common law of the British Virgin Islands and by the BVI Act. The common law of the British Virgin Islands is derived
in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has
persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes
or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed
body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially
interpreted bodies of corporate law. As a result of the foregoing, holders of our ordinary shares may have more difficulty in protecting
their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S.
company.
The laws of the British Virgin Islands
provide limited protection for minority shareholders, so minority shareholders will have limited or no recourse if they are dissatisfied
with the conduct of our affairs.
Under the laws of the
British Virgin Islands, there is limited statutory law for the protection of minority shareholders other than the provisions of
the BVI Act dealing with shareholder. The principal protection under statutory law is that shareholders may bring an action to
enforce the constituent documents of a British Virgin Islands company and are entitled to have the affairs of the company conducted
in accordance with the BVI Act and the memorandum and articles of association of the company. As such, if those who control the
company have persistently disregarded the requirements of the BVI Act or the provisions of the company’s memorandum and articles
of association, then the courts will likely grant relief. Generally, the areas in which the courts will intervene are the following:
(i) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by
the majority; (ii) acts that constitute fraud on the minority where the wrongdoers control the company; (iii) acts that infringe
on the personal rights of the shareholders, such as the right to vote; and (iv) acts where the company has not complied with provisions
requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded to minority
shareholders under the laws of many states in the United States.
It may be difficult to enforce judgments
against us or our executive officers and directors in jurisdictions outside the United States.
Under our Memorandum
and Articles of Association, as amended, we may indemnify and hold our directors harmless against all claims and suits brought
against them, subject to limited exceptions. Furthermore, to the extent allowed by law, the rights and obligations among or between
us, any of our current or former directors, officers and employees and any current or former shareholder will be governed exclusively
by the laws of the British Virgin Islands and subject to the jurisdiction of the British Virgin Islands courts, unless those rights
or obligations do not relate to or arise out of their capacities as such. Although there is doubt as to whether United States courts
would enforce these provisions in an action brought in the United States under United States securities laws, these provisions
could make judgments obtained outside of the British Virgin Islands more difficult to enforce against our assets in the British
Virgin Islands or jurisdictions that would apply British Virgin Islands law.
British Virgin Islands companies
may not be able to initiate shareholder derivative actions, thereby depriving shareholders of one avenue to protect their interests.
British Virgin Islands
companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances
in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may
result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company
organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate
wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce judgments of courts in the
United States based on certain liability provisions of United States securities law or to impose liabilities, in original actions
brought in the British Virgin Islands, based on certain liability provisions of the United States securities laws that are penal
in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although
the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits. This means that even if shareholders were to sue the Company successfully, they may
not be able to recover anything to make up for the losses suffered.
Risk Relating to This Offering
Since our management will have broad
discretion in how we use the proceeds from this offering, we may use the proceeds in ways with which you disagree.
Our management will
have significant flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management
with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to influence
how the proceeds are being used. It is possible that the net proceeds will be invested in a way that does not yield a favorable,
or any, return for us. The failure of our management to use such funds effectively could have a material adverse effect on our
business, financial condition, operating results and cash flow.
Because we are a small company, the
requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, may strain
our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or
cost-effective manner.
As a public company
with listed equity securities, we must comply with the federal securities laws, rules and regulations, including certain corporate
governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Act, related
rules and regulations of the SEC and the NASDAQ, with which a private company is not required to comply. Complying with these laws,
rules and regulations occupies a significant amount of the time of our Board of Directors and management and significantly increases
our costs and expenses. Among other things, we must:
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maintain
a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
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comply
with rules and regulations promulgated by the NASDAQ;
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prepare
and distribute periodic public reports in compliance with our obligations under the federal securities laws;
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maintain
various internal compliance and disclosures policies, such as those relating to disclosure controls and procedures and insider
trading in our ordinary shares;
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involve
and retain to a greater degree outside counsel and accountants in the above activities;
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maintain
a comprehensive internal audit function; and
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maintain
an investor relations function.
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Future sales of our ordinary shares, whether
by us or our stockholders, could cause our stock price to decline.
If our existing shareholders
sell, or indicate an intent to sell, substantial amounts of our ordinary shares in the public market, the trading price of our
ordinary shares could decline significantly. Similarly, the perception in the public market that our shareholders might sell of
our ordinary shares could also depress the market price of our ordinary shares. A decline in the price of our ordinary shares might
impede our ability to raise capital through the issuance of additional of our ordinary shares or other equity securities. In addition,
the issuance and sale by us of additional of our ordinary shares or securities convertible into or exercisable for of our ordinary
shares, or the perception that we will issue such securities, could reduce the trading price for our ordinary shares as well as
make future sales of equity securities by us less attractive or not feasible. The sale of ordinary shares issued upon the exercise
of our outstanding options and warrants could further dilute the holdings of our then existing shareholders.
Investors in this offering will experience
immediate and substantial dilution.
Because the price per
share of our ordinary shares being offered is substantially higher than the net tangible book value per share of our ordinary shares,
you will suffer substantial dilution in the net tangible book value of our ordinary shares. Based on an offering price of $1.62
per share, after deducting estimated offering commissions and expenses, and based on our net tangible book value of the ordinary
shares per share as of June 30, 2018, if you purchase of our ordinary shares in this offering, you will suffer immediately dilution
of $2.8229 per share in the net tangible book value of the ordinary shares.
Securities analysts may not cover our
ordinary shares and this may have a negative impact on the market price of our ordinary shares.
The trading market
for our ordinary shares will depend, in part, on the research and reports that securities or industry analysts publish about us
or our business. We do not have any control over independent analysts (provided that we have engaged various non-independent analysts).
We do not currently have and may never obtain research coverage by independent securities and industry analysts. If no independent
securities or industry analysts commence coverage of us, the trading price for our ordinary shares would be negatively impacted.
If we obtain independent securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our
ordinary shares, changes their opinion of our shares or publishes inaccurate or unfavorable research about our business, our stock
price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly,
demand for our ordinary shares could decrease and we could lose visibility in the financial markets, which could cause our stock
price and trading volume to decline.
You may experience future dilution as a
result of future equity offerings or other equity issuances.
We may in the future
issue additional of our ordinary shares or other securities convertible into or exchangeable for of our ordinary shares. We cannot
assure you that we will be able to sell of our ordinary shares or other securities in any other offering or other transactions
at a price per share that is equal to or greater than the price per share paid by investors in this offering. The price per share
at which we sell additional of our ordinary shares or other securities convertible into or exchangeable for our ordinary shares
in future transactions may be higher or lower than the price per share in this offering.
The price of our ordinary shares may
be volatile or may decline, which may make it difficult for investors to resell of our ordinary shares at prices they find attractive.
The trading price of
our ordinary shares may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition,
the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares
of many companies. These broad market fluctuations could adversely affect the market price of our ordinary shares. Among the factors
that could affect our stock price are:
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the
perception of U.S. investors and regulators of U.S. listed Chinese companies;
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actual
or anticipated fluctuations in our semi-annual operating results;
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changes
in financial estimates by securities research analysts;
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negative
publicity, studies or reports;
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changes
in the economic performance or market valuations of other microcredit companies;
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announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. dollar; and
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general
economic or political conditions in China.
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actual
or anticipated quarterly fluctuations in our operating results and financial condition, and, in particular, further deterioration
of asset quality;
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changes
in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
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failure
to meet analysts’ revenue or earnings estimates;
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speculation
in the press or investment community;
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strategic
actions by us or our competitors, such as acquisitions or restructurings;
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actions
by institutional shareholders;
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fluctuations
in the stock price and operating results of our competitors;
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general
market conditions and, in particular, developments related to market conditions for the financial services industry;
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proposed
or adopted regulatory changes or developments;
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anticipated
or pending investigations, proceedings or litigation that involve or affect us; or
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domestic
and international economic factors unrelated to our performance.
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The stock market has
experienced significant volatility recently. As a result, the market price of our ordinary shares may be volatile. In addition,
the trading volume in our ordinary shares may fluctuate more than usual and cause significant price variations to occur. The trading
price of the of our ordinary shares and the value of our other securities will depend on many factors, which may change from time
to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our
equity or equity related securities, and other factors identified above in “Forward-Looking Statements.”
Accordingly, the of
our ordinary shares that an investor purchases, whether in this offering or in the secondary market, may trade at a price lower
than that at which they were purchased, and, similarly, the value of our other securities may decline. Current levels of market
volatility are unprecedented. The capital and credit markets have been experiencing volatility and disruption for more than a year.
In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without
regard to those issuers’ underlying financial strength.
A significant decline
in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities
litigation.
Volatility in our Ordinary Shares price
may subject us to securities litigation.
The market for our
Ordinary shares may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may
continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities
and could divert management’s attention and resources.
Our articles of association allows for
our board to create new series of preferred shares without further approval by our stockholders, which could adversely affect the
rights of the holders of our ordinary shares.
Our board of directors
has the authority to fix and determine the relative rights and preferences of preferred shares. Our board of directors has the
authority to issue up to 5,000,000 shares of our preferred shares without further stockholder approval. As a result, our board
of directors could authorize the issuance of preferred shares that would grant to holders the preferred right to our assets upon
liquidation, the right to receive dividend payments before dividends are distributed to the holders of ordinary shares and the
right to the redemption of the shares, together with a premium, prior to the redemption of our ordinary shares. In addition, our
board of directors could authorize the issuance of a series of preferred shares that has greater voting power than our ordinary
shares or that is convertible into our ordinary shares, which could decrease the relative voting power of our ordinary shares or
result in dilution to our existing stockholders. Although we have no present intention to issue any additional preferred shares
or to create any additional series of preferred shares, we may issue such shares in the future.
There is no public market for the warrants.
There is no established
public trading market for the warrants being offered in this offering and we do not expect a market to develop. In addition, we
do not intend to apply for listing of the warrants on any securities exchange or automated quotation system. Without an active
market, investors in this offering may be unable to readily sell the warrants.
The warrants may be dilutive to holders
of our ordinary shares.
The ownership interest
of the existing holders of our ordinary shares will be diluted to the extent the warrants are exercised. Our ordinary shares underlying
the warrants represented approximately 6.47% of our ordinary shares outstanding as of May 24, 2019 (assuming that the total ordinary
shares outstanding includes the 2,845,000 offered pursuant to this prospectus supplement and the 1,809,420 ordinary shares issuable
upon exercise of the warrants).