ITEM
1. BUSINESS.
Overview
of Our Business
We
were incorporated in the State of Nevada on July 15, 2013, under the name “I In The Sky, Inc.” On July 22, 2015, we
changed the company name to our current name. Our original business plan was to manufacture and market low cost GPS tracking devices
and software to businesses and families. However this business was not successful and we had no revenues generated from our business
until April 12, 2016 when we completed our reverse acquisition of AEEGCL.
AEEGCL
is a company incorporated under the laws of Samoa on May 29, 2015. Effective November 30, 2015, we executed a Sale and Purchase
Agreement (the “Purchase Agreement”) to acquire 100% of the shares and assets of AEEGCL, in exchange for one billion
(1,000,000,000) shares of common stock of the Company that were issued to the owners of AEEGCL. The transactions contemplated
by the Purchase Agreement were closed on April 12, 2016. As a result, our previous business plan was terminated and we are currently
engaged in the business of AEEGCL.
AEEGCL
offers an international equity assistance and information service platform designed to provide member registration services, equity
investment financing information to enterprises in Asia, mainly in China. Currently 34 companies are registered with us, and additional
36 companies are in the process of preparing the necessary documents for registration with us. All companies currently registered
with us are located in China, as are the additional companies in the process.
Our
member registration services refer to companies seeking to join our equity investment and financing information dissemination
platform. All medium and small-sized enterprises in Asia can apply to register with us. They can distribute their basic information,
project status, financial status and equity structure information through our platform to attract individual investors and investment
institutions all over the world. Our current focus is on helping companies in China which seek financing while we plan to offer
our services in other Asian countries where we can assist with a company’s public and investor awareness and investor relationship
needs and financing needs. Where we can, we will assist companies by finding appropriate legal as well as accounting services.
We do not work with companies planning to become SEC reporting companies or that intend to begin trading on U.S. markets.
AEEGCL
owns 100% of AEEX HK, a Hong Kong corporation incorporated on December 22, 2014. AEEX HK owns 100% of Asian & American Consultant
(Shenzhen) Co., Ltd., a corporation incorporated in the PRC on April 15, 2015. Both AEEX HK and AACCL are engaged in the provision
of investment and corporate management consultancy services.
The
acquisition of AEEGCL and its subsidiaries by us was accounted for as a reverse merger because on a post-merger basis, the former
shareholders of AEEGCL held a majority of our outstanding common stock on a fully-diluted basis. As a result, AEEGCL is deemed
to be the acquirer for accounting purposes. Accordingly, the consolidated financial statement data presented are those of AEEGCL,
recorded at the historical basis of AEEGCL, for all periods prior to our acquisition of AEEGCL on April 12, 2016, and the financial
statements of the historical operations of the consolidated companies from the effective date of the closing of the reverse merger.
We
generated revenues of $563,363 and $nil for the fiscal years ended December 31, 2016 and 2015, respectively. We had a net loss
of $255,800 in 2016 and a net loss of $44,435 in 2015. As of December 31, 2016, we had an accumulated deficit of $387,719 and
net assets of $734,568.
On
July 8, 2015, our board of directors authorized a change in our fiscal year end from September 30, 2015 to December 31, 2015.
We filed a transition report on form 10-Q for the transition period from October 1, 2015 to December 31, 2015. As a result of
the change in fiscal year, our 2016 fiscal year began on January 1, 2016 and ended on December 31, 2016.
Our
Corporate Structure
All
of our business operations are conducted primarily through our operating subsidiaries. The chart below presents our current corporate
structure:
Our
Business
Many
small and medium sized enterprises throughout Asia seek to take advantages of the potential offered by becoming a publicly traded
company. Greater public awareness and the corresponding increased ability to have access to financing through international investment
channels can make the transition from private to public company status a means by which a company can create real growth.
However,
many enterprises may not be familiar with public company listing requirements and financing methods overseas. Management of these
small to medium-sized companies find the rules and regulations difficult to comprehend, may consider the intricacies and potential
costs too difficult to overcome, and are unable to realize the full potential of their enterprise.
In
addition, the jurisdictions into which these companies might want to move may speak different languages and will have different
securities laws and legal requirements.
To
assist these enterprises, we have developed a program to seek out and engage local personnel with legal, regulatory and language
expertise in those jurisdictions. We work to identify qualified personnel through a careful vetting and due diligence process.
Our
multi-task service platform serves as a means not only for assisting these companies to secure public company listing and enhanced
means of achieving financing overseas, but also assist overseas individual and institutional investors seeking quality equity
investment. AEEX also provides registration, supervision and management services.
To
accomplish these goals on behalf of our clients, we have established a number of corporate tools. These include:
Listing
services
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We
provide listing services to companies seeking to join our equity investment and financing information dissemination platform.
Medium and small-sized enterprises in Asia can apply to list with us, but our current focus is on helping companies in China,
which seek financing and increased public awareness of what they offer. Our services for companies that list with us relate primarily
to markets and regulatory structures in China, but we plan to offer our services in other Asian countries where we can assist
with a company’s public and investor awareness and investor relationship needs and with their financing needs. Where we
can, we will assist companies by finding appropriate legal representation as well as accounting services. We do not work with
companies planning to become SEC reporting companies or that want to begin trading on U.S. markets. We believe there are numerous
US-based law firms and American consulting services that are better equipped to deal with those services.
In
order to be taken on as a client, we conduct a strict due diligence of the potential client’s business, history and management.
Clients must disclose audited financial statements and legal opinions in accordance with international standards issued by professional
third party institutions. They are also required to conform to strict standards for disclosure of information after listing, which
helps to facilitate their connections to international capital markets.
To
be a qualified applicant for listing with us, a potential client must:
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Be
established and validly existing pursuant to relevant laws and regulations in a country or region in Asia;
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Demonstrate
that they have a good business reputation and operating performance, and comply with professional ethics;
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Have
an experienced quality and stable management team and operation;
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Have
a sustainable operating project with the expectation of a good return on investment;
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Have
not breached any law or regulation in a material respect, or have received any administrative penalty from a regulatory body
or other department in the past twenty four months;
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Acknowledge
and comply with relevant listing rules of us, and pay fees relating to our client enterprise listing services;
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Pass
a professional qualification review conducted by us, and pay fees relating to such review.
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It
is important to note that we are not now nor do we intend to be a trading market or provide quotations services for our clients.
We provide a platform designed solely for distributing equity investment information and financing information, which facilitates
connections and negotiations between investors and project management. We assist investors seeking investment opportunities and
companies seeking international investment.
Since
August 2015, we have carried out a number of roadshows in various cities such as Shenyang, Dalian, Shanghai, Hangzhou, Fuzhou
and Shenzhen, which have extended our influence and enhanced our brand recognition. We plan to continue our all-round roadshows
at regional, national and international levels to further increase awareness of our brand and advance our business development.
Listing
Planning and Evaluation:
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We
conduct comprehensive evaluation of a client’s prospects, including its assets and liabilities, financial position,
management, development prospect and business model;
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We
offer assistance in reorganizing and standardizing the client’s business, work to optimize its business model and procedures,
and help the client integrate its resources to highlight the value of the client;
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We
help reorganize the corporate structure and assist the client to build a management team for going public based on the actual
conditions of the client; and
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We
assess and recommend qualified lawyers, auditors, investment banks and other institutions which can provide the client with
pre-listing services.
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We
also ensure that we are in regular and efficient communication with all our clients who are planning to become a public company,
or have already become public, and make certain that they have received the consulting services they need.
Where
necessary, we will meet with clients on critical issues in public listing, or help them become familiar with important regulations
in the securities markets and assist them in meeting the standards for going public. We also make sure that clients are updated
with regulatory and legal changes.
Listing
Solutions
: We provide clients planning for a public listing with consulting services, which include models for reference and
examples of successful cases. We also use our resources and experience to help clients connect directly with the corresponding
securities regulatory commission.
Assistance
with Negotiation and Implementation
: With our advantages in resources and information, we assist clients with key negotiations
with different parties and help them deal with various issues and problems before and after their public listing.
Funding
Initiation
: We use our resources to help clients who plan to go public, but face funding shortages to connect with venture
capital, banks or other financial institutions that can provide potential assistance in their financing needs.
Client
Equity Securitization Reform
: We help to confirm the equity position of companies planning for going public, and provide assistance
for them in working with qualified accounting and law firms to determine the share capital structure, stock par value and holding
percentages of shareholders, and, where necessary, help clients to build a new equity structure in accordance with requirements
of the relevant securities regulatory commission with whom the client is dealing.
Restructuring
Consultancy:
We work with qualified lawyers and auditing firms to help reorganize the client’s business model, procedures
and organizational structure in order to maximize the client’s value and ensure that its public listing needs and requirements
are met.
Route
Design
: We plan and design the proper procedures and methods for going public on behalf of our clients based on their assets,
financial position, operations and other conditions.
Team
Establishment:
In accordance with the conditions of the clients and requirements by the relevant securities regulatory commission,
we assist the clients to establish an organizational structure and a management team best suited for going public.
“Headhunting”
Services
: We work with headhunting companies, i.e. companies that provide employment or recruiting services to find the most
qualified managers and professionals to meet the specific needs of our clients.
Follow-up
Service
: We provide clients with continuous consultancy and following-up services throughout the entire public listing process,
from planning and preparation to success in becoming a public company.
Merger
and Acquisition Planning:
A major feature of our service is overall merger and acquisition planning and assistance with listing
on international main boards of various countries, assistance with the preparation and execution of overseas initial public offering
efforts and main board listing through public shell companies by means of reverse merger.
One
useful tool in the transition from private to public company is the reverse merger or reverse takeover.
In
a reverse merger, the shareholders of a private company acquire a majority of the shares of a “shell company”. The
shell company is a public company that does not have an active business operation or significant assets. The shell company is
then merged with the private company. This makes the public company registration process less time consuming and potentially less
expensive. To finalize the reverse merger, the private company trades shares with the public shell in exchange for the shell company’s
stock, and the private enterprise becomes a public company.
With
numerous jurisdictions with which to deal, these mergers can be difficult. For small private companies, extra-jurisdictional government
regulations and laws governing mergers are often difficult to understand, and without careful planning, there is a high failure
rate with companies conducting mergers and acquisitions. Careful planning and pre-merger research is vital. Many companies starting
out do not have the experience or resources to do the research necessary to complete a successful merger and to see a successful
entity emerge from the process.
Among
other requirements for a successful merger is detailed advance evaluation of the merger target, and the evaluation of the merger
organization and its business plan. Clients will also need experienced assistance to develop strategies as they move beyond the
merger process. Assistance with post-merger or post-acquisition organization, negotiations and planning are also important elements
in determining the client’s success or failure. We have designed a program specifically tailored to address those issues
for companies seeking to go public by means of a merger.
Assistance
with Public Company Corporate Management:
Among the services provided by us on behalf of our clients are those corporate services
that are fundamental to a company’s survival and success. These include:
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Assistance
with and the preparation of all internal corporate documents, including corporate resolutions, minutes, changes and amendments
to corporate documents as required;
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Assistance
with and the preparation of required legal and regulatory documents, including, but not limited to disclosure statements and
agreements, subscription agreements, federal, state and regulatory filings, such registration statement(s), as required;
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Assistance
with the preparation of all required responses resulting from the filing of any of the aforesaid documents, and the preparation
or assistance with the preparation of any and all required amendments to the aforesaid documents;
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Guidance
for the proper maintenance of all required legal and regulatory filings related to the foregoing documents;
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Direct
and continuous liaison with corporate attorneys, accountants and auditors on behalf of the enterprise;
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Assisting
the client with the proper maintenance of all company files.
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Resource
Matching:
As we move forward in our business and increase our client base, we are working to establish long-term cooperation
with a number of qualified accounting firms, law firms, investment banks, venture capital and other relevant institutions.
Developing
Public Awareness:
We are working to develop public awareness for clients through an in-house publication, by creating and
producing road-shows for clients and by developing publicity materials as part of an ongoing commitment to help our client to
achieve success
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Markets
Our
market includes small and medium-sized enterprises (“SME”) in Asia, enterprises with financial requirements, enterprises
seeking to increase public awareness and enterprises planning to expand their business internationally.
Competition
There
is a similar equity financing platform in China, the ‘National Equities Exchange and Quotations’ (NEEQ, www.neeq.cc).
It is managed by the Chinese Government and has considerable support from the government itself. NEEQ has been in operation since
September 2012, and currently services more than 5,000 listed companies. While its services are limited to mainland China, there
is no assurance that other countries or groups will not initiate similar services to compete directly with us. NEEQ is a financial
service platform which deals with both equity information services as well as equity trading. While we offer information services
for clients, we are not involved with equity trading and we are not an equity trading market and it is important to note that
we are not now nor does it intend to be a trading market or provide quotations services for its clients. It is a platform designed
solely for equity investment information and financing information services. It facilitates connections and negotiations between
investors and project management. We assist investors seeking investment opportunities and companies seeking international investment.
Additionally,
the online equity information industry we are entering into is intensely competitive. Large companies may preempt the field if
they view opportunities that have sufficient financial rewards to enter the market. We are a relatively late entry into a mature
market for most online information services. There can be no assurance that we will be able to develop a profitable niche in this
market. While we intend to find niche products and services relying on previously unexploited services, there can be no assurance
that we will be successful in this endeavor.
Intellectual
Property
We
are in the process of registering our trademark in Hong Kong and the United States. Our trademark registration has been approved
both in Hong Kong and the United States.
Employees
We
had a total of 6 employees as of December 31, 2016. The following table sets forth the number of our employees by function.
Function
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Number
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Finance
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2
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Technological
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1
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Listing
Service
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1
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General
and administrative
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2
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Total
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6
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Our
employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced
any work stoppages. We believe we maintain good relations with our employees.
Government
Regulations
Through
AEEGCL and its Chinese subsidiaries, we are providing consulting services to our clients. Our platform is designed to provide
information of equity investment and financing to medium and small-sized enterprises in Asia. Upon becoming member clients, we
assist these enterprises to distribute information about themselves, their project status, financial status and equity structure
information and use our platform to attract individual investors and investment institutions worldwide. Our business goal is to
develop business partners not only in China but throughout Asia. However, at present we have only 26 business partners all of
which are located in China. These partners include legal consulting and accounting firms which are also responsible for seeking
out and identifying suitable business enterprise clients and to help these potential clients to understand what we offer and to
assist these clients to register as members of our platform. As we move forward we will seek business partners and clients throughout
Asia.
Our
business is mainly conducted by our China-based subsidiary, AACCL. AACCL provides training courses for our business partners to
help them understand our platform and provides management and business consultancy for our Chinese business clients. Such services
are within the scope of AACCL’s business license and is permitted by Chinese laws. We established AACCL due to our expectation
that most of the business will originate in China and, as such, we are required to have a Chinese entity to conduct business in
China.
The
business scope of AACCL registered and recorded with the Chinese government as required during incorporation of AACCL includes:
engaging in enterprise management consulting, economic information consulting, corporate image planning and the research and development,
import and export service of electronic products, computer software and hardware products. As a foreign-invested company in China,
AACCL is subject to government regulations on foreign investment and business operation. Specifically, according to Article 14
of Law of the People’s Republic on Foreign-capital Enterprises, all foreign-invested enterprises should establish account
books, conduct independent accounting, submit accounting reports and statements as required and accept supervision by the financial
and tax authorities. If an enterprise with foreign capital refuses to maintain account books in China, the financial and tax authorities
may impose a fine on it, and the industry and commerce administration authorities may order it to suspend operations or may revoke
its business license. In addition, China adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation
rules, effective on September 18, 2008. The Labor Contract Law and related rules and regulations impose more stringent requirements
on our Chinese subsidiaries with regard to, among others, minimum wages, severance payment and non-fixed-term employment contracts,
time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed-term employment
contract. Furthermore, pursuant to company law of China, our Chinese subsidiaries are required to allocate at least 10% of their
annual after-tax profits determined in accordance with accounting standards and regulations of China to a statutory general reserve
fund until the amounts in said fund reaches 50% of their registered capital.
Other
than the required adherence to general business laws and regulatory disclosure as described above, our services do not appear
to be affected by any specific Chinese government regulations. However, this does not preclude the possibility that China will
institute regulations that will make it difficult or impossible for us to operate successfully, if at all, in China, and we would
have to focus our business on companies located outside China.
However,
it should also be noted that our business is operated by AEEGCL, a company incorporated in Samoa. No special license is required
for its operations in Samoa. Though most of its business currently comes from China, its Samoan operations are not subject to
regulations by the Chinese government.
ITEM
1A. RISK FACTORS.
RISKS
RELATED TO OUR BUSINESS
We
may not be able to obtain sufficient business partners to effectively cover our targeted market.
The
business model adopted by us is to promote our services through our business partners in targeted countries and regions who are
more familiar with the local markets and may be able to help us develop clients quickly. However, it takes time to develop qualified
business partners and those selected may not turn out to be the right business partners, which may have a negative effect on our
business development.
Our
business plan is based on a relatively new model that may not be successful and we may not successfully implement our business
strategies.
Our
products and services are targeted at an emerging market and any potential increase in our revenues depends on the achievement
of equity financing by our current and future clients, the SMEs in Asia, which is a new market in the region. In addition, we
cannot guarantee the full and successful implementation of our business strategies. To ensure the successful reception of our
products and services by a large number of SMEs in China, great efforts must to be made in promotion and business partner development.
However, we cannot guarantee successful promotion of our products and services and we may not be able to realize our business
goals.
The
online equity information industry we are entering is highly competitive and there is no assurance that we will be successful
in developing our product and entering the market successfully.
The
online equity information industry we are entering is intensely competitive. Large companies may preempt the field if they view
opportunities that have sufficient financial rewards to enter the market. We are a relatively late entry into a mature market
for most online information services. There can be no assurance that we will be able to develop a profitable niche in this market.
While we intend to find niche products and services relying on previously unexploited services, there can be no assurance that
we will be successful in this endeavor.
China
is in a period of transformation, with a great number of SMEs facing industry upgrading and innovation which requires large amount
of funding. The Chinese government encourages SMEs to solve the lack of funds through equity financing. As a result, the National
Equities Exchange and Quotations (NEEQ) and regional equity transaction centers have experienced rapid development in the past
years. Though our products and services have advantages over those of NEEQ and regional equity transaction centers, these other
agencies may have already preempted the field and gained recognition among SMEs. The Company must work hard to narrow such gap
as quickly as possible and win the recognition by clients of our advantages and their acceptance of our products and services.
If we are unable to do so, we may be unable to gain a sufficient number of clients and our business may fail.
As
yet we have a limited number of clients or customers and we cannot guarantee we will ever have more. Even if we obtain additional
clients or customers, there is no assurance that we will make a profit.
We
have a limited number of clients or customers. We have identified additional potential clients, but we cannot guarantee we will
be able to bring them in as clients. Even if we obtain additional clients or customers for our services, there is no guarantee
that we will develop products and/or services that our clients/customers will want to purchase. If we are unable to attract enough
customers/clients to purchase services (and any products we may develop or sell) it will have a negative effect on our ability
to generate sufficient revenue from which we can operate or expand our business. The lack of sufficient revenues will have a negative
effect on the ability of the Company to continue operations and it could force the Company to cease operations.
We
provide services or will expand to provide services in a number of different jurisdictions with different legal, regulatory and
language requirements. This will require personnel with legal, regulatory and language expertise in those jurisdictions and such
personnel may not be readily available
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We
provide services or will expand to provide services in a number of different countries. All of these jurisdictions may speak different
languages and have different securities laws and legal requirements, especially with respect to laws governing reverse mergers.
This will require us to seek out and engage local personnel with legal, regulatory and language expertise in those jurisdictions.
Identifying qualified personnel may be very difficult, and such personnel may not be readily available or may be very expensive.
Should we be unable to find properly trained and experienced personnel, we will be unable to function in those jurisdiction causing
costly gaps in our ability to provide services.
Our
business model will require the use and training of outside personnel, who may not be available to provide qualified services
when needed.
Our
business model requires relevant services from our business partners in other countries who will be selected in accordance with
certain standards and provided with training by us in all aspects of our business. However, their trainability, professionalism
and work ethic will vary and may not meet the strict requirements for our business. Additionally, outside personnel may not be
available when needed, which may reduce customer satisfaction and further affect the image and business development of us. If
we are unsuccessful in finding and training the required personnel, our business plan and ultimately our Company will fail.
The
failure of our business partners to effectively promote the business may have a negative effect on our business development.
Our
business partners are required to meet a large number of clients and educate them about all necessary aspects of the listing business.
To ensure that our clients, some of which may have poor management skills, can meet the listing standards, extra and long-term
efforts will have to be made by our business partners, some of whom may not do their utmost to promote the business. Lack of sufficient
effort by our business partners will negatively affect our business development and we might fail.
A
large amount of investment in promotion and business partner development at the early stage will affect our profits.
We
are currently at the early stage of development and conducts business only in China. Though cooperative relationships have been
established with some business partners, it will still require significant effort to achieve full business coverage in China.
To promote our business and provide products and services for clients, we have made all-round and detailed promotional plans and
policies and will carry out a number of road shows at regional, national and international levels. We will also adopt preferential
policies for attracting business partners to advance our business. This will require a large amount of investment at the beginning
and may affect our profits. If the necessary expenses are too high, we might not have sufficient funds to carry on our business
and we will fail.
If
we are not able to increase and maintain our brand influence, we may face difficulties in attracting new business partners and
clients and may suffer damage to our business.
The
Asia Equity Exchange brand is still being nurtured. We believe it is critical to increase and maintain our brand influence in
our development of clients and in attracting new business partners. Our major competitors have built well-known brands and continue
to increase their influence. Our failure to increase and maintain our brand influence for any reason may result in a material
adverse effect on our business, operating results and financial position.
The
fast growing and changing business environment may intensify our shortage of resources.
We
plan to expand our business while developing customers and seeking market opportunities. Our limited operating, administrative
and financial resources may not support our planned development. As the number of our clients and business activities increase,
we will need to increase investment. We will need to improve the existing and implement new operating and financial systems, processes
and controls, and expand, train and manage a growing team of employees. In addition, management will need to maintain and strengthen
our relations with business partners. If we fail to effectively manage our development and expansion, our service quality may
decrease, our business may suffer damage and our operating results may be materially and adversely affected.
We
may be adversely affected due to the complicated and unclear regulatory system in the financial sector in which we operate.
The
Chinese government strictly regulates the financial sector by setting out requirements for licenses and permits of foreign financial
investment. Since regulations and rules in the financial sectors are relatively new and continuously changing, how they should
be interpreted and exercised is extremely unclear. The interpretation and quotations of the current Chinese regulations and policies,
the position of China Securities Regulatory Commission and new regulations and policies that may become materially uncertain factors
in the legality of the current and future foreign investment and in the operation and management of Chinese equity financing,
including our business. Under some circumstances, our current and former services or business may be deemed to have violated Chinese
regulations, and we may be fined or penalized or our business and services may be terminated. This risk does not apply to our
Samoan operations, which are not subject to Chinese regulations.
We
depend heavily on key personnel, and turnover of key employees and senior management could harm our business.
Our
future business and results of operations depend in significant part upon the continued contributions of our key technical and
senior management personnel, including Jun Liu, our Chairman and Chief Executive Officer and Tao Peng, our Director and Chief
Technical Officer. They also depend in significant part upon our ability to attract and retain additional qualified management,
technical, marketing and sales and support personnel for our operations. If we lose a key employee or if a key employee fails
to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business
could suffer. Significant turnover in our senior management could significantly deplete our institutional knowledge held by our
existing senior management team. We depend on the skills and abilities of these key employees in managing our business, any part
of which could be harmed by further turnover.
As
an “emerging growth company” under the Jumpstart our Business Startups Act (JOBS Act), we are permitted to rely on
exemptions from certain disclosure requirements.
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely
on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required
to:
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have an auditor report on our
internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply with any requirement that
may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the
auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion
and analysis);
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submit certain executive compensation
matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and
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disclose certain executive compensation related items such as the correlation between executive
compensation and performance and comparisons of the CEO’s compensation to median employee compensation.
In
addition, Section 107 of the JOBS Act also 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. We have elected to take advantage of the benefits of this extended transition period. Our financial statements
may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
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 but not to “emerging growth companies,” including, but
not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley of 2002,
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved.
We
will remain an “emerging growth company” for up to five years, or until the earliest of: (i) the last day of the first
fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Securities Act of 1934, which would occur if the market value of our ordinary
shares that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second
fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three
year period.
Notwithstanding
the above, we are also currently a “smaller reporting company,” meaning that we are not an investment company, an
asset-backed issuer, nor a majority-owned subsidiary of a parent company that is not a smaller reporting company, and has a public
float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. If
we are still considered a “smaller reporting company” at such time as we cease to be an “emerging growth company,”
we will be subject to increased disclosure requirements. However, the disclosure requirements will still be less than they would
be if we were not considered either an “emerging growth company” or a “smaller reporting company.” Specifically,
similar to “emerging growth companies”, “smaller reporting companies” are able to provide simplified executive
compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring
that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over
financial reporting; are not required to conduct say-on-pay and frequency votes until annual meetings ; and have certain other
decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years
of audited financial statements in annual reports. Decreased disclosures in its SEC filings due to its status as an “emerging
growth company” or “smaller reporting company” may make it harder for investors to analyze the Company’s
results of operations and financial prospects.
We
have identified material weaknesses in our internal control over financial reporting. If we fail to remediate the material weaknesses
or maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial
results or prevent fraud, and investor confidence and the market price of our shares may be adversely affected.
To
implement Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include
a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K.
Under current law, we are subject to the requirement that we maintain internal controls and that management perform periodic evaluation
of the effectiveness of the internal controls, assuming our filing status remains as a smaller reporting company. A report of
our management is included under Item 9A of this Annual Report on Form 10-K. Our management has identified the following material
weakness in our internal control over financial reporting: (i) our inability to complete our implementation of comprehensive entity
level controls, (ii) our lack of a sufficient complement of personnel with an appropriate level of knowledge and experience in
the application of U.S. GAAP commensurate with our financial reporting requirements, and (iii) our lack of the quantity of resources
necessary to implement an appropriate level of review controls to properly evaluate the completeness and accuracy of the transactions
we enter into. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. We have taken measures and plan to continue to take measures to
remedy this material weakness. However, the implementation of these measures may not fully address the material weakness in our
internal control over financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial
statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory
filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result,
our business, financial condition, results of operations and prospects, as well as the trading price of our shares, may be materially
and adversely affected.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock
price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed
and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed
so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors,
financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered
around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result
of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply
decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder
lawsuits and SEC enforcement actions, and are conducting internal and external investigations into the allegations. It is not
clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock
price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will
have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly
and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless,
our company and business operations will be severely and your investment in our stock could be rendered worthless.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny
of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental
agency that is located in China where substantially all of our operations and business are located have conducted any due diligence
on our operations or reviewed or cleared any of our disclosures.
We
are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules
and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose
operations are located primarily in the United States, however, substantially all of our operations are located in China. Since
substantially all of our operations and business take place in China, it may be more difficult for the Staff of the SEC to overcome
the geographic and cultural obstacles that are present when reviewing our disclosures. These same obstacles are not present for
similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports
and other disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to the review of China Securities Regulatory Commission,
a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports,
filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company
and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed
or otherwise been scrutinized by any local regulator.
Our
auditors, based in Beijing, China, like other independent registered public accounting firms operating in China and to the extent
their audit clients have operations in China, is not permitted to be subject to full inspection by the Public Company Accounting
Oversight Board and, as such, you may be deprived of the benefits of such inspection.
Our
independent registered public accounting firms that issued the audit reports included in our annual reports filed with the SEC,
as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting
Oversight Board (United States), or PCAOB, are required by the laws of the United States to undergo regular inspections by the
PCAOB to assess their compliance with the laws of the United States and professional standards.
However,
our operations are solely located in the PRC, a jurisdiction where PCAOB is currently unable to conduct inspections without the
approval of the PRC authorities. Our independent registered public accounting firm, like others operating in China, is currently
not subject to inspection conducted by the PCAOB. Inspections of other firms that the PCAOB has conducted outside China have identified
deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection
process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors operating in China
makes it more difficult to evaluate our auditors’ audit procedures or quality control procedures. As a result, investors
may be deprived of the benefits of PCAOB inspections.
Proceedings
instituted by the SEC against five PRC-based accounting firms could result in financial statements being determined to be not
in compliance with the requirements of the Securities Exchange Act of 1934.
In
December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based
accounting firms, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder
by failing to provide to the SEC the firms’ work papers related to their audits of certain PRC-based companies that are
publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any person, temporarily or
permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have
willfully violated, or willfully aided and abetted the violation of, any such laws or rules and regulations. On January 22, 2014,
an initial administrative law decision was issued, sanctioning four of these accounting firms and suspending them from practicing
before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by
the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of the initial decision. In February
2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with the SEC. The
settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures
to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If a firm does not follow the procedures,
the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against the non-compliant
firm or it could restart the administrative proceeding against all four firms.
While
these issues raised by the proceedings are not specific to our auditor or to us, they potentially affect equally all PCAOB-registered
audit firms based in China and all businesses based in China (or with substantial operations in China) with securities listed
in the United States. Depending upon the final outcome, public companies in the United States with major PRC operations may find
it difficult or impossible to retain auditors in respect of their operations in the PRC, which may result in SEC’s revocation
of the registration of their shares under the Exchange Act. Such a determinate would cause the immediate delisting of our Common
Stock from the NASDAQ Stock Market, and the effective termination of the trading market for our securities in the United States,
which would likely have a significant adverse effect on the value of our securities. Moreover, although our independent registered
public accounting firm was not named as a defendant in the above SEC administrative proceedings, any negative news about the proceedings
against these audit firms may erode investor confidence in China-based, US public companies, including us, and the market price
of our shares may be adversely affected.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes
in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.
We
conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition and prospects
are significantly dependent on economic and political developments in China. China’s economy differs from the economies
of developed countries in many aspects, including the level of development, growth rate and degree of government control over
foreign exchange and allocation of resources. While China’s economy has experienced significant growth in the past 30 years,
the growth has been uneven across different regions and periods and among various economic sectors in China. We cannot assure
you that China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that
if there is a slowdown, such slowdown will not have a negative effect on its business and results of operations.
The
PRC government exercises significant control over China’s economic growth through the allocation of resources, control over
payment of foreign currency-denominated obligations, implementation of monetary policy, and preferential treatment of particular
industries or companies. Certain measures adopted by the PRC government may restrict loans to certain industries, such as changes
in the statutory deposit reserve ratio and lending guidelines for commercial banks by the People’s Bank of China, or PBOC.
These current and future government actions could materially affect our liquidity, access to capital, and ability to operate our
business.
The
global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into
recession. Since 2012, growth of the Chinese economy has slowed down. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy but may also
have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed
to boost the Chinese economy, may contribute to higher inflation, which could adversely affect our results of operations and financial
condition.
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of our business through our operating subsidiaries. Our operating subsidiary in China is subject to
laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises,
or FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference, but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations
of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties
for you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources
and management attention. Moreover, most of our executive officers and directors are residents of China and not of the United
States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult
for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against
our Chinese operations and subsidiary.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other
matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations
of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest
we then hold in Chinese properties or joint ventures.
We
rely on dividends and other distributions on equity paid by our subsidiary for our cash needs.
We
are a holding company, and we conduct all of our operations through our subsidiaries. We rely on dividends and other distributions
on equity paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions
to our stockholders, to service any debt we may incur and to pay our operating expenses. Current regulations in the PRC permit
payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations.
According to the articles of association of our PRC subsidiary, it is required to set aside at least 10% of its after-tax profit
based on the PRC accounting standards and regulations each year to its statutory general reserve, until the balance in the reserve
reaches 50% of the registered capital of the company. Funds in the reserve are not distributable to us in forms of cash dividends,
loans or advances. In addition, if our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the
debt may restrict its ability to pay dividends or make other distributions to us, which in turn will adversely affect our available
cash. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct
our business.
Restrictions
on currency exchange may limit our ability to receive and use our sales revenue effectively.
The
majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our
ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested
enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB in the future.
In
addition, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating
Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises, issued by the PRC State Administration of Foreign Exchange (“SAFE”), and effective as of August 29, 2008
(“Circular 142”), regulates the conversion by foreign-invested enterprises of foreign currency into RMB by restricting
how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-dominated capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the relevant government authority and may not be
used to make equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the
flow and use of RMB funds converted from the foreign currency-dominated capital of a foreign-invested enterprise. The use of such
RMB may not be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not
yet been used. Any violation of Circular 142 may result in severe penalties, including substantial fines.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our securities will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative
to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change
in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments
we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. However, the PBOC regularly intervenes in the foreign exchange
market to limit fluctuations in RMB exchange rates and achieve policy goals. Following the removal of the U.S. dollar peg, the
RMB appreciated more than 20% against the U.S. dollar over the following three years. From July 2008 to June 2010, the RMB traded
within a narrow range against the U.S. dollar. On April 16, 2012, the PBOC announced a policy to expand the maximum daily floating
range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange market from 0.5% to 1%. On March 17,
2014, the People’s Bank of China announced a policy to further expand the maximum daily floating range of RMB trading prices
against the U.S. dollar in the inter-bank spot foreign exchange market to 2%. In the long term, the RMB may appreciate or depreciate
more significantly in value against the U.S. dollar or other foreign currencies, depending on the market supply and demand with
reference to a basket of currencies.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Failure
to comply with PRC regulations relating to the investment in offshore special purpose companies by PRC residents may subject our
PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC
subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
On
July 14, 2014, SAFE issued the Circular on Relevant Issues Relating to Domestic Residents’ Investment and Financing and
Roundtrip Investment through Special Purpose Vehicles (“Circular 37”), which replaced the Circular 75, promulgated
by SAFE on October 21, 2005. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such
PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred
to in Circular 37 as a “special purpose vehicle.”
We
have notified substantial beneficial owners of our company who we know are PRC residents to comply with the registration obligation.
However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have
control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with Circular
37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner
pursuant to Circular 37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration
procedures set forth in Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure
to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive
dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may
be penalized by SAFE. These risks may have a material adverse effect on our business, financial condition and results of operations.
The
M&A Rule establishes 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.
On
August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Provisions
Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on
September 8, 2006. The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese
companies by foreign investors more time-consuming and complex, including requirements in some instances that the PRC Ministry
of Commerce be notified in advance of any change-of-control transaction and in some situations, require approval of the PRC Ministry
of Commerce when a foreign investor takes control of a Chinese domestic enterprise. The regulations prohibit a transaction at
an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures,
require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits
our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration,
holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities.
Transaction structures involving trusts, nominees and similar entities are prohibited. Government approvals will have expiration
dates by which a transaction must be completed and reported to the government agencies. In the future, we may grow our business
in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also
requires PRC Ministry of Commerce anti-trust review of any change-of-control transactions involving certain types of foreign acquirers.
On February 3, 2011, the Circular on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises
by Foreign Investors was promulgated by the General Office of the State Council, which went into effect on March 4, 2011. On August
25, 2011, the Ministry of Commerce issued the corresponding implementation rules. According to these rules, a foreign investor’s
acquisitions of Chinese companies in the fields of military, important agricultural products, energy and resources, infrastructure,
transport service, key technology and major equipment manufacturing, and other restricted fields requires security review by a
ministerial panel established and governed under the direction of the State Council and led by the National Development and Reform
Commission and Ministry of Commerce. Complying with the requirements of the M&A Rule to complete such transactions could be
time-consuming, and any required approval processes, including obtaining approval from the PRC 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.
Investors
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in
China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.
All
of our current operations are conducted in China. Moreover, all of our current directors and officers are nationals or residents
of China. All or a substantial portion of the assets of these persons are located outside the United States and in the PRC. As
a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons.
In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained
against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United
States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon
the securities laws of the United States or any state thereof.
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC shareholders.
On
March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November
28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an
enterprise established outside of China with “de facto management bodies” within China is considered a “resident
enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.
The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies,
or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled
offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior
management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops,
board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income
and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear
as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We
may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source
income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing
rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that
such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated
as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect
to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed
on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC stockholders from transferring
our shares.
Heightened
scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations
and its acquisition strategy.
Pursuant
to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
SAT Circular 698, effective on January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect
Asset Transfer by Non-PRC Resident Enterprises , or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a
non-resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly
or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate
income tax, the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate
income tax. SAT Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer
has a reasonable commercial purpose. However, as SAT Announcement 7 is newly issued, there is uncertainty as to the application
of SAT Announcement 7 and the interpretation of the term “reasonable commercial purpose.”
Under
SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders
has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate
income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax
due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from
the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
Although
SAT Announcement 7 is generally effective as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction
that took place prior to its effectiveness has not yet been finally settled. As a result, SAT Announcement 7 could be determined
by PRC tax authorities to be applicable to the historical reorganization, and it is possible that these transactions could be
determined by PRC tax authorities to lack a reasonable commercial purpose. As a result, the transfer of shares by certain shareholders
to other parties could be subject to corporate income tax of up to 10% on capital gains generated from such transfers, and PRC
tax authorities could impose tax obligations on the transferring shareholders or subject us to penalty if the transferring shareholders
do not pay such obligations and withhold such tax.
SAT
Announcement 7 and its interpretation by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers
of shares in a publicly-traded entity that is listed overseas is available if the purchase of the shares and the sale of the shares
both take place in open-market transactions. However, if a shareholder of an entity that is listed overseas purchases shares in
the open market and sells them in a private transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject
to SAT Circular 698 and SAT Announcement 7, which could subject such shareholder to additional reporting obligations or tax burdens.
Accordingly, if a holder of the Company’s common stock purchases such common stock in the open market and sells them in
a private transaction, or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities
may take actions, including requesting to provide assistance for their investigation or impose a penalty on it, which could have
a negative impact on the company’s business operations.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act (“FCPA”), and other laws that prohibit improper payments or offers
of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute,
for the purpose of obtaining or retaining business. We have operations, have agreements with third parties, and make most of our
sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized
payments or offers of payments by the employees, consultants, sales agents, or distributors of our subsidiaries, even though they
may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants,
sales agents, or distributors of our subsidiaries may engage in conduct for which we might be held responsible. Violations of
the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek
to hold our subsidiaries liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
RISKS
RELATED TO OUR COMMON STOCK
Our
common stock is quoted on the OTC Market which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTC Market. The OTC Market is a significantly more limited market than the New York Stock Exchange
or Nasdaq system. The quotation of our shares on the OTC Market may result in a less liquid market available for existing and
potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have
a long-term adverse impact on our ability to raise capital in the future.
Numerous
factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly.
There
are numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly.
These factors include:
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actual
or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial
market analysts and investors;
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changes
in financial estimates by us or by any securities analysts who might cover our shares;
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speculation
about our business in the press or the investment community;
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significant
developments relating to our relationships with our clients;
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stock
market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the our industries;
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investor
perceptions of the our industry in general and our company in particular;
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the
operating and stock performance of comparable companies;
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general
economic conditions and trends;
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major
catastrophic events;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
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changes
in accounting standards, policies, guidance, interpretation or principles;
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loss
of external funding sources;
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sales
of our shares, including sales by our directors, officers or significant shareholders; and
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additions
or departures of key personnel.
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Securities
class action litigation is often instituted against companies following periods of volatility in their share price. This type
of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities
markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance
of particular companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions
experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price
of our shares and other interests in our company at a time when you want to sell your interest in us.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The
SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock
is a “penny stock” and as a result, we may become subject to Rule 15g-9 under the Exchange Act, or the “Penny
Stock Rule”. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons
other than established customers and “accredited investors” (generally, individuals with a net worth in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). These rules require, among other things,
that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii)
disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction
and (iv) monthly account statements showing the market values of our securities held in the customer’s accounts. A broker
would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This
information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions
in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for shareholders
to purchase or sell our shares.
Our
holding company structure may limit the payment of dividends to our stockholders.
We
have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions
to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into
U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders
upon conversion of the dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits
according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China
are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits
under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards,
we will be unable to pay any dividends.
Our
major shareholders, collectively, own approximately 95.88% of our outstanding common stock and may be able to control our management
and affairs.
Due
to the controlling amount of their share ownership in our Company, the controlling shareholders have a significant influence in
determining the outcome of all corporate transactions, including the election of directors and approval of significant corporate
transactions, such as mergers, consolidation, and sale of all or substantially all of our assets. Their interests may differ from
the interests of other stockholders and thus result in corporate decisions that are disadvantageous to other shareholders. Consequently,
this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation
or other business combination involving us, even if such a change of control would benefit our stockholders.
Shareholders
may be diluted significantly through our efforts to obtain financing and satisfy obligations through issuance of additional shares
of our common stock.
We
have no committed source of financing. Wherever possible, our board of directors will attempt to use non-cash consideration to
satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common
stock. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized
(3,000,000,000) but unissued (1,854,000,000) shares of common stock. In addition, if a trading market develops for our common
stock, we may attempt to raise capital by selling shares, possibly at a discount to market. These actions will result in dilution
of the ownership interests of existing shareholders may further dilute common stock book value, and that dilution may be material.
We
do not have a majority of independent directors on our Board and the Company has not voluntarily implemented various corporate
governance measures, in the absence of which stockholders may have more limited protections against interested director transactions,
conflicts of interest and similar matters.
Federal
legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response
to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges,
such as the NYSE or the NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges are those that address board of directors’ independence and
audit committee oversight. We have not yet adopted any of these other corporate governance measures and since our securities are
not yet listed on a national securities exchange, we are not required to do so.
Our
Board of Directors is comprised of three individuals, all of whom are also our officers. As a result, we do not have independent
directors on our Board of Directors.
We
have not adopted corporate governance measures such as an audit or other independent committee of our board of directors, as we
presently do not have independent directors on our board. If we expand our board membership in future periods to include additional
independent directors, we may seek to establish an audit and other committee of our board of directors. It is possible that if
our Board of Directors included independent directors and if we were to adopt some or all of these corporate governance measures,
stockholders would benefit from somewhat greater assurance that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
For
example, at present in the absence of audit, nominating and compensation committees comprised of at least a majority of independent
directors, decisions concerning matters such as compensation packages or employment contracts to our senior officers are made
by a majority of directors who have an interest in the outcome of the matters being decided. However, as a general rule, the board
of directors, in making its decisions, determines first that the terms of such transaction are no less favorable to us that those
that would be available to us with respect to such a transaction from unaffiliated third parties. The company executes the transaction
between executive officers and the company once it was approved by the Board of Directors.
Prospective
investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.
We
are subject to the 15(d) reporting requirements under the Securities Exchange Act of 1934 which does not require a company to
file all the same reports and information as fully reporting company.
Pursuant
to Section 15(d), we are required to file periodic reports with the SEC, such as annual reports on Form 10-K, quarterly reports
on Form 10-Q, and current reports on Form 8-K. However, we are not required to prepare proxy or information statements; our common
stock will not be subject to the protection of the going private regulations; we will be subject to only limited portions of the
tender offer rules; our officers, directors, and more than ten (10%) percent shareholders are not required to file beneficial
ownership reports about their holdings in our company; that these persons will not be subject to the short-swing profit recovery
provisions of the Exchange Act; and that more than five percent (5%) holders of classes of our equity securities will not be required
to report information about their ownership positions in the securities.